Public Housing: HUD's Oversight of Housing Agencies Should Focus More on Inappropriate Use of Program Funds
Published: 2009-06-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Housing and Urban Development (HUD) provided over $6.7 billion in fiscal year 2008 to housing agencies to operate, modernize, and develop about 1.2 million public housing units. It is important that HUD exercise sufficient oversight of housing agencies to help ensure that public housing funds are being used as intended and properly managed. In this report, GAO examines HUD's oversight processes for detecting housing agencies at risk of inappropriate use and mismanagement of public housing funds. GAO analyzed HUD financial data on about 3,300 housing agencies, compared HUD's oversight policies with program and agency objectives, and interviewed agency officials.
section_title: What GAO Found
paragraphs: Key HUD oversight processes could be more focused on identifying potential inappropriate use or mismanagement of public housing funds. HUD primarily relies on single audits to identify such problems, although HUD, its Office of Inspector General (OIG), and the President's Council on Integrity and Efficiency (now known as the Council of the Inspectors General on Integrity and Efficiency) have identified weaknesses with some audits. Further, even when these audits do identify issues, HUD does not systematically summarize audit findings to identify and understand emerging and persistent issues to better monitor housing agencies for inappropriate use and mismanagement of public housing funds. Understanding these problems could be useful for identifying housing agencies that are at greater risk of inappropriately using or mismanaging public housing funds. HUD uses the Public Housing Assessment System (PHAS) to monitor and rate the overall condition and financial health of public housing agencies. However, PHAS is not intended to identify inappropriate uses of public housing funds and is limited in its ability to detect potential mismanagement. HUD also analyzes the financial data of public housing agencies, but its review focuses on the accuracy and completeness of the information used to calculate PHAS scores. GAO analyzed financial data from the housing agencies and found many housing agencies showed indicators that they were at risk of potential inappropriate use and mismanagement of public housing funds--while most received passing PHAS scores. For example, GAO found that from 2002 to 2006, 200 housing agencies had written checks for more than the funds available in their bank accounts (bank overdrafts) on average of $25,000 or more. However, 75 percent of these agencies received passing PHAS scores. Such overdrafts raise questions about these agencies' cash management. But HUD does not use these and similar measures to identify housing agencies at greater risk of inappropriately using or mismanaging public housing funds. Without fully leveraging the audit and financial information it collects, the department limits its ability to identify housing agencies that are at greater risk of inappropriately using or mismanaging program funds.

section_title: Letter
paragraphs: In fiscal year 2008, the Department of Housing and Urban Development  (HUD) provided approximately $6.7 billion to about 3,300 public housing  agencies to subsidize the costs of operating, modernizing, and developing  about 1.2 million units through the public housing program. HUD oversees  these agencies in cities and communities nationwide to ensure compliance  with extensive program requirements. Over the years, we and HUD’s  Office of Inspector General (OIG) have identified weaknesses in HUD’s  monitoring of housing agencies’ compliance with program requirements  and in the agencies’ accounting practices as well as instances of misspent  public housing funds. A number of recommendations have been made  addressing these shortcomings. It is important that HUD exercise adequate  oversight of housing agencies’ use of public housing funds, and as a result,  we undertook a review of HUD’s oversight processes under the Acting  Comptroller General’s authority to conduct evaluations on his own  initiative. This report examines the oversight processes HUD employs to  identify housing agencies that are at risk of inappropriately using and  mismanaging public housing funds.
To evaluate HUD’s oversight processes, we compared HUD’s oversight  policies with its programmatic and agencywide oversight goals. We  analyzed housing agency audits and available HUD financial data on its  portfolio of housing agencies. We also interviewed HUD headquarters and  field office officials. Finally, we met with officials from four field offices  and visited nine housing agencies in California, Florida, Maryland, and  Washington, D.C. In selecting these sites, we considered various factors,  including recent allegations of mismanagement of public housing funds,  the activity and size of public housing programs in these locations, and  proximity to GAO locations.
We conducted this performance audit from January 2007 through March  2009 in Alameda, Monterey, Richmond, and San Francisco, California;  Miami and Fort Lauderdale, Florida; Baltimore and Prince George’s  County, Maryland; and Washington, D.C. in accordance with generally  accepted government auditing standards. Those standards require that we  plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on the audit  objectives. Appendix I provides further details of our objective, scope, and  methodology.
subsections: section_title: Background
paragraphs: Under the U.S. Housing Act of 1937, as amended, Congress created the  public housing program to provide decent and safe rental housing for  eligible low-income families, the elderly, and persons with disabilities.  HUD provides subsidies for operating and maintaining public housing  units through the Operating Fund. HUD also provides funds to modernize  and develop public housing units through the Capital Fund. Public  housing agencies administer these formula grant programs on HUD’s  behalf. In using these funds, the agencies are responsible for ensuring that  the housing is affordable to eligible low-income households. In 1992,  Congress established the Urban Revitalization Demonstration Program,  commonly known as HOPE VI, which provides grants to housing agencies  to rehabilitate or rebuild severely distressed public housing.
The Single Audit Act, as amended, requires state and local governments  and nonprofit organizations that expend $500,000 or more in federal  awards in a fiscal year to have either a single audit or a program-specific  audit. Under a single audit, the auditor must report its opinion on the  presentation of the entity’s financial statements and schedule of federal  expenditures, and on compliance with applicable laws, regulations, and  provisions of contracts or grant agreements that could have a direct and  material effect on the financial statements and, when applicable, on any  major program of the audited entity. The auditor must also report the  results of its review and testing of internal control related to the financial  statements and major programs as well as a schedule of any audit findings  and questioned costs. Public housing agencies subject to the act must  submit audit reports to HUD and to the Federal Audit Clearinghouse.  Single audit is a key assurance process used by HUD in its oversight of  public housing agencies. Single auditors are required by the act to identify  and test programs for compliance with specific program requirements and  report identified findings (or the lack thereof), which can include those of  inappropriate use and mismanagement of funds. HUD’s Real Estate  Assessment Center (REAC), which is responsible for reviewing housing  agencies’ financial data, began tracking the status of single audit findings  in 2007 using the Monitoring and Planning System (MAPS) Audit Tracking  Module. Through this tracking system, HUD monitors the resolution of  audit findings. HUD maintains an additional system, the Audit Resolution  and Corrective Action Tracking System (ARCATS), to monitor the status  of management and financial findings issued by our or OIG’s  recommendations.
HUD’s PHAS is another key oversight process. While single audits may  identify specific instances of inappropriate use or mismanagement of  public housing funds, PHAS was developed to evaluate the overall  condition of housing agencies and measure performance in major  operational areas of the public housing program. These include financial  condition, management operations, and physical condition of the housing  agencies’ public housing programs as well as resident satisfaction with the  programs (see fig. 1).
The Financial Assessment Subsystem (FASS) component score is based  on six financial data analyses that HUD has determined to be key in  evaluating housing agencies’ financial condition. These include the  following:  the current ratio, which measures the housing agency’s ability to cover its  short-term obligations; the months expendable funds balance ratio, which measures the housing  agency’s reserves for unexpected expenses;  the tenant receivables outstanding, which measures how well the housing  agency manages rent collections; the occupancy loss, which measures how well the housing agency  maximizes its revenue by renting out vacant units; the expense management, which measures whether the housing agency  has adequate cost controls to manage expenses; and the net income, which measures whether the housing agency is spending  more than it makes.
Housing agencies with scores of less than 60 percent in either the overall  PHAS score (less than 60 points out of a total 100 points) or in any one of  the major subcomponents, including the FASS (less than 18 points out of  30 points), are designated as substandard performers, also known as  troubled. For example, points may be deducted from housing agencies’  FASS scores if the six financial analyses indicate that housing agencies are  experiencing overall financial difficulties that may threaten the stability of  the housing agency. According to HUD officials, although housing  agencies’ financial data are usually audited, REAC analysts also review  financial data to ensure the accuracy of information that is used to  calculate the FASS scores. For example, REAC analysts examine specific  line items in the financial data, investigate changes or discrepancies in  amounts reported, and review auditors’ notes.
HUD field offices establish mechanisms to identify and correct  deficiencies if a housing agency is designated as a troubled performer in  either the PHAS overall score or the FASS subcomponent. Such  mechanisms may include the development of an improvement plan or a  memorandum of agreement. If technical assistance and sanctions fail to  result in significant improvement within a year, the housing agency is  referred to the HUD Enforcement Center, which may institute proceedings  to place the agency in receivership and remove failed agency  management. Receiverships generally result from long-standing, severe,  and persistent management problems that have led to the deterioration of  the public housing stock.
section_title: HUD’s Primary Oversight Processes Could Be Better Focused to Detect Housing Agencies at Risk of Inappropriate Uses or Mismanagement of Public Housing Funds
subsections: section_title: Persistent Problems with Audit Quality and Gaps in What Audits Cover Can Limit HUD’s Ability to Detect Misuse or Mismanagement of Public Housing Funds
paragraphs: Single audits, HUD’s primary tool for overseeing the use of public housing  funds, are intended to, among other things, promote sound financial  management by serving as a key accountability mechanism in the  oversight and monitoring of recipients’ use of federal funds. Single audits  provide federal agencies with information on the use of federal funds,  internal control deficiencies, and compliance with federal program  requirements. The Single Audit Act that mandated the audits does not  require the auditors to perform procedures that focus specifically on all  federal programs that housing agencies administer. Instead, auditors are to  select and closely audit “major” programs administered by the recipient of  the funds—typically large or risky programs—for compliance with specific  program requirements, including the appropriate use of funds. In addition  to single audits, OIG selects various housing agencies to audit as part of its  oversight of HUD’s public housing program. HUD’s strategic goals for its  public housing program call for the department to resolve issues identified  by these audits and improve its management of internal controls to, among  other things, eliminate fraud, waste, and abuse.
However, both HUD’s quality assurance office and a recent study  conducted by PCIE have identified problems with single audits of housing  agencies. OIG also identified problems with single audits after conducting  detailed reviews of housing agency operations as part of its oversight  process. Both OIG’s audits and quality assurance reviews by HUD have, in  some cases, resulted in disciplinary action for single auditors. HUD quality  control reviews cover housing agency audits as well as audits of other  entities that receive HUD financial assistance. According to data from  HUD’s Quality Assurance Subsystem, 52 of the 247 quality assurance  reviews it conducted between 2000 and 2008 resulted in referrals for firms  auditing entities receiving HUD funding. According to HUD, many of these  included public housing agency audits. Examples of problem public  housing agency audits include the following:    Single audits for the Miami-Dade Housing Authority (MDHA) did not  identify significant instances of inappropriate use and mismanagement of  funds. In 2006, a media investigation provided extensive coverage of  problems with public housing funds at the agency. HUD stated that  MDHA’s single audits should have alerted the department to these  problems, but they did not. Instead, HUD stated that it learned about the  allegations of misuse and mismanagement of funds from the Miami  Herald newspaper in 2006. In response to these allegations, HUD ordered  a detailed review and new single audit of the housing agency that found  serious and pervasive financial and management problems, including  deficiencies in financial management, mismanagement of development  funds, and several apparent conflicts of interest. MDHA went into  receivership in 2007, with HUD taking possession and control of all of  MDHA’s activities, including public housing.
In 2007, OIG found that the Dallas Housing Authority had inaccurate,  unreliable, and altered records. Further, OIG noted that the firm  conducting the 2006 single audit had failed to meet professional auditing  standards. State authorities took disciplinary action against the auditing  firm in 2007. According to HUD, the Dallas Housing Authority engaged this  firm after it had removed an earlier auditing firm that had identified  problems with the housing agencies’ financial management.
Also in June 2007, PCIE issued its Report on National Single Audit  Sampling Project, which concluded that there were problems with audit  quality that needed to be addressed and made recommendations.  Specifically, PCIE reviewed a nationwide sample of 208 out of more than  38,000 single audits performed on various grant recipients that were  submitted for the period between April 1, 2003, and March 31, 2004.  According to the HUD OIG, the PCIE sample included single audits of 11  housing agencies, of which 6 were determined to be unacceptable, 1 was  found to have limited reliability, and 4 were determined to be acceptable,  but with deficiencies.
In a 2007 GAO testimony at a congressional hearing on the PCIE study, we  noted that problems with the quality of single audits were unacceptable  and that we were concerned that audits were not being conducted in  accordance with professional standards and requirements. We also noted  that such audits could mislead users of audit reports, causing them to  incorrectly conclude that agencies were in compliance with program  requirements or did not have weaknesses in internal controls when in fact  such problems might exist but had gone undetected. However, we also  noted continued support for single audits as a key oversight mechanism  over federal awards.
Compounding the problems with the quality of audits is the fact that many  housing agencies’ public housing programs may not have to undergo the  detailed major program compliance testing that could potentially uncover  inappropriate use and mismanagement of public housing funds. Only  entities expending $500,000 or more in federal funding annually are  required to receive single audits that assess compliance with specific  program requirements and associated internal controls that have a direct  and material effect on each major program. Furthermore, even when  housing agencies receive single audits, not all public housing programs  will be designated as major programs by independent public accountants  conducting the single audit. For example, although about 76 percent of  operating fund dollars were designated by the housing agencies’  independent auditors as major in 2006, less than a third of the housing  agencies submitting approved financial data to HUD for that year  underwent a single audit and had their operating funds audited as major  programs. Without compensating monitoring tools, gaps in coverage at  many housing agencies in any one year could allow emerging problems to  go undetected and unreported by single audits in a timely manner.
HUD has attempted to improve the quality of these audits but has faced  significant challenges. As noted above, HUD performs quality assurance  reviews of the independent public auditors who perform the audits. In  some cases, these quality assurance reviews have led to investigations and  actions against substandard auditors. HUD officials said that the agency  could pursue debarment or suspension of poorly performing auditors but  noted that such remedies were costly and time-consuming. Further, efforts  to improve audit quality will not address gaps in coverage that leave some  housing agencies and programs unaudited for more than a year. In light of  these limitations, fully leveraging other useful information becomes key to  ensuring more consistent monitoring of public housing funds.
section_title: HUD Does Not Systematically Summarize the Results of Audits to Understand Problems and Address Vulnerabilities in Its Oversight Processes
paragraphs: Although the quality and coverage of single audits can be problematic, the  single audit continues to be an important oversight mechanism. Yet, HUD  has not fully leveraged how it uses the results of audits to fully understand  emerging or persistent problems at housing agencies. Understanding  commonly occurring audit findings could be useful for identifying housing  agencies that are at greater risk of inappropriate use or mismanagement of  public housing funds and assessing vulnerabilities in HUD’s oversight  processes. In 2002, we reported that summarizing information about the  results of single audits and identifying commonly occurring issues could  be valuable in helping management evaluate agency oversight, monitor  activities, and identify problem areas. Further, the Domestic Working  Group’s Guide to Opportunities for Improving Grant Accountability  states that agencies can summarize the results of internal and external  audits for program managers to help identify problems with grantees’  financial management and program operations. For example, officials  from one federal grant program within the Department of Transportation  stated to us that they had taken such an approach to using audit data by  summarizing the results of audits to identify recurring issues and direct  their oversight policies. These officials stated that their analysis had  identified procurement-related problems as a recurring finding area, which  resulted in staff conducting grantee workshops and technical assistance  on federal procurement requirements.
HUD does track the resolution of individual audit findings for each  housing agency. Specifically, HUD uses its ARCATS to track the resolution  of the HUD Inspector General’s audit findings. In addition, HUD recently  developed MAPS to track the resolution of single audit findings. However,  on the basis of our discussions with HUD officials, HUD has not used  either ARCATS or MAPS to summarize and systematically evaluate the  results of audits to understand problems that may commonly occur at  multiple housing agencies, identify programwide problems of  inappropriate use and mismanagement of public housing funds, detect  emerging issues, or address possible vulnerabilities in its oversight  processes. HUD’s systems contain data that categorize the findings of  single audits in a manner that would allow the agency to identify  commonly occurring problems across housing agencies. Yet, on the basis  of our discussions with HUD, the department has not used these data for  this purpose.
We conducted an analysis of a sample of 81 OIG and 56 single audit  reports of housing agencies from 2002 through 2007 and categorized the  526 audit findings we identified into major categories of inappropriate use  and mismanagement of public housing funds that we developed. Examples  of these categories and the number of findings in our sample included:  accounting issues, including internal control and documentation findings  (150); inappropriate transfer of operating funds to other HUD programs  and non-HUD entities, including affiliated organizations that were not used  for public housing purposes (98); and other management issues (41). We  also noted that for 14 housing agencies where audits identified commonly  occurring problems with internal control, documentation, and other  management issues, 27 of the findings reported involved management of  cash resources. These findings included inadequate separation of duties,  fraudulent check writing, and theft of cash.
Such a systematic evaluation of audit results could be useful for program  managers, helping them to understand commonly occurring problems,  identify and monitor emerging issues, and address limitations in HUD’s  overall monitoring and oversight processes. Such information could also  be useful for HUD field offices, housing agency auditors, and the housing  agencies themselves by alerting them to persistent or emerging problems  of potential inappropriate use and mismanagement of public housing  funds. HUD public housing managers in headquarters and field offices  stated that summarized results of audits would aid in helping them carry  out their oversight activities. Not effectively using readily available  information on the results of audits will continue to hamper these  managers’ efforts to monitor housing agencies for misuse and  mismanagement of funds.
section_title: PHAS and HUD’s Internal Analyses of Financial Data Could Be Better Focused to Identify Housing Agencies at Risk for Misuse and Mismanagement of Public Housing Funds
paragraphs: PHAS and HUD’s internal analyses of data from housing agencies’ financial  data could be better focused to identify housing agencies that are at  greater risk of potential inappropriate uses or mismanagement of public  housing funds. As a result, these oversight processes may not alert HUD to  potential problems and allow for timely monitoring and additional  oversight activities that may be warranted. PHAS primarily assesses data  on management operations and the financial health and physical condition  of the housing agencies’ public housing programs and alerts HUD to  potentially troubled agencies. For example, as noted earlier, PHAS was  developed to alert HUD to liquidity problems at housing agencies.  However, PHAS was never intended to identify individual instances of  inappropriate use of public housing funds, and some potential indicators  of liquidity problems may not be detected by PHAS. As a result, housing  agencies have continued to receive passing PHAS scores even when their  financial data may indicate that the housing agency is at greater risk of  inappropriately using funds or experiencing serious financial difficulties.  HUD has stated that it would primarily rely on single audits to identify  such problems.
HUD’s policies state that the agency conducts analyses of financial data to  help improve public housing agencies’ financial health and provide  guidance in identifying possible fraud, waste, and abuse. However, HUD  told us that it primarily used its analysis of housing agencies’ financial  statements to ensure the mathematical reasonableness and completeness  of the financial data used to calculate housing agencies’ PHAS scores.  However, we analyzed housing agencies’ financial data and found that  many of these agencies showed signs that they may be at greater risk of  inappropriately using or mismanaging public housing funds, even though  the agencies in question received passing PHAS scores.
subsections: section_title: Potential Inappropriate Use—Improper Advances of Low-Income Public Housing Operating Funds
paragraphs: Our analysis of data from housing agencies’ financial statements indicates  that many housing agencies receive passing PHAS scores even though an  analysis of their financial data indicates that these agencies are at greater  risk of inappropriately advancing their public housing program’s operating  funds to other programs or affiliated entities that may not use the funds  for public housing purposes. Both we and OIG found that financial data  could be used to identify housing agencies that were potentially at greater  risk of inappropriately advancing funds in this manner. Specifically, using  financial data, we identified 837 housing agencies that reported balances  in their public housing program of over $100,000 as due from other  programs—that is, operating funds that were advanced or loaned to other  programs or entities and were potentially not used for public housing  purposes—between 2002 and 2006. The prior HUD OIG work noted that  housing agencies showing balances in excess of $100,000 as due from  other programs in their public housing program often inappropriately  advanced or loaned public housing program funds to other programs or  affiliated entities—such as nonprofit organizations—without these funds  being repaid to the public housing program. For example, OIG noted  instances where public housing funds were advanced inappropriately and  used for private housing development. In response to these OIG audits,  HUD reported that it had taken steps to resolve audit recommendations  and had made referrals for administrative action to be taken against those  housing agencies. HUD further recognized that housing agencies showing  large amounts in their due from other funds accounts may warrant greater  scrutiny and analyses of transactions.
Our analysis of housing agencies’ due from other program accounts shows  that from fiscal years 2002 through 2006, about 15 to 17 percent of housing  agencies exhibited this indicator of possible inappropriate advances  ($100,000 or more as due from other programs). (See fig. 2.)
While these housing agencies’ financial data were showing that these  agencies were at greater risk of inappropriately advancing operating  funds, their PHAS scores may not have provided HUD with any indication  of this potential risk. PHAS assesses the overall management operations  and the financial and physical condition of the housing agencies’ public  housing programs, but it was not developed to identify potential  inappropriate use of funds, such as inappropriate advances of operating  funds. Our analysis found that about 80 percent of the housing agencies  that reported balances in excess of $100,000 in the operating fund’s due  from other program from fiscal years 2002 through 2006 received passing  scores in PHAS (see fig. 3). Thus, the PHAS score by itself would not  identify or trigger any further oversight of housing agencies that may be at  risk of potential improper advancement of funds.
HUD officials stated that they would continue to rely on single audits to  identify improper advances of this nature despite concerns about the  quality of single audits and gaps in the number of housing agencies and  programs covered and that they do not conduct specific financial analyses  to identify housing agencies at risk of inappropriate advances of their  operating funds. However, HUD does perform analyses of financial data to  help it identify housing agencies that are at risk of improper advances for a  HUD rental housing program—the Housing Choice Voucher program.  Specifically, HUD conducts an assessment of housing agencies’ financial  data to identify housing agencies reporting transfers of voucher program  dollars that warrant additional oversight. Analyzing operating fund  financial data as it has with the Housing Choice Voucher program  illustrates how the department could leverage opportunities to identify  and monitor housing agencies at greater risk of inappropriate advances of  public housing funds.
section_title: Potential Mismanagement of Funds—Poor Cash Management
paragraphs: Our analysis also indicated that some housing agencies showed signs that  they are at greater risk of mismanaging public housing funds. For example,  we found that some housing agencies reported check overdrafts in their  financial data. Our analysis of housing agencies’ financial data for fiscal  years 2002 through 2006 showed 200 housing agencies reporting average  bank overdrafts of $25,000 or more, and 10 housing agencies reporting  average bank overdrafts of more than $1 million. The vast majority of  housing agencies do not show this indicator of potential funds  mismanagement. In fact, over 92 percent of all housing agencies reported  no check overdrafts during this period. According to HUD’s OIG, writing  checks in excess of funds available in a housing agency’s bank account is  of concern and could indicate serious cash and financial management  problems or indicate that the housing agency is prone to potential fraud.  MDHA provides an example of how check overdrafts could have been  used as an indicator of serious liquidity problems. Specifically, HUD audits  noted that MDHA was consistently holding checks in a safe after it had  written them and reported the millions of dollars in these checks as bank  overdrafts in the housing agency’s financial data. HUD officials overseeing  the receivership of MDHA stated that the housing agency was taking this  action because it did not have the funds available to meet its financial  obligations. MDHA’s single audits for this period were later determined to  be substandard, in part because they did not identify an accounting  misclassification of cash that may have masked the agency’s liquidity  problems.
HUD officials stated that housing agencies’ PHAS and FASS scores were  used to alert the agency to potential issues with finances and liquidity.  However, we found that housing agencies’ PHAS and FASS scores did not  reflect the large bank overdrafts that we identified. Of the 10 housing  agencies reporting bank overdrafts in excess of $1 million, 7 (including  MDHA) received passing PHAS scores. Only 1 had a PHAS score indicating  that the agency was troubled. Further, MDHA received a passing FASS  score for 3 of 5 years included in our analysis. The remaining 2 agencies  were exempted from reporting PHAS scores because of their participation  under the Moving to Work program. As shown in figure 4, when we  looked at the 200 housing agencies reporting an average bank overdraft of  $25,000 or more from 2002 through 2006, we found that nearly 75 percent  of these housing agencies received passing PHAS and FASS scores.
HUD officials stated that they were concerned about housing agencies  with substantial bank overdrafts but added that overdrafts were not  flagged for further monitoring because PHAS and single audits were  expected to detect such poor financial management. However, as we have  seen, single audits, PHAS, and the department’s current approach to  analyzing financial data do not always detect or alert HUD to housing  agencies at greater risk of potential inappropriate use or mismanagement  of public housing funds. This shortcoming underscores the importance of  leveraging the financial data HUD collects to focus on housing agencies at  risk of these potential problems. For example, HUD could use financial  indicators to identify housing agencies that are at greater risk of such  problems. HUD could then use the information to alert its field offices,  auditors, and the housing agencies themselves to potential problems.  Developing such indicators of potential inappropriate use and  mismanagement could also be a particularly useful compensating  mechanism for monitoring housing agencies that are not subject to single  audits and a valuable monitoring tool to mitigate the limitations of PHAS.  Not fully leveraging the information it already has limits HUD’s ability to  identify potential waste and abuse of its resources.
section_title: Conclusions
paragraphs: HUD relies on single audits to identify potential misuse and  mismanagement of public housing funds, and many single audits as well as  those of OIG have identified such problems. However, concerns about the  quality of single audits and gaps in the coverage of these audits have  limited HUD’s confidence that single audits will consistently identify  inappropriate use and mismanagement of public housing funds at every  housing agency. Although HUD has faced difficulty in making  improvements to the quality of audits and is aware that many housing  agencies’ public housing programs may not receive annual single audit  coverage, it has not adapted the way it uses information it collects to  develop mechanisms to mitigate these limitations. Specifically, HUD does  not systematically summarize and analyze the types and causes of misuse  and mismanagement that single and OIG audits do successfully identify.  Understanding the attributes of these commonly occurring problems that  single and OIG audits have found could be useful to public housing  program managers in identifying emerging issues and evaluating HUD’s  overall monitoring and oversight processes. Promising practices identified  by the Domestic Working Group’s Guide to Opportunities for Improving  Grant Accountability call for such efforts. In fact, our review of over 130  audits conducted between 2002 and 2007 showed almost 100 findings  related to inappropriate advancement of public housing operating funds to  non-HUD programs or entities. Summarized results could also be useful to  HUD’s field offices, auditors, and the housing agencies themselves, helping  them understand emerging and persistent issues in HUD’s national  portfolio of housing agencies and carry out their responsibilities in  monitoring public housing programs.
HUD currently uses PHAS to monitor housing agencies, but this system  has not always identified housing agencies at risk of problems such as  cash management issues and was not intended to identify inappropriate  use of public housing funds. Although HUD has developed automated  checks of housing agencies’ financial information to help ensure its  completeness and accuracy for PHAS, the department has not used these  checks as a mechanism to identify housing agencies at greater risk for  potential misuse and mismanagement of public housing funds. HUD itself  uses such checks to identify potential inappropriate use of its Housing  Choice Voucher Program funds. Fully utilizing data HUD collects—for  example, by developing financial indicators to help identify housing  agencies at greater risk of inappropriately using or mismanaging public  housing funds—would help in developing tools to compensate for the  limitations of key oversight processes.
section_title: Recommendations for Executive Action
paragraphs: In order to strengthen its oversight of housing agencies administering the  public housing program and better leverage information that it already  collects, we recommend that the Secretary of the Department of Housing  and Urban Development:    Regularly summarize and systematically evaluate the results of OIG and  single audits of public housing agencies to allow program managers to  identify and understand problems of potential inappropriate use and  mismanagement of public housing funds, identify emerging issues, and  evaluate overall monitoring and oversight processes. Summarized results  of audits should be disseminated to field offices, housing agencies, and  their auditors to help make them aware of emerging or persistent  problems and assist them in monitoring and administering HUD’s public  housing programs.
Develop mechanisms—such as financial indicators—to identify housing  agencies that are at greater risk of inappropriately using or mismanaging  public housing funds. Such mechanisms may be developed based on the  department’s evaluation of commonly occurring and emerging issues  identified in OIG and single audits of housing agencies and developed by  leveraging financial information that the department currently collects.  Once such indicators are developed, the department should use them as  part of its ongoing monitoring and review of housing agencies’ use of  public housing funds.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments from the General Deputy Assistant Secretary for  Public and Indian Housing (see app. II), HUD stated that the draft report  contains useful information, but that the agency did not believe that our  recommendations would achieve the objectives of strengthening oversight  of housing agencies that administer the public housing program and of  better leveraging information that it already collects. Although it provided  no specific explanation for why it thought our recommendations would  not achieve its objectives, HUD stated that more analysis of its existing  oversight mechanisms and information collected from housing agencies  should be performed in order to evaluate and develop possible alternatives  and indicated that it would involve Public and Indian Housing parties in  developing a more creative and comprehensive approach to addressing the  issues raised in our report. We welcome efforts by HUD to reconsider the  mechanisms and data it uses to oversee housing agencies and to identify  opportunities for improving its oversight. However, we disagree with  HUD’s statement that our recommendations do not help achieve the  objectives of strengthening its oversight and better leveraging the audit  and financial information it already has. We believe the recommended  actions present a reasonable first step in leveraging its existing  information and permit HUD to better focus its limited resources. In fact,  as noted in the report, the mechanisms that we are recommending for  identifying potential problems to identify housing agencies that are at risk  of inappropriate use of funds are already being used by another key HUD  rental assistance program and by the HUD OIG. Moreover, HUD has in  place systems that capture the information needed for such analysis. As  HUD reevaluates its oversight mechanisms and seeks the input of its new  Assistant Secretary, we believe that thinking about ways of leveraging the  information it receives from single audits and financial data will be helpful  in identifying emerging issues related to inappropriate use and  mismanagement of funds and in providing the oversight necessary to  address these issues.
We will send copies of this report to the Secretary of the Department of  Housing and Urban Development and other interested parties. In addition,  the report will be available at no charge on our Web site at  http://www.gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.
If you or your staff has any questions about this report, please contact me  at (202) 512-8678 or sciremj@gao.gov. GAO contact information and staff  acknowledgments are listed in appendix III.
section_title: Appendix I: Objective, Scope, and Methodology
paragraphs: This report evaluates the Department of Housing and Urban  Development’s (HUD) oversight of public housing agencies’ use of federal  funds to operate, modernize, and develop public housing units through the  Operating Fund, Capital Fund, and HOPE VI programs—the three main  sources of funding for the public housing program. In 2008, the Operating  Fund, Capital Fund, and HOPE VI programs provided approximately   $6.7 billion to housing agencies for capital asset management. The  objective of this report was to examine the oversight processes HUD uses  to understand and detect instances of inappropriate use and  mismanagement of public housing funds.
We reviewed applicable federal laws and regulations to describe  permissible uses for the public housing funds within the scope of this  report—specifically, funds available under the Operating Fund, Capital  Fund, and HOPE VI programs. To describe HUD processes to ensure that  housing agencies use public housing funds for statutorily allowable uses,  we reviewed pertinent federal laws, agency notices, and program guides,  and other job aids or documents. We interviewed program officials in the  Office of Public and Indian Housing, including administrators from the  Offices of the Deputy Secretary for Field Operations and of the Deputy  Secretary for Public Housing Investments in Washington, D.C. We  obtained information on the Public Housing Assessment System (PHAS)  and financial management assessment procedures from officials  responsible for this system at HUD’s Real Estate Assessment Center  (REAC). In addition, we reviewed key documents that describe the annual  single audit process as applicable to housing agencies that receive federal  funds, such as the Office of Management and Budget’s (OMB) Circular A- 133: Audits of States, Local Governments, and Non-Profit Organizations  and HUD program documents.
We also interviewed officials from four HUD field offices and obtained  additional documentary and testimonial information to summarize the  oversight processes. We selected field offices for review. We selected the  HUD field office in Miami-Dade because it oversaw the Miami-Dade  Housing Authority, which had been the most recent housing agency to go  into receivership pursuant to a settlement agreement resolving allegations  of financial mismanagement. We also met with officials from three other  HUD field offices: Baltimore, San Francisco, and Washington, D.C. Within  their portfolios, these field offices all have housing agencies with active  Operating Fund, Capital Fund, and HOPE VI programs, with a range of  housing agencies of different sizes, and in proximity to cities near GAO  offices. Although the results of our discussion with these field offices may  not be generalized across all field offices, our discussions provided  important context on HUD’s implementation of its oversight processes and  corroboration of information we collected. We also obtained information  on HUD’s oversight procedures with staff from selected public housing  agencies in each of the HUD field office locations: the Housing Authority  of the City of Alameda, Housing Authority of the County of Monterey,  Richmond Housing Authority, and San Francisco Housing Authority in  California; the Miami-Dade Housing Authority and Housing Authority of  the City of Fort Lauderdale in Florida; the District of Columbia Housing  Authority; and the Housing Authority of Baltimore City and Prince  George’s County Housing Authority in Maryland.
To understand commonly occurring reported findings of inappropriate use  or mismanagement of public housing funds by housing agencies, we  conducted a content analysis of findings in HUD’s Office of Inspector  General (OIG) audit and single audit reports of housing agencies. Through  this analysis we developed a number of categories and subcategories of  common findings reported in these audits, including instances of  noncompliance and internal control deficiencies. We took steps to ensure  that the categories and subcategories we developed were consistently  applied across both OIG and single audit reports, which included  independent verification that the established categories and subcategories  in the OIG reports were applicable to the findings we analyzed in the  single audit reports. To select OIG audits for our analysis, we obtained a  list of all audit reports with findings related to the three public housing  funds (Operating Fund, Capital Fund, and HOPE VI) from 2002 through  2007. This list contained 144 audit reports. We also determine whether  these audits met the following additional criteria for inclusion in our  content analysis sample: (1) The audit findings were related to  inappropriate use of funds and mismanagement issues, and (2) the audits  were initiated by OIG or entities other than HUD program officials. We  identified 81 OIG audits that met these criteria and constituted our final  sample.
Single audit reports for our analysis were selected from audits conducted  from audit years 2002 through 2005. This period differs from one for our  analysis of OIG audit report because single audit reports are not due to  HUD or to the Federal Audit Clearinghouse—the source from which we  drew our sample—until 9 months after a housing agency’s fiscal year end.  As a result, some housing agencies had not yet submitted their 2006 or  2007 single audit reports by the time we performed our analysis. Using  HUD financial data on housing agencies, we created a list of 129 single  audit reports with findings related to the three public housing funds from  audit years 2002 through 2005. We ensured that these single audit and OIG  reports related to financial management issues within the scope of our  review. Our final sample of 56 reports included 8 reports in 2002, 10 in  2003, 18 in 2004, and 20 in 2005.
To identify potential cases of housing agencies at greater risk of  inappropriately using or mismanaging funds across the HUD housing  agency portfolio, we reviewed financial information from REAC’s financial  data schedule (FDS) database for approximately 3,300 housing agencies.  We reviewed HUD’s Financial Data Schedule Line Definition and  Crosswalk Guide on the data fields available in this system and analyzed  certain data line items. Specifically, we identified those FDS line items that  could be used to assess potential areas of inappropriate use and financial  mismanagement. In particular, we looked at FDS information on advances  of public housing funds as a potential indicator of improper use and on  cash management (bank overdrafts) as a potential indicator of financial  mismanagement. At the time that we obtained these data from HUD, fiscal  year 2006 was the last year for which a full year of financial data schedules  was available.
We assessed the reliability of the data by (1) reviewing existing  information about the systems and the data, (2) interviewing agency  officials knowledgeable about the data, and (3) examining data elements  used in our work by conducting electronic edit checks and comparing  actual with anticipated values. For the FDS data, we analyzed the most  current available data from the system for the years within the scope of  our review. We obtained explanations on inconsistencies we found in the  data from agency officials. We determined that the data were sufficiently  reliable for the purposes of this report.
Analysis of potential inappropriate use of funds: As a potential  indicator of inappropriate use, such as improper advances of funds, we  analyzed balances of funds due from other program (FDS line item 144)  for all housing agencies’ operating funds from fiscal years 2002 through  2006. We selected this line item because HUD’s OIG has identified housing  agencies that have inappropriately advanced public housing operating  funds by analyzing FDS for housing agencies that reported balances in  excess of $100,000 on line item 144 for the operating fund. OIG found that  housing agencies often used the public housing general fund bank account  as the payment account for various other activities of the housing agency.  When these other activities did not repay the operating fund account, a  balance was reported on line 144 of the FDS. When housing agencies did  this for activities requiring substantial amounts of cash, the balance in line  144 tended to grow, indicating an inappropriate use of funds. Similarly, we  identified housing agencies showing amounts due from other program  balances in excess of $100,000 for its operating fund as an indicator of  potential inappropriate advances of funds.
Analysis of potential mismanagement of funds: To identify housing  agencies that may have fund mismanagement problems, such as poor cash  management, we analyzed amounts reported as bank overdrafts in FDS  (line item 311). This line item on FDS represents checks written in excess  of funds available in bank accounts. In identifying this line item as an  indicator of potential fund mismanagement, we interviewed HUD officials  to determine if there were sound or legitimate operational reasons for a  housing agency writing checks in excess of funds available in a housing  agency’s bank account. HUD officials could not provide such reasons.  Further, OIG agreed that using bank overdrafts as an indicator of potential  funds mismanagement was reasonable.
We conducted this performance audit from January 2007 through March  2009 in Alameda, Monterey, Richmond, and San Francisco, California;  Miami and Fort Lauderdale, Florida; Baltimore and Prince George’s  County, Maryland; and Washington, D.C. in accordance with generally  accepted government auditing standards. Those standards require that we  plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on the audit  objectives.
section_title: Appendix II: Comments from the U.S. Department of Housing and Urban Development
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Daniel Garcia-Diaz (Assistant  Director), Emily Chalmers, May Lee, John Lord, Marc Molino, Jasminee  Persaud, Carl Ramirez, Linda Rego, Suneeti Shah, and Julie Trinder made  key contributions to this report.