HUD Single-Family and Multifamily Property Programs: Inadequate Controls Resulted in Questionable Payments and Potential Fraud
Published: 2004-03-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In our 2003 performance and accountability report on the Department of Housing and Urban Development (HUD), we continued to identify HUD's single-family (SF) mortgage insurance program as highrisk --an area we have found to be at high risk for fraud, waste, abuse, and mismanagement. Also, for years, GAO and HUD's Office of Inspector General (OIG) have reported weaknesses in HUD's contract administration and monitoring for both SF and multifamily (MF) programs. Given these known risks and the millions of dollars in disbursements made by the agency each year, GAO was asked to review payments related to the single-family property program and determine whether (1) internal controls provide reasonable assurance that improper payments will not be made or will be detected in the normal course of business and (2) payments are properly supported as a valid use of government funds. We also assessed HUD's monitoring of a major multifamily project with a state housing agency.
section_title: What GAO Found
paragraphs: Significant internal control weaknesses in the process used to pay for SF property expenses made HUD vulnerable to and in some cases resulted in questionable payments and potential fraud. These weaknesses included (1) delegation of oversight functions in a manner that weakened the control environment, (2) lack of key control activities, including proper documentation and approvals and (3) limited monitoring of contractor performance. These weaknesses likely contributed to the $16.5 million in questionable and potentially fraudulent payments that we identified using data mining, document analysis and other forensic auditing techniques. GAO classified $16.3 million of payments as questionable because they were not supported by sufficient documentation to determine their validity. GAO also classified $181,450 of payments as potentially fraudulent after visiting single-family properties being managed by a certain contractor. At all the properties visited, GAO noted discrepancies between what was represented on paid invoices and what was actually received. The photographs below were taken at one of the occupied properties after HUD paid $2,060 for bathroom repairs. These potentially fraudulent payments for single-family properties were made to the same contractor that was engaging in potentially fraudulent billing practices related to our earlier work on the HUD MF property program. HUD paid this contractor $2 million in fiscal year 2002 and $2.5 million in fiscal year 2003 for SF property expenses. GAO also identified insufficient HUD monitoring of a major MF program with a state housing agency. While HUD provided all the funding for the program, it provided little oversight and instead relied on the state housing agency to perform oversight functions. Ten years into the program, actual cost totaled over $500 million dollars, almost triple the original development budget.

section_title: Letter
paragraphs: A strong system of internal controls provides checks and balances against  waste, fraud, abuse, and mismanagement and is an important component  of an organization’s ability to operate efficiently and effectively. This is  particularly important to the Department of Housing and Urban  Development (HUD), which depends heavily on contractors to accomplish  its mission. These contractors deliver program services and perform many  functions that used to be done by HUD’s staff, including those in its  mortgage insurance program area. HUD mortgage insurance programs are  dependent on the actions of many third parties, including the contractors  who market and manage the HUD single-family (SF) properties that HUD  acquires when borrowers default on their mortgages.
In our 2003 performance and accountability report on HUD, we continued  to identify HUD’s single-family mortgage insurance program as high risk— an area we have found to be at high risk for fraud, waste, abuse, and  mismanagement. Also, for years, we and HUD’s Office of Inspector  General (OIG) have reported weaknesses in HUD’s contract administration  and monitoring for both SF and multifamily (MF) programs. These  weaknesses, together with significant growth in HUD’s contracting activity,  increased the department’s vulnerability to and in some cases resulted in  fraud, waste, and abuse. Furthermore, HUD expects contracting to  increase even more.
In light of these concerns, you requested that we review internal controls  over fiscal year 2002 payments to contractors and other vendors related to  SF properties. During fiscal year 2002, HUD reported that it paid more than  $310 million for various goods and services, including management fees  and property repairs for its SF property portfolio. For these payments, our  objectives were to determine whether (1) internal controls provided  reasonable assurance that improper payments would not be made or would  be detected in the normal course of business and (2) payments were  properly supported as a valid use of government funds. In addition, you  requested that we continue our review of HUD’s multifamily program.  Therefore, we assessed HUD’s monitoring of a major MF program being  carried out with a state housing agency that has payments of over a half  billion dollars from its inception in 1994 through September 30, 2003.
To identify and assess internal controls, we obtained an understanding of  HUD disbursement processes; conducted interviews with HUD  headquarters, four homeownership centers, and three contractor offices,  and performed walk-throughs of transactions. We also reviewed HUD  policies and procedures; property management and marketing contracts  and amendments, and reviewed our own reports, those by HUD’s OIG, and  others. In addition, we tested a statistical sample of transactions to  evaluate key internal control activities. To test for validity of payments, we  selected transactions using forensic auditing techniques, including data  mining and document analysis. We then physically inspected selected  properties to determine if the services or goods HUD paid for had been  fully performed and the tangible goods received.
In June 2003, based on the results of the above described work, we  communicated to HUD and members of your office that we had identified  certain potentially fraudulent payments. At your request, we expanded our  work to (1) determine whether HUD had made changes to its internal  controls to address the causes of the potentially fraudulent payments that  we had identified in June 2003 and (2) test for additional potentially  fraudulent payments. To accomplish this additional work, we interviewed  HUD officials and used forensic auditing techniques to test for additional  potentially fraudulent payments made in fiscal years 2002 and 2003.
To assess HUD’s monitoring of the MF program with a state housing  agency, we reviewed HUD’s MF policies and procedures, the state agency’s  policies and procedures, and HUD’s interagency agreement with the state  housing agency. We also conducted walk-throughs of transactions and  interviewed officials at HUD headquarters, one field office, and the state  housing agency. In addition, we analytically reviewed payment activity  since inception of the project in 1994 through September 30, 2002.
While we identified some potentially fraudulent and questionable  payments, our work was not designed to identify all fraudulent or  questionable payments. Appendix I provides a more detailed discussion of  our scope and methodology. We conducted our work from December 2002  through January 2004, in accordance with generally accepted government  auditing standards as well as with the investigative standards established  by the President’s Council on Integrity and Efficiency. We requested  comments on a draft of this report from the Secretary of HUD or his  designee. HUD’s written comments are reprinted in appendix II.
subsections: section_title: Background
paragraphs: HUD, through its Federal Housing Administration (FHA), helps finance  home purchases by insuring private lenders against losses on mortgages for  single-family and multifamily homes. If a borrower defaults on a loan and  the loan is subsequently foreclosed, the lender may file a claim for most of  its losses with HUD. After an insurance claim is paid from one of HUD’s  various mortgage insurance funds, HUD assumes title to the property and  the property becomes part of the HUD property inventory. HUD’s mortgage  insurance funds support a wide variety of MF and SF insured loan  activities, including management of HUD properties until they are sold.  HUD’s mortgage insurance funds are financed by annual appropriations  from the Congress, upfront and periodic mortgage insurance premiums  from transactions with the public, or interest revenue.
In 1994, we first designated HUD’s programs as high risk due to serious,  long-standing, departmentwide management problems. In January 2001, we  reduced the number of programs deemed to be high risk from all HUD  programs to two of its major program areas. One of the two programs was  SF mortgage insurance, which includes the management of property  inventory. In fiscal year 2003, we designated HUD’s acquisitions  management, to include contractor monitoring, as a new major  management challenge because of extensive and growing reliance on  contractors.
Our initial evaluation of payments related to HUD properties was first  discussed in our October 2002 testimony on our review of, among other  things, fiscal year 2001 payments to a contractor responsible for managing  HUD multifamily properties. We reported that this contractor engaged in  questionable billing practices that resulted in potentially fraudulent  payments. The contractor split construction renovation charges into  multiple projects to stay below the $50,000 threshold of HUD-required  approval. We identified about $10 million of this contractor’s invoices that  individually were less than $50,000. We also found cases for which HUD  paid this contractor for goods or services that were not received.
subsections: section_title: Single-Family Program
paragraphs: In its SF property program, HUD contracts with six property management  firms who are responsible for all activities associated with managing and  marketing properties. Each of the contracts includes (1) having the  properties appraised; (2) securing the properties to prevent unauthorized  entry; (3) inspecting the properties to ensure that they are clean and in  presentable condition; (4) performing routine maintenance, as well as  repairs and renovations necessary to preserve and protect the property;   (5) listing the properties for sale, and (6) selling them. Each contract covers  a different geographic area that is under the jurisdiction of what are  referred to as HUD’s homeownership centers. Contractors may have  agreements in more than one geographical area. HUD also contracts with a  support services contractor to facilitate payment to these management  firms and other vendors.
The homeownership centers are located in Atlanta, Georgia; Denver,  Colorado; Philadelphia, Pennsylvania; and Santa Ana, California. Figure 1  shows the geographical jurisdiction of each of the four centers. The centers  report directly to HUD’s Deputy Assistant Secretary for Single-Family  Housing who, in turn, reports to the Assistant Secretary for Housing– Federal Housing Commissioner.
The Director of the Real Estate Owned Division in each of the four centers  is responsible for monitoring contractors’ performance in the respective  center’s jurisdiction. Homeownership center staff manage and conduct the  monitoring and prepare monthly assessments on contractors’ performance.  The homeownership centers have a number of resources upon which they  can draw to aid them in making these assessments. For instance, to assist  in HUD’s oversight, third-party contractors are to inspect 10 percent of the  properties handled by each management and marketing contractor. Also  for oversight purposes, another national contractor is to follow a HUD  checklist of procedures to be performed for the review of 10 percent of the  management and marketing contractors’ property case files each month. In  fiscal year 2002, HUD paid contractors $11 million for assistance in  reviewing and processing payments and performing quality control  oversight of management contractor performance.
In addition, the center’s program support staff are to conduct follow-up  property inspections and file reviews, as well as a monthly on-site review at  the contractors’ offices. As part of the analysis, the HUD staff assign a risk  rating of low, medium, or high to the contractor’s performance on each of  11 performance dimensions such as claims review, property maintenance,  and sales procedures. According to agency data, payments for SF property  expenses totaled more than $310 million in fiscal year 2002. The SF  Acquired Asset Management System (SAMS) payment process reimburses  management contractors for costs incurred in managing and marketing  HUD properties, and makes direct payments to certain other vendors, such  as oversight contractors, and pays management fees to the management  contractors. The HUD payment process, as designed, includes four key  steps: (1) the preparation of the payment request by the property  management contractor or other vendor seeking funds, (2) initial review of  the payment request by a support services contractor, (3) HUD approval, to  include a technical review by a person appointed as the government  technical monitor (GTM), and final authorization by a government  technical representative (GTR), and (4) payment either by electronic  transfer or paper check.
section_title: Multifamily Project
paragraphs: In its MF program, HUD contracts for property management services, such  as on-site management, rent collection, and maintenance for the  multifamily properties it acquires through the foreclosure process. In 1994,  due to a substantial increase in HUD’s inventory of MF properties, HUD  entered into an agreement with a state housing agency for the renovation,  disposition, and interim management of certain MF properties located in  one geographical region.
HUD officials told us this program was intended to be a demonstration or  pilot program, to determine if this type of agreement is feasible as a  common practice within HUD. Under this pilot, HUD is responsible for  providing all the money needed to fund the program, and the state agency  is responsible for developing and monitoring the project.
section_title: Internal Controls Over SF Property Payments Were Inadequate
paragraphs: HUD’s internal controls did not provide reasonable assurance that  improper payments would not occur or would be detected in the normal  course of business. We identified fundamental weaknesses in the four-step  process used to pay for SF property expenses. Our Standards for Internal  Control in The Federal Government include (1) establishing a positive  control environment throughout the organization, (2) performing of control  activities, which are an integral part of an entity’s accountability for  stewardship of government resources, and (3) monitoring to assess the  quality of performance over time. However, we found HUD did not delegate  functions in a way that supported a positive control environment;  specifically, the agency routinely relied on a support services contractor to  prepare management contractors’ and other vendors’ payment requests  and perform technical reviews of payment requests. HUD also routinely  failed to require or ensure that all transactions were clearly documented,  which is a control activity that helps ensure accountability for resources.  HUD monitoring of contractors’ performance, particularly the review of the  nature and amount of expenses incurred, was also inadequate. In addition,  HUD did not respond appropriately to identified vulnerabilities that  increased the risk of unsatisfactory performance. These internal control  weaknesses made the HUD SF property program highly susceptible to  fraud, waste, and abuse.
subsections: section_title: Process for Payment of SF Property Expenses Relied Extensively on Contractor
paragraphs: HUD delegated oversight functions in a manner that weakened its control  environment and resulted in established controls not being followed. We  found that HUD routinely relied on a support services contractor to  perform key elements of the first three steps in the four-step payment  process (fig. 2) for SF property expenses. These delegated oversight  functions included preparing payment requests (step 1), performing the  administrative review (step 2) and performing a technical review (step 3.1)  of payment requests.
HUD relied on the support services contractor to perform the functions in  both step 1 and step 2 of the payment process when HUD staff or the  support service contractor determined that the original request needed to  be modified. When payment requests received by HUD from the property  management firms or other vendors needed modification to either the  amount requested or property to be charged with the expense or other  information, the support service contractor would make the change and  prepare a revised payment request. This function is analogous to voiding  and then replacing a check in a manual payment system. HUD’s written  policies require that the management contractor create its own payment  requests and those needing modification be returned to the requesting contractor for any changes. That is, the contractor requesting the payment  was responsible for resubmitting the payment request after addressing the  issues that caused the need for modification.
However, HUD regional officials advised us and were aware that this  control was not followed primarily to avoid delays in processing payments.  In these cases, the support service contractor, using the same transmittal  number that was used for the original request, created the revised payment  requests.
HUD also relied on the support service contractor to prepare payment  requests (step 1) and perform the administrative review (step 2) of  payment requests when the vendors requesting payment did not have  access to the electronic payment system—HUD SAMS. While the property  management contractors have access to SAMS, other vendors who  routinely request payment from HUD, for example closing agents, do not.  In some of the cases, the vendors without access to SAMS were submitting  requests for payments directly to the support services contractor, rather  than to the property manager of the underlying property or a HUD official  who would be in a better position to monitor the completion and quality of  work.
In addition, HUD requires that vendors provide a signed request form, as  assurance that the information submitted on payment requests is true and  accurate. We found numerous requests created by the support services  contractor that did not have this signature. Instead, the support services  contractor signed the request form.
This text box as well as those following in this section of the report are quotes from the U.S.  General Accounting Office, Standards for Internal Control in the Federal Government,  GAO/AIMD-00-21.31.1. (Washington, D.C.: Nov. 1999). “Transactions and other  significant events should  be executed by persons  acting within the scope of  their authority.” homeownership centers were not properly approved due to a lack of  technical review. Specifically, we found that the support services  contractor was routinely performing the technical review (step 3.1)  reserved for the HUD-appointed GTM at two of the four HUD  homeownership centers. In these situations, HUD permitted the support  services contractor to act outside the contractor’s scope of authority  granted through the HUD control structure by conducting the review,  which requires a HUD-appointed individual with specific technical  expertise. That is, the request for payment should not have been approved  due to the absence of the GTM technical review.
HUD’s delegation of the oversight functions for three of the four steps of  the SF property payment process significantly weakened the control  environment. The overreliance on the support service contractor resulted  in a control environment where the controls over rejected payment  requests and the approval of requests were not followed. When oversight  functions are delegated in a manner that does not support a positive  control environment, the control process may not be effective in detecting  and preventing improper payments.
section_title: HUD Payments Lacked Adequate Support
paragraphs: On the basis of our statistical sample, we estimated that about 42 percent  of the total number of SF property payments at the four homeownership  centers were not adequately supported. That is, the minimum support  necessary for a third party to determine the validity of the payment was not  included in the documentation provided with the payment. Control  activities, such as clearly documenting all transactions, are an integral part  of an entity’s accountability for stewardship of government resources.
HUD did not enforce consistent program wide documentation  requirements, but rather allowed each HUD approving official to determine  the adequacy of supporting documentation. As a result, the nature and  extent of acceptable supporting documentation was inconsistent from  region to region. For example, two of the four HUD homeownership  centers accepted “manual” payment requests that were created outside of  the HUD automated system. This deviation from the written internal  control policy created inconsistencies in the payment request process  among the contractors for that region as well as across the four  homeownership centers. These “manual” payment requests did not have all  the supporting data elements (e.g., payee Social Security number or tax  identification number, address, remittance address) that the system- generated payment request included. Therefore, edit checks in the  automated system, such as limitations on who was authorized to change  the payment remittance address, were lost when manual payment requests  were created.
We found payments that also lacked adequate support, such as evidence  that goods or services had been received, and that competitive bids had  been obtained prior to the work being performed. Some supporting  documentation lacked evidence of any validation of the charges. For  example, payments to the contractor responsible for spot inspections of  properties typically would be based on an invoice that reflected a fixed rate  per property inspected and a list of the properties inspected. However, the  support for these payments was devoid of any indication that the reviewer  had verified the rate used, HUD’s ownership of the properties inspected, or  otherwise determined the validity of the amount and relevant terms of the  payment request. We also found that invoices and other supporting  documentation were not effectively canceled to prevent unauthorized or  inadvertent reuse as support for subsequent billings, and that other than  original documents were used to support payments without any indication  as to why other than an original invoice was accepted.
We advised HUD officials when adequate supporting documentation was  missing and we could not determine the validity of a payment selected for  review. HUD management advised us that the support for certain amounts  paid was not included with the payment documentation; however, the  reviewing, approving and certifying officials were to simply review the  contract file to verify the accuracy of the charges. We did not see evidence  of this contract review. For example, as discussed later, through data  mining we identified $15.2 million in payments for contract modifications  with insufficient supporting documentation. The support for these  payments was typically limited to copies of e-mails to the homeownership  center from headquarters directing that payment be made, incomplete  standard contract modification forms, and spreadsheets detailing by  property only an insignificant portion of the total amount paid. We also  identified cases where the HUD approving official at one of the  homeownership centers was not requiring a contractor to provide specific  support for payments to subcontractors, even though certain minimum  support was required by the terms of the management contract, such as  evidence that the contractor had paid the subcontractor before requesting  reimbursement from the government. Adequate support for these amounts  is critical because the payment is a reimbursement for the amount paid by  the contractor to the subcontractor. Later in this report, these and other  examples of payments without adequate support that were identified  through data mining will be discussed in more detail.
section_title: HUD Failed to Monitor Contractors Adequately
paragraphs: Neither HUD headquarters personnel, nor the regional staffs,  systematically performed detailed analytical reviews of the millions of  dollars in expenses generated by payments to contractors and other  vendors. Monitoring the quality of performance over time is a critical  control activity. Detailed analytical review of expenses focusing on key  data elements is a way for management to assess performance and identify  areas of risk. Although monitoring was deficient, HUD did perform some  program wide analysis of certain financial performance indicators and  limited analysis was done on a region-by-region basis. For example, the  average holding costs per property and average time held in inventory  were calculated. HUD headquarters officials stated that when a region had  a “spike” in one of its performance indicators, a conversation to identify  potential causes will take place. However, without specific analytical  review of expenses, the real causes of the “spikes” may not be identified.
Analytical reviews include focusing on key data elements, such as property  number, vendor name, and expense classification, to identify patterns or  anomalies that may require further inquiry or analysis. The results of  detailed reviews can lead to cost-saving opportunities, the identification of  usual patterns, and ultimately the discovery of instances of fraud, waste,  and abuse. The automated SF payment system captures expenses by   (1) case number and (2) expense category. These system features have the  potential to assist HUD in strengthening its oversight of contractors. For  example, totaling expenses by property provides HUD with the ability to  compare and analyze property expenses over time from acquisition  through sale of the property in a variety of ways, including by geographical  region and contractor. Further, analyzing expenses by category, such as  board-up, general repair, and clean-up expenses, would provide HUD with  meaningful oversight information. Also, HUD management may find  focused expense analysis work, similar to that which we performed for this  review, to be an effective and efficient method for assisting in preventing  and detecting improper payments. Our detailed analytical reviews of HUD  payment data identified patterns that led us to specific improper payments.  For example, figure 3 illustrates one of the basic types of analyses we  performed to determine areas of high risk that allowed us to focus on the  areas we viewed as most vulnerable to improper payments.
Our analysis, as depicted at figure 3, focused our attention on determining  the reason for the relatively high expense per property in the Philadelphia  homeownership center, and then on one particular contractor within that  center, when compared to other regions. We ultimately identified  significant potentially fraudulent payments made at the New York City  properties that are discussed later in the report. Our Executive Guide:  Strategies to Manage Improper Payments explains how data mining and  other forensic auditing techniques analyze data for relationships that have  not previously been discovered. The guide also provides examples of  various federal and state agencies that had performed such analysis. HUD  officials indicated that lack of resources was the primary reason that they  did not perform detailed expense analysis.
We found that one potential roadblock to a meaningful detailed analytical  review was HUD’s lack of control over expenses that it classified as  allocated costs (AC). This expense category was intended to be used to  accumulate expenses that could not be directly charged to a property and  then allocate those expenses over all properties or those that received  some benefit from the expense. For instance, the expense incurred for  bonding coverage and file reviews for the entire program would be  properly chargeable to AC and then allocated to all properties. However,  HUD routinely used AC for expenses that should have been charged to  specific properties. For example, we identified renovation charges for a  specific property being classified as allocated costs. The accountability for  HUD resources and ultimately the monitoring of the contractors’  performance were negatively affected when expenses were not  consistently and accurately classified.
HUD’s internal control monitoring of its contractors did not ensure timely  and effective action in response to identified risks. For example, we found  there was not an effective property inspection program that linked physical  inspections to work billed. We also found that HUD made payments in its  single-family program to a contractor for 1 year after we testified that the  same contractor was engaging in abusive billing practices in HUD’s  multifamily program. Although HUD held numerous meetings with the  contractor over several years since shortly after the inception of the  contract in June 2001, HUD did not promptly or effectively address the  identified risk by implementing compensating controls over this  contractor’s activities. We will discuss these issues in greater detail later in  this report.
section_title: Lack of Controls Contributed To Questionable and Potentially Fraudulent Payments
paragraphs: The lack of fundamental internal controls over the process used to pay SF  property expenses likely contributed to $16.3 million of questionable and  $181,450 of potentially fraudulent payments that we identified through the  use of forensic auditing techniques, including data mining and document  analysis. We found questionable payments for invoices that had not been  appropriately reviewed and authorized, that lacked adequate support and  documentation, and where one person falsified a key support document. In  addition, HUD did not monitor contractor performance and take prompt  action to correct known deficiencies. As a result, we found a number of  instances where HUD paid for contractor services that were substandard  or not performed at all. These potentially fraudulent billings were all made  by a contractor we identified in our previous work on certain fiscal year  2001 MF property payments as carrying out highly questionable billing  practices. HUD recently took action to end its use of this contractor. The  $16.5 million of questionable and potentially fraudulent payments made to  contractors and other vendors during fiscal years 2002 and 2003  demonstrates the unacceptably high vulnerability of the program to  questionable and potentially fraudulent payments.
subsections: section_title: Questionable Payments
paragraphs: We classified payments as questionable if they were not supported by  sufficient documentation to enable an objective third party to determine if  each payment was a valid use of government funds. For the $16.3 million in  payments we classified as questionable, we could not determine, as  applicable, one or more of the following: (1) the nature of the goods or  services HUD was paying for, (2) if the quantity and cost for the goods or  services was correct for each item purchased, (3) if the government  received the goods or services, (4) if a valid contract or other agreement  existed to support the payment, (5) if the payment was for a valid  obligation of the program, (6) if competitive bids had been obtained for the  work, and (7) if there was a legitimate government need for the goods or  services. Table 1 summarizes these questionable payments.
For illustrative purposes, we provide specific examples of actual support  for eight payments. The documents that are reproduced in the examples  were provided to us by HUD as support for these payments and are the  same support that HUD officials relied on to review and approve the  payments.
We identified $15.2 million of questionable payments to contractors for  contract change orders with inadequate support for the payments. For  example, five property management contractors received $10.6 million in  payments for change orders when either no standard contract modification  agreement supported the payments or the modification agreement was not  signed by one or both parties. In addition, details of the amount charged for  each property were not provided for most of the amounts included in each  payment. Frequently, the payments were for services performed over long  periods of time prior to the date of payment and the supporting  documentation did not address why. For example, a change order issued  March 2001 led to payments over a year later of fixed amounts totaling in  the millions without an adequate explanation for the delay in payment  included in the supporting documentation.
In January 2004, HUD headquarters officials advised us that fully executed  contract modification agreements existed at the time each of the payments  was made. While HUD officials acknowledged that the agreements and  underlying detail support by property were not in the payment files, they  stated that the reviewer, approver, and certifying official reviewed all  documentation in order to verify the accuracy of the charges. We found no  evidence that the reviewers, approvers, or certifying officials had located  these documents to validate payments.
Figure 4 shows that the only support for a single payment of $1,318,692 in  June 2002 was an invoice that included two lines of explanation for  $452,000 and $862,661 with the description: “Lump sum Payment for  Change Order.” No other support was provided for these two line items,  such as a copy of a contract modification agreement signed by both parties,  a list of the property numbers for the properties that received the goods or  services, the time period covered by the payments, or an explanation as to  what the government was paying for. Allocated costs, a pooled expense  category, was charged with $1,314,661 of the total payment. The balance of  $4,031 was charged to specific properties. HUD internal control policies  require that specific properties be charged for all identifiable expenses.  Further, there was no indication that the approver sought to determine the  time period of the charges and relate that period to the dates HUD owned  the properties for which the payments were made.
Example 2–Water and Sewer Services We identified a $206,597 payment to one contractor for water and sewer  charges related to 31 HUD properties for an average of $6,664 per property.  HUD acquired the majority of the properties in 2001 or 2002. Substantially  all the $206,597 paid was for services provided prior to HUD's ownership.  We considered this payment as questionable because the support was  inadequate.
HUD regional officials informed us that payments were made to protect the  properties from liens by the water authority. We found no indication in the  payment support as to why HUD was paying for services provided even  before the period of ownership covered by the most recent HUD-insured  mortgage. While recognizing HUD's concern to protect the property from  liens, we found no indication that HUD pursued why these charges had not  been identified at the time of settlement and acquisition of the properties,  or that the contractor or HUD had pursued negotiating a settlement with  the water authority. Further, our review of the charges indicated numerous  large amounts given the nature of the property and the time period  involved. For example, one invoice dated July 2002 was for $35,756 for  water and sewer services from May 1995 through June 2002 for a property  HUD acquired in June 2001. Our research identified three prior owners of  this property during the period covered by the bill paid by HUD. Another  invoice was for $18,530 for services from January 1999 through May 2002  on a property HUD acquired in May 2002. Furthermore, at least two of the  prior owners received FHA loans to purchase this property, even though at  the time of purchase there were outstanding water and sewer bills related  to the property. Yet, HUD's payment files contain no indication that HUD  officials reviewed the charges for accuracy, despite the unusually large  amounts.
Example 3–Lead-Based Paint Abatement Program  Our review found eight payments totaling $268,800 that HUD headquarters  directed its regional offices to make to a contractor for partial  reimbursement of claimed expenses of $529,682 to develop a lead-based  paint abatement program. The contractor claimed that the lead-based paint  abatement program was developed in response to a HUD request. Support  for these payments did not include a signed contract modification form or  other agreement for the contractor to develop such a program, or any  indication of the amount or basis for settlement against the claimed  expense of $529,682. The support provided to us for two payments totaling  $99,000 had no signatures by HUD officials indicating the requests had  been reviewed, approved or certified for payment.
Further, the entire amount of the payments was charged to allocated costs,  a pooled expense category, and not to specific properties as required by  HUD policy.
Although we started asking for support for these payments in August 2003  and received some information from HUD over time, it was not until  January 2004, HUD headquarters provided us with documentation that  included emails from a HUD contracting official to the contractor that  indicate that the contractor agreed to accept $240,000 as the remaining  payment on the lead-based paint services, that invoices for this amount will  be handled as pass-through expenses similar to what was done for the  initial payment of $300,000 and that “we won’t need to issue contract  modifications this way.”
No explanation was provided as to how the $540,000 settlement was  reached or why such amount exceeded the total amount claimed by the  contractor. Further, the management contract provides that all costs of  performance are at the expense of the contractor unless otherwise  specifically identified as pass-through cost in the contract. HUD must  approve any additional pass-through expenses prior to the expense being  incurred. We found no evidence that development of a lead based paint  abatement program was specifically identified as a pass-through cost or  that HUD granted approval prior to the contractor incurring the expense.
Example 4-Signs and Airfreight Delivery We identified 10 payments totaling $58,343 for the purchase and shipping of  over 14,950 “for sale” signs for use by contractors on HUD properties. The  airfreight fee to ship the signs from Texas, the contractor's home office, to  field offices in various states including California, Tennessee, and Illinois,  totaled $6,805. The contractor did not obtain the required competitive  bids. Further, we found no evidence that (1) local supply sources had  been considered, (2) the quantity of signs paid for was reviewed for  reasonableness, or (3) the large air freight charges had been questioned.  Also, we could not reconcile some amounts paid to the invoices used to  support the payments. In January 2004, HUD headquarters officials advised  us that they agreed to be responsible for all costs incurred by the  contractor for developing the signs and for the accelerated delivery and  that a contract modification agreement was executed. However, they did  not provide an explanation as to why local supply sources had not been  considered, nor did they address the other issues described above.
We identified five payments totaling $30,366, to reimburse a management  contractor for fencing installed at multiple locations by a single vendor.  Figure 5 shows one such fence. There was no evidence that the contractor  obtained the required written competitive bids. The representatives of the  contractor that we interviewed in August 2003 told us that a city ordinance  requires this particular fencing vendor be used. In January 2004, HUD  headquarters officials advised us that the vendor was awarded the work  after a competitive bidding process. However, HUD could not locate the  supporting documentation as the bidding process had occurred some years  earlier.
We identified one payment of $98,695 and two subsequent payments of  $98,696 each for a total of $296,087 to a contractor for “Records  Management.” The support for the first payment (fig. 6) was the billing  from the contractor and an annotation from a HUD employee indicating  that it was “OK to pay.” There was no contract included with the support  for any of the payments. There also was no indication that the amount of  the payments had been compared to a contract. HUD regional staff advised  us that the “OK to pay” notation on one of the invoices by the division  director was sufficient to process the payment. In January 2004, HUD  headquarters officials advised us that a valid agreement for the services  was in place at the time of payment, but neither the contract for the  services, nor the modification to the agreement with the contractor, is  required to be attached to the payment. However, we found no evidence  that these documents were reviewed or considered prior to payment of the  invoices.
We identified a payment of $1,300 to reimburse a contractor for a fee paid  to an individual to vacate a property not in the HUD inventory. The support  for the payment was an internal e-mail questioning if the property was in  HUD’s inventory, a generic invoice that was unsigned and did not include  the FHA property number–a HUD requirement for all payments (fig. 7), an  unsigned “Agreement to Vacate” (fig. 8), and a final approval e-mail (fig. 9)  without explanation. HUD regional staff subsequently told us that a signed  “Agreement to Vacate” existed; however, we found no evidence of the  signed agreement with the support for the payment. HUD charged the  payment to Allocated Costs, a category for pooled expenses. The property  located at the address on the form did not have a FHA property number,  which is required to submit expenses for a HUD property. In January 2004,  HUD regional officials confirmed that at the time of payment the property  was not in the HUD automated payment system.
Example 8–Lawn Service and Repairs During our document analysis work we identified suspicious documents  supporting a number of payments. Specifically, we found numerous work,  one of which is illustrated by figure 10, that were initialed three times by  the same person certifying (1) receipt of competitive bids, (2) completion  of the work by the subcontractor, and (3) inspection of the work  performed. During our site visit to Santa Ana, California, we interviewed  representatives of the contractor and asked for an explanation for the  initials on these work orders. We were told that they had not noticed the  similarity in the initials and did not know the identity of “S. C”, the person  whose initials were on the work orders. Later the same day, the contractor  advised HUD by phone that the work orders had been falsified to support  disbursement requests.
We suggested to HUD that it perform an extensive review of payments  meeting certain criteria to identify any additional potentially improper  payments. HUD advised us in August 2003 that it was seeking  reimbursement of approximately $23,000 in payments that had been made  based on similar falsified work orders. However, approximately 2 months  later, HUD reversed its position and decided not to seek reimbursement for  these payments because the contractor assured them the work had been  performed. In January 2004, HUD headquarters officials advised us that  they supported the decision to not seek reimbursement from the contractor  because the work was “verified for completion.” However, the verification  of performance of the work was provided–months after the date of  payment–by the contractor that had falsified the documentation; HUD has  not independently verified that the work was performed.
In addition to the previous eight examples, we identified 22 other  questionable payments totaling $228,773. These included payments for  steel roll-up doors, appraisal services, newspaper advertising, and utilities.  The common issue with these payments, like others classified as  questionable, was the lack of adequate supporting documentation included  with the payment. Without this support, we could not determine whether  these payments were a valid use of government funds.
Because we tested only a small portion of the transactions that appeared to  be high risk and HUD internal controls did not provide reasonable  assurance that improper payments would not occur or would be detected  in the normal course of business, there are likely other questionable  payments that we have not identified.
section_title: Potentially Fraudulent Payments
paragraphs: HUD’s failure to monitor contractor performance and institute additional  control activities in response to known risks resulted in at least $181,450 of  potentially fraudulent payments. We identified $163,965 of potentially  fraudulent payments made in fiscal year 2002 and $17,485 made in fiscal  year 2003. We classified payments as potentially fraudulent when the scope  or quality of the work appeared to be misrepresented by the contractor or  the work appeared not to have been done at all.
Through data mining, we initially identified 287 invoices, totaling $476,104,  for single-family construction renovations that were submitted to HUD by  the contractor that our prior work identified as using highly questionable  billing practices, including (1) alleging that construction renovations were  emergencies, thus not requiring HUD preapproval, and (2) splitting  renovations into multiple projects to stay below the dollar threshold  requiring HUD approval. Each of the 287 invoices supported fiscal year  2002 payments and was for an amount less than the $2,500 threshold  requiring HUD approval. We selected properties to test the validity, by  physical inspection, of some of these $476,104 in payments, focusing on  those that appeared to be for tangible goods that we could readily identify.  In total, we tested the validity of payments totaling $136,264.
In June 2003, we visited nine HUD-owned single-family properties in New  York City being managed by the contractor referred to above. HUD staff  responsible for oversight of this contractor accompanied us to the  properties. At each of the nine properties we visited, we noted  discrepancies between what was represented on select invoices and what  was actually received, and determined that all of the $136,264 payments  tested were potentially fraudulent payments. We took photographs to  support our observations, when possible.
All of the invoices that we tested indicated that the work performed was  purported to have been for emergency repairs, meaning that no HUD  preapproval was required, nor was the property manager required to obtain  competitive bids for the work. Many of the work projects for the same  addresses were split among multiple invoices, most likely to stay below the  dollar threshold requiring HUD approval–as in the case we reported last  year about the multifamily construction renovation work performed by this  contractor. The labor charge was always $91 an hour–whether for clean up  and debris removal or a project typically requiring a mastered skill, such as  masonry.
We noted serious discrepancies between what was represented on invoices  and what was actually received at each of the nine properties we visited.  For illustrative purposes, we are providing specific examples of some of  the discrepancies noted at five of the nine properties.
On the basis of physical inspection, we determined that HUD paid at least  $30,701 in fiscal year 2002 for goods or services related to this property that  were incomplete or do not appear to have been provided at all by the  contractor. For example, HUD paid (1) over $4,000 for replacement of the  entire apartment floor, including the bathroom, (2) $2,320 for a new ceiling  and bathroom door, (3) $2,170 to have four workers repair and install new  Sheetrock®, and (4) $1,590 for a small kitchen cabinet. The photographs  (figs. 11 through 14) show little or no evidence that this work was  performed.
As illustrated in figures 11 through 14, we saw no evidence of new flooring  in the apartment, and in fact, most of the floors were missing tiles or  otherwise very worn. The “new” ceiling was severely damaged and caved  in, and there was no new bathroom door. We found no new Sheetrock®, but  about two square feet of wall had been roughly patched. While there was a  new cabinet, we found a cabinet similar to the one pictured at a large  retailer for a price of less than $50.
On the basis of our physical inspection, we determined that HUD paid at  least $11,176, in fiscal year 2002, for goods or services related to this  occupied property that were incomplete or do not appear to have been  provided at all by the contractor. For example, HUD paid $2,060 for  “emergency repairs” to a bathroom and $1,082 for repairs to a stairway. The  photographs (figs. 15 through 17) show the condition of the “repaired”  bathroom and minimal work performed in the stairway at the time of our  physical inspection.
As illustrated in figure 17, the bathroom was in total disrepair. The repairs  to the stairway were merely two wooden dowels that replaced missing  balusters.
On the basis of physical inspection, we determined that HUD paid at least  $9,538 for goods or services related to this property that were incomplete  or do not appear to have been provided at all by the contractor. Specifically,  HUD paid (1) $2,265 for new ceilings, (2) $3,560 for repairing and painting  walls and ceilings, (3) $3,162 for floor repairs and replacement, and   (4) $551 for a new refrigerator. The photographs (figs. 18 through 20) show  the general condition of the ceilings, walls, and floors throughout this  property after the repairs.
As shown in the preceding pictures, it appeared that new Sheetrock® was  installed on the kitchen ceiling, however the job was not completed–the  ceiling had not been sanded or painted. The dining room ceiling was caved  in and the floors were old and in poor condition. In addition, the new  refrigerator was missing.
On the basis of a physical inspection, we determined that HUD paid at least  $32,677 for goods or services related to this property that were incomplete  or do not appear to have been provided at all by the contractor. For  example, HUD paid $2,292 for four new metal doors and installation. We  only found one metal door in the basement, shown in figure 21, which does  not appear to be new.
In addition, HUD reimbursed the contractor for five invoices, totaling  $8,407, for additional work performed in the basement, including clean up  and debris removal and replacement of a wooden floor. The occupant we  spoke with said the only work he was aware of being done to the basement  was the installation of the one old metal door. HUD also paid $3,978 for  repairs to the front entrance stoop (fig. 22).
Although we did observe patches of relatively new concrete, it appears that  HUD was overcharged for this work. In addition, HUD paid $3,200 for  cleaning and removing debris from the backyard. The occupant said no one  had cleaned the backyard and we noted that the backyard was currently  covered with debris, including old broken bicycles and large broken slabs  of concrete.
On the basis of physical inspection, we determined that HUD paid at least  $5,021 for goods or services related to this property that were incomplete  or never received. The contractor was reimbursed $1,048 for “emergency”  repair and painting of the public hall. The photograph (fig. 23) is of the  public hall.
As shown in figure 23, only portions of the walls were roughly painted. In  addition, HUD paid $2,167 for repairs, including plastering and painting the  walls and ceiling in the living room and dining room of one of the  apartments on this property. The photograph (fig. 24) shows the condition  of the ceiling and part of the wall in one of the rooms where this work was  said to have been performed. Similar conditions were observed in the other  rooms purported to have been repaired.
We noted similar discrepancies, totaling $47,151, at the other four  properties we visited. In total, based on our June 2003 physical inspection,  our work indicated that 82 invoices, totaling $136,264, were most likely  fraudulent.
In June 2003, we met with HUD officials in headquarters to discuss the  results of our June visit. The HUD Philadelphia office officials that  accompanied us on our physical inspection were teleconferenced in on the  meeting. We used the photographs included in this report to help  communicate the severity of the deficiencies we noted.
We also discussed the results of our June visit with Committee staff, which  resulted in an expansion of our work (1) to determine whether HUD had  made changes to its internal controls to address the causes of the  potentially fraudulent payments that we had identified in June 2003 and   (2) to test for additional potentially fraudulent payments. Our work  included additional tests for receipt of goods and services for payments  made in fiscal year 2002, as well as certain payments made in fiscal year  2003. As a result, we found another $45,186 in potentially fraudulent  payments, consisting of $25,657 of fiscal year 2002 payments and $19,529 of  fiscal year 2003 payments.
We determined that HUD had not implemented new controls or modified  existing controls to address weaknesses previously identified. For  example, HUD did not institute monitoring policies that would increase the  frequency or scope of the inspection to verify that goods or services paid  for had, in fact, been received. Furthermore, HUD officials told us that the  contractor had not been directed to perform the services for which HUD  had paid $136,264 and received little in return.
In November 2003, we attempted to physically inspect the same apartments  in each of the nine previously visited properties. However, we only had  access to the apartments within each property where the occupants  allowed us to enter. In total, we gained access to seven of the nine  properties that we visited in June. At these seven properties, we saw no  evidence that any attempt was made to correct the work that HUD paid  $39,686 for and we previously identified as having been incomplete or not  performed at all. The additional $45,186 in potentially fraudulent payments  that we found included $13,138 for repairs and renovations to the  properties we visited in June. The remaining $32,048 of additional  potentially fraudulent payments was related to nine additional properties  that we visited. The same contractor managed these properties.
During this second visit, we again noted numerous discrepancies between  what was represented on invoices and what was actually received. For  illustrative purposes, we are providing specific examples of a few of the  discrepancies noted.
At one of the properties that we revisited, HUD paid a total of $2,759 for  “emergency” repairs to a bathroom wall and floor tiles ($1,756) and bathtub  repairs ($1,003). As evidenced by the photograph (fig. 25), the only  indication that the bathroom wall or floor tiles had been repaired was that a  few tiles on the wall by the toilet had been replaced.
As shown in the photograph (fig. 26), the “repaired” bathtub was old and  rusted and did not appear to have received $1,003 in repairs.
At yet another revisited property, we found an additional $2,977 that HUD  paid the contractor for repairs to the entrance lobby and public hallway. As  discussed previously in this section, the entrance lobby had not been  repaired and only portions of the public hall had been roughly painted. It  was not evident that any further work had been done.
The remaining $32,048 of additional potentially fraudulent payments was  related to the nine new properties that we visited. We determined that HUD  paid at least $19,763 for goods and services related to one of these  properties that did not appear to have been delivered. For example, HUD  paid $1,813 for installing new tiles to the stairs pictured (fig. 27).
As evidenced by the photograph above, the stairway was not retiled. At this  same property, HUD paid the contractor $2,008 to install a new ceramic tile  bathroom floor, a shower rod, and a medicine cabinet. The floor we saw  (fig. 28) appeared to be several years old. Furthermore, the occupant stated  that he purchased and installed the medicine cabinet.
At another property, we determined that HUD paid at least $7,420 in  potentially fraudulent payments, including $1,847 for installing a new  bathroom floor. As indicated in the photograph (fig. 29), portions of the  bathroom floor were missing, and clearly had not been recently replaced.
Our analysis of supporting documentation indicated that the contractor  might have used the same scheme in the SF payment process that it had  used to circumvent controls in the MF payment process, which we  reported in October 2002. The scheme involved (1) alleging that  construction renovations were emergencies, thus not requiring multiple  bids or HUD preapproval, and (2) splitting renovations into multiple  projects to stay below the dollar threshold of HUD-required approval. We  referred the improprieties that we previously identified to the HUD OIG. A  HUD OIG investigator told us that these improprieties have been referred  to the U.S. Attorney’s Office.
As illustrated in figure 30, HUD hired the contractor in July 1997 to manage  a portfolio of MF properties. During the first year of the contract, HUD  became concerned about the contractor’s billing practices. HUD  questioned the contractor about the rotation of vendors, determination of  fair pricing, and reasonableness of work orders issued. HUD documented  its many concerns, including that “it is evident that a great amount of  money is being spent with little control in place.” In June 2001, despite  serious performance deficiencies, including questionable procurement  practices, HUD increased the contractor’s responsibilities by modifying the  contract to include certain SF properties in New York City. In November  2001, HUD began to question the contractor about its billing practices  related to the SF properties. In October 2002, we testified about the  potentially fraudulent fiscal year 2001 billing practices of this contractor.  According to HUD officials, the MF contract expired in February 2003.
According to HUD officials, the agency aggressively monitored the  contractor’s performance; identified performance deficiencies from the  onset of the task order; and identified deficiencies in services, products,  and billings to the contractor management. A HUD memorandum  summarizing its efforts to improve the contractor’s performance indicated  that in November 2001, it began meeting with the contractor to review  issues of concern about the SF properties. HUD noted that one of the  obstacles to the contractor’s successful performance was that the contract  did not clearly define the details of work to be performed. In addition, the  statement of work for the contract did not take into account the special  nature of the 203(k) property challenges, such as sites dispersed  throughout New York City and extensive legal and municipal involvement.  The memorandum also stated that HUD considered terminating the  contract. However, since the agency (1) had not issued any formal notices  of concern to the contractor and (2) difficulty existed in quickly finding a  qualified replacement contractor, HUD agreed to one final effort to  improve the contractor’s performance. HUD and the contractor agreed to  revise the statement of work to reflect a clearer and mutually agreed upon  basis by which to measure the contractor’s performance. The new  statement of work was issued in June 2003. Within 60 days of the issuance  of the new statement of work, HUD noted serious findings, including  unacceptable work, unreasonable prices, and some work that appeared not  to have been done at all. Throughout all of this period, HUD continued to  pay bills from this contractor.
On October 23, 2003, HUD issued an amendment to the contractor’s task  order to end the contractor’s management responsibilities on October 31,  2003. A new contract was put in place on October 17, 2003, which requires  the new contractor to absorb the cost of all routine maintenance and  repairs. HUD officials stated that the agency held back the payment of  recently submitted billings from the prior contractor that HUD deemed  questionable. However, HUD officials also told us that the agency was not  seeking reimbursement for any previously paid billings, including those  identified by our audit for which HUD received little in return. HUD paid  this contractor $2 million in fiscal year 2002 and over $2.5 million in fiscal  year 2003 for SF property expenses.
section_title: Insufficient Monitoring of a Major Multifamily Program
paragraphs: We found HUD’s monitoring of a major multifamily pilot program with a  state housing agency to be insufficient. HUD entered into an agreement  that made it responsible for providing all the money needed to complete  the program, while the state agency was responsible for developing and  monitoring the program. HUD viewed the program as a way for the state  agency to employ innovative management and disposition methods and  entered into a sole source agreement with an initial development budget in  the amount of $187.5 million. However, HUD did not fully assess the  program’s inherent risks under the terms of the agreement and design  compensating internal controls to address these risks. In addition, HUD did  not implement internal controls appropriate for monitoring the escalating  risks, while the cost of the program, borne by one of HUD’s mortgage  insurance funds, climbed to over $537 million from inception in 1994  through September 30, 2003. Additional oversight by HUD may have helped  prevent at least some of the more than half a billion dollars in program  costs—$286,400 expended per apartment unit—for the renovation, interim  management, and ultimate disposition of 1,875 apartment units.
The National Housing Act authorizes the Secretary of HUD to delegate to  state agencies the performance of management and disposition-related  functions. HUD determined that it was in the public interest for it to enter  into a sole source agreement with a state housing agency for interim  property management, to include renovation and ultimate disposition of 18  HUD-owned multifamily properties within the agency’s home state. HUD is  providing all the money for the program and the state agency is responsible  for all spending, including amounts for construction, renovation, and day- to-day operations of the properties. Although the program agreement did  not list an expected completion date, HUD officials told us that the  program was intended to take approximately 3 years. It is currently in its  10th.
Our publication, Standards for Internal Control in The Federal  Government, states that (1) management needs to comprehensively  identify risks and should consider all significant interactions between the  entity and other parties, (2) internal control monitoring be performed to  assess the quality of performance over time, and (3) appropriate internal  controls should be implemented to improve accountability. However, we  found that HUD’s monitoring was limited to the approval of property  budgets. Internal controls should be designed to ensure that ongoing  monitoring occurs in the course of normal operations. When, as here, the  terms of the agreement charge one party with authority over virtually all  spending decisions, including to whom, in what amount, and under what  terms large construction contracts will be let, and the other party is  responsible for paying all the bills, strong monitoring controls are  necessary to control spending and encourage financial accountability.
In spite of the inherent risks that stemmed from the terms of the underlying  agreement with the state housing agency, HUD did not analyze these risks  and design controls to address them either initially or in reaction to  escalating costs over a 9-year period. HUD did not incorporate adequate  spending controls that may have served to limit its financial exposure  before entering into the program agreement with the state agency.  Spending controls that may have been appropriate considering the terms of  the agreement with the state agency include: specifying performance  penalties for missed completion dates, requiring that feasibility studies be  conducted prior to undertaking major contractual commitments, providing  a cost-sharing formula that would assign some economic risk to the  program developer, and limiting the amount that HUD would pay for  specific line items by project, such as a ceiling on the amount that would be  reimbursed for tenant upgrades by property. Furthermore, despite  significant spending in excess of the original budget, HUD’s oversight of the  program never evolved beyond approval of the properties’ initial  development budgets. HUD also did not establish processes to routinely  estimate and compare projected development costs to total estimated costs  per the program agreement or to consider the impact of unanticipated  occurrences, such as expenses to mitigate environmental hazards.
The largest categories of expenditures were for general construction and  other contractor charges. The state agency was responsible for all aspects  of the contracting process including the competition plan, which typically  is a key function in ensuring that the government receives the best  combination of price and quality. These general construction payments  totaled approximately $178 million of the total incurred cost of $481 million  through September 30, 2002. The state agency awarded 23 separate  construction contracts to rehabilitate the 16 properties in the program that  ranged in amount from $49,600 to over $45 million. The construction  contractors received periodic payments based on the percentage of work  completed, which was reflected in monthly requisitions. The state agency  was solely responsible for reviewing and approving the monthly  requisitions and construction contractors’ periodic payment requests. HUD  paid all of these expenses, while providing no oversight of the construction  contractor’s monthly payments beyond the approval of initial development  budgets.
HUD paid significant amounts for expenses in excess of amounts in the  original contract award due to unforeseen natural conditions, tenant  requests, and other contract amendments for changes in the architectural  scope of work. For example, HUD paid an additional $8.9 million in  contract amendments at one property, which had an initial construction  contract of over $45 million. Contract amendments were granted when the  architectural specifications included in the original construction contract  did not include certain work being performed by the construction  contractor. These payments were for unforeseen conditions, such as the  need to address environmental hazards and requests from tenants for  tenant upgrades. Tenant upgrades at one 236-unit property included the  following: installation of molding on stairs, $101,779 ($431 per unit); labor  and materials for two coats of varnish on stair molding, $115,000 ($487 per  unit); upgrades to ceiling light fixtures, $114,648 ($189 per bedroom);  ceramic tile back splashes, $71,775 ($304 per unit); soap dispensers at sinks  for $19,430 ($82 per unit); and upgrades of door hardware from satin  chrome to satin brass for $18,650 ($79 per unit). HUD was not in a position,  due to its limited monitoring of the program, to challenge or otherwise  determine the validity of these payments.
HUD also granted the state agency the flexibility to make payments “off- budget.” The expenses designated as off-budget included such costs as  environmental hazards, consulting and monitoring, and tenant relocation  expenses. The state agency’s annually adjusted asset management fee was  also considered off budget. In addition, for one property we found that  HUD directed the classification of charges associated with extraordinary  site development and building demolition as environmental hazard  expenses. This classification allowed the costs to be considered as off  budget. Since inception of the program, payments made by HUD that were  classified as off-budget totaled over $241 million (see table 2), including  environmental hazard expenses of approximately $58 million, and  expenses related to tenant relocation of $46 million. When HUD granted  the state agency the ability to charge off-budget items and then did not  define or limit this type of spending, it substantially weakened the  effectiveness of the limited control stemming from its approval of the  original development budget for each property.
As of the close of fiscal year 2002, the program has cost HUD in excess of  $481 million, almost $300 million more than the original development  budget, and remains a work in progress. In addition, HUD reported that an  additional $56 million was expended for this program in fiscal year 2003.  HUD officials have advised us that they do not plan on entering into any  future agreements with similar terms. Internal controls tailored to address  the inherent risk, including additional oversight by HUD, may have  prevented some of the cost escalation and would have provided  management with a reasonable basis for ensuring that the more than half a  billion dollars in program payments were properly supported as a valid use  of government funds.
section_title: Conclusions
paragraphs: The problems we identified with internal controls and risk management  over HUD single-family and multifamily property programs leave the  agency vulnerable to wasteful, fraudulent, or otherwise improper  payments. This vulnerability was capitalized upon by at least one  contractor and potentially others during the period of our review as  evidenced by the potentially fraudulent and questionable payments we  identified in the SF program. Even after HUD officials became fully aware  of this improper activity, they did not take timely action to stop the flow of  money being paid to this contractor for substandard or nonexistent  services. Further, HUD also failed to establish any kind of control over  money it provided for the major multifamily program, even though costs  escalated to triple the original development budget.
Improper payments increase the expense of program delivery and may  reduce the quality of program services. This additional expense must be  funded by either a decrease in spending-in the affected program area or in  other FHA programs-or by an increase in revenue from congressional  appropriations or mortgage insurance premiums paid by those buying  homes through the FHA SF program. Because of the long-term nature of  funding decisions for the HUD mortgage insurance funds, including the  rates charged for mortgage insurance, the impact of improper payments  might not be visible to policymakers and managers. Such hidden expenses  are nevertheless real and cumulative in effect. HUD must take steps to  identify and manage its improper payments in order to minimize costs to  FHA mortgage holders and taxpayers and maximize funds available to  carry out its programs.
section_title: Recommendations for Executive Action
subsections: section_title: Single-Family Property Program
paragraphs: To improve internal controls over HUD’s single-family property program,  we recommend that the Secretary for Housing and Urban Development  direct the Assistant Secretary for Housing-Federal Housing Commissioner  to take the following 22 actions to address the weaknesses within the  single-family program discussed in this report.
Establish policies and procedures that create a positive control  environment for all key steps in the single-family payment process.  These polices and procedures should  require management contractors to prepare all payment requests for  which they are the payee, including any revised payment requests  that may be required;   provide adequate controls over preparation, review, and approval of  payment requests for vendors that do not have access to the  automated HUD Single-Family Acquired Asset Management System;   specify that the technical review of payment requests be performed  solely by HUD-appointed individuals with the requisite training and  experience; and   require HUD monitoring at prescribed time intervals to ensure that  these control features are being consistently implemented at all  payment review locations.
Establish policies and procedures over single-family payments to  contractors and other vendors that ensure all such payments are clearly  documented and the documentation is readily available for appropriate  officials to consider at the time they review and approve payment  requests. Depending on the type of payment, these policies and  procedures should   necessitate evidence of the nature of the goods or services the  payment is for;  call for documenting that the quantity and cost for the goods or  services is correct, was received and has been reviewed for each item  purchased;   require annotated verification that the amount and timing of the  payment is supported by a valid contract or other agreement signed  by both parties;   require documentation that the payment is for a valid obligation of   stipulate that competitive bids be obtained and evaluated before the   require confirmation that the goods or services are for a legitimate   require that all invoices and other supporting documentation be  effectively canceled to prevent reuse; and  require that only original documents be used to support payments, or  that there be evidence of compliance with policies concerning the  use of reproduced documents.
Establish policies and procedures over single-family payments to  contractors and other vendors that will improve the effectiveness of  HUD’s oversight of contractor performance. These policies and  procedures should  establish standard business metrics for comparing contractor  performance, to include expense data by contractor, total expenses  per property, and per expense classification;   ensure the preparation and review of these metrics regularly to  identify cost saving opportunities, unusual patterns that require  attention, and potential instances of fraud, waste, and  mismanagement; and  establish specific guidelines for when single-family payments to  contractors and other vendors may be classified as allocated costs.
Establish consistent practices for single-family payment processes, to  include the preparation of payment requests, review and approval of  payment requests, and minimum supporting documentation standards  for all payments, that will clarify what policies and procedures must be  adhered to by headquarters and all homeownership centers.
Follow up on each of the payments we identified as questionable or   determine if the payments are a valid use of government funds;   identify the causes for these payments to occur and not be detected  in the ordinary course of business; and   pursue recovery of amounts paid, as appropriate.
Perform a risk assessment of single-family payments to contractors and  other vendors to determine the nature and extent of HUD’s exposure to  improper payments. The risk assessment should   include a comprehensive review and analysis of operations to  determine where risks exist and what those risks are, including  assessing the need for linking property inspections with billed  amounts for goods and services provided;  measure the potential or actual impact of identified risks on program   establish compensating internal controls to address areas of  vulnerability identified through the risk assessment process.
section_title: Multifamily Program with a State Housing Agency
paragraphs: To address the significant internal control weaknesses that we identified  related to monitoring the multifamily program with a state housing  agency under a sole source agreement, we recommend that the  Secretary of Housing and Urban Development direct the Assistant  Secretary for Housing-Federal Housing Commissioner take the  following two actions.
Implement risk-based oversight and monitoring policies and  procedures to reduce HUD’s vulnerability to fraud, waste, abuse, and  mismanagement in the multifamily program with the state housing  agency.
Consider requesting the HUD Office of Inspector General to review  the propriety of the use of funds under the program with the state  housing agency.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, from HUD’s Assistant  Secretary for Housing–Federal Housing Commissioner which are reprinted  in appendix II, HUD agreed with some of our findings and  recommendations and disagreed with others. In particular HUD  (1) disagreed with our classification of certain payments, including   $15.2 million of inadequately supported payments for contract change  orders, as questionable payments; (2) agreed that the contractor for the  New York properties failed to provide certain services or provided  unacceptable services, but stated it had held back certain payments to the  contractor that included amounts we reported as potentially fraudulent;  and (3) regarding our recommendations related to the MF pilot program,  acknowledged that its agreement with the state agency did not contain the  necessary controls and oversight protocols to preclude the types of  problems we identified and agreed to examine opportunities to enhance its  oversight over the remaining life of this particular program; however, it did  not agree to enlist the HUD IG’s support to review the propriety of the use  of the funds at this time. HUD did not specifically comment on the other 22  recommendations related to its SF program.
With regard to contract change orders, HUD stated that it is inappropriate  for us to consider these 23 payments totaling $15.2 million as questionable.  HUD stated that for each of these payments (1) it had provided us signed  copies of the contract modifications, (2) the payments are clearly  supported by contract modifications issued by approved HUD contracting  specialists, (3) agency staff adhered to appropriate procedures in the  review and payment for the services identified in the modifications, and  (4) notations on the respective invoices by the HUD reviewing official that  he or she had looked at the contract modification to confirm its existence  prior to payment  is certainly not a prescribed procedure  and should not cause these payments to be classified as questionable.
We disagree. We classified payments as questionable if they were not  supported by sufficient documentation to enable an objective third party to  determine if the payment was a valid use of government funds. We found  each of these 23 payments totaling $15.2 million to be inadequately  supported at the time the payment was made. As stated in the report, these  payments were made without basic support such as standard contract  modification or other agreements signed by the contractors and HUD,  indication of the timing, quantity, and nature of the goods and services  provided, and identification of the specific properties covered by the  payments.
In January 2004, several months after our initial request for supporting  documentation for these payments and after our fieldwork was completed,  HUD headquarters officials advised us that fully executed contact  modification agreements existed at the time each of these payments was  made. These officials acknowledged that the agreements and underlying  detail support by property were not in the payment files but that the  reviewing, approving, and certifying officials reviewed all documents in  order to verify the accuracy of the charges. However, we found no evidence  of this during our site visits. In fact not one HUD reviewing, approving, or  certifying official indicated to us that they went beyond the documentation  contained with the payment request to ascertain the propriety of the  payments we reviewed.
Also, in January 2004, HUD headquarters officials forwarded us signed  copies of some, but not all of the contract modifications. That fact that the  signed contract modifications may have existed at the time payments were  made is peripheral to one of our core points that—HUD reviewing,  approving, and certifying officials have available and consider at the time  they review and approve the payment sufficient supporting documentation  to determine that a payment is a valid use of government funds. It is clear  from our review that this did not occur in the case of these $15.2 million  payments for contract change orders. In addition, the existence of the  contract modifications does not negate our other core point. Without  specific documentation, which HUD did not provide, indicating such things  as (1) the properties the charges relate to, (2) the time period the charges  were incurred, (3) an explanation of what goods or services were provided,  and (4) that HUD owned the properties at the time the goods or services  were provided, we could not determine the validity of these payments.  Therefore, they remain questionable.
HUD raised similar issues with regard to each of the other 8 categories of  payments totaling $1,113,266 that we classified as questionable. We address  these other issues in our more detailed comments in appendix II, where we  reaffirm our position that all of these payments are questionable.
Regarding the potentially fraudulent payments, HUD stated, and we agree,  that the department is obligated by government contracting procedures to  work with a sub-performing contractor to improve performance, rather  than move to immediate termination. However, it is not clear to us why  knowing of these serious performance deficiencies, including questionable  procurement practices that became apparent within the first year of the  contract, HUD continued for over 6 years to pay this contractor over   $425 million for charges related to SF and MF properties without instituting  additional controls to determine whether the goods and services billed for  had actually been provided at the properties.
In addition, we disagree with HUD’s statement that its “hold back” included  disbursements reported as potentially fraudulent payments in this report.  First, we assume that HUD means that it is recouping some of these  payments by holding back payment on newly received invoices from this  contractor. However, HUD staff responsible for oversight of the contractor  informed us that the held back payments relate to a barrage of old invoices,  some going back 2 or 3 years, that the contractor submitted during the  contract termination process. Many of these invoices had previously been  rejected by HUD, and the contractor merely resubmitted them. Therefore,  holding back payment on these invoices, while helping HUD avoid making  additional potentially fraudulent payments, does not result in the  recoupment of previously made payments for invalid charges.
In regards to our MF program recommendation to consider requesting the  HUD IG to review the propriety of the use of funds under the program,  HUD stated it has already initiated enforcement actions and claims against  certain architects and contractors for failing to perform satisfactorily and  plans to vigorously pursue all necessary enforcement actions that arise  related to this program. However, HUD said it would not consider  requesting the IG to review the propriety of the use of the funds for this  program at this time, as we recommended, but may elect to refer  unsatisfactory performance issues to the IG for further review. HUD also  said that it intends to complete a full evaluation of the program goals and  implementation at the end of the program and that the current HUD  administration would not recommend that the program be repeated. We  share HUD’s concern regarding this type of program and continue to  believe that given the hundreds of millions of dollars in budget overruns,  and the minimal oversight by HUD, that an independent review by the IG  office should be considered a part of HUD’s fiduciary responsibilities over  the funds.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from its  date. At that time, we will send copies to the Ranking Minority Member of  the House Committee on Government Reform; the Secretary of Housing  and Urban Development; and other interested parties. We will make copies  available to others upon request. In addition, this report will be available at  no charge on GAO’s Web site at http://www.gao.gov.
Should you or your staff have questions on matters discussed in this report,  please contact me at (202) 512-9508 or calboml@gao.gov or Robert Owens,  Assistant Director, at (202) 512-8579 or owensr@gao.gov. Major  contributors to this report are acknowledged in appendix III.
section_title: Scope and Methodology
subsections: section_title: Single-Family Property Program
paragraphs: To assess internal controls over HUD SF property payment transactions  and determine whether they provide reasonable assurance that improper  payments will not be made or will be detected in the normal course of  business, we   reviewed HUD SF policies and procedures, property management and  marketing contracts and amendments, our previous reports, and reports  issued by HUD’s IG, a financial management consultant, and an  independent contractor.  conducted walk-throughs of transactions and interviewed officials at  HUD headquarters, each of the four homeownership centers, and three  contractor offices.   tested internal controls using a statistically selected sample of  transactions. Specifically, we selected a stratified random probability  sample of 145 single-family disbursement transactions from a  population of 238,411 fiscal year 2002 transactions. We stratified the  population into HUD’s four regions--Atlanta, California, Denver, and  Philadelphia--on the basis of SF disbursement transactions made during  fiscal year 2002. The sampling unit was one disbursement transaction  occurring between the October 1, 2001, and September 30, 2002 posting  dates. Our estimates were calculated using a 95 percent confidence  level. In other words, we are 95 percent confident that each of the  confidence intervals in the report includes the true values in the  population. We tested the following attributes: (1) proper approval and  (2) validity of payment. We provided HUD with the transactions selected  and obtained and reviewed related supporting documentation.
To determine whether payments are properly supported as a valid use of  government funds, we  performed data mining on the database of HUD’s fiscal year 2002  disbursements for HUD SF properties to identify potentially improper  and questionable payments. We discussed the results of our analysis  with HUD regional and headquarters managers and requested that they  provide specific written responses to the payments that we identified as  potentially improper and questionable. We considered the responses we  received to assess whether in fact the payments were improper–that is,  questionable or potentially fraudulent and  nonstatistically selected certain payments described in the payment  records as incurred for tangible goods and services and physically  inspected the properties to test if the work described in the books and  records was fully performed and the tangible goods received.
In June 2003, on the basis of the results of the above-described work, we  communicated to HUD and representatives of your Committee on  Government Reform, that we had identified certain potentially fraudulent  payments. In November 2003, at the request of the Committee, we  expanded our work to (1) determine whether HUD had made changes to its  internal controls to address the causes of the potentially fraudulent  payments that we had identified in June 2003 and (2) test for additional  potentially fraudulent payments. We performed this work by interviews  with officials at HUD headquarters and one homeownership center, data  mining and physical inspection of properties. Our data mining and physical  inspection work included additional tests for receipt of goods and services  for payments made in fiscal year 2002 as well as certain payments made in  fiscal year 2003.
To assess internal controls over HUD SF properties and to identify  generally accepted principles and practices for a sound internal control  environment, we used our Standards for Internal Control in the Federal  Government, Internal Control Management and Evaluation Tool, Guide  for Evaluating and Testing Controls Over Sensitive Payments, and  Strategies to Manage Improper Payments.
While we identified some improper payments–questionable and potentially  fraudulent–our work was not designed to identify all improper payments  made in the HUD SF property program.
section_title: Multifamily Program with a State Housing Agency
paragraphs: To assess HUD’s monitoring of the multifamily program with a state  housing agency, we   reviewed HUD’s MF policies and procedures, the state housing agency’s  policies and procedures, contracts and agreements including HUD’s  contract with the state housing agency, our previous reports, as well as  reports issued by HUD’s IG and  conducted walk-throughs of transactions and interviewed officials at  HUD headquarters, a field office, and the state housing agency and its  contractor offices to identify what controls had been established to  manage the inherent risk of the program as well as monitor payments  over time.
We also performed analytical reviews of the payment activity since  inception in 1994 through September 30, 2002. Specifically, we developed a  template of program expenses for each property by expense line items,  such as general construction expense, environmental abatement expenses,  and expense per housing unit. We compared total costs per property to  amounts per the initial contract with the general contractor as well as  subsequent amendments. We discussed the results of our analysis with  HUD regional and headquarters managers and requested that they provide  specific written responses to issues and questions identified by our  analysis. We considered the responses we received – in writing and orally– in assessing HUD’s performance in monitoring the program.
We conducted our review, in accordance with generally accepted  government auditing standards as well as with the investigative standards  established by the President’s Council on Integrity and Efficiency, from  December 2002 through January 2004 at HUD headquarters, a field office,  and homeownership centers in Atlanta, Ga.; Philadelphia, Pa.; and Santa  Ana, Calif. We also visited contractor offices in Atlanta, Ga.; Philadelphia,  Pa.; Santa Ana, Ca.; and Falls Church, Va.
We requested written comments on this report from the Acting Secretary of  HUD or his designee. Written comments were received from Assistant  Secretary for Housing–Federal Housing Commissioner and are reprinted in  appendix II.
section_title: Comments from the Department of Housing and Urban Development
paragraphs: The following are GAO’s comments on the Department of Housing and  Urban Development’s letter dated February 19, 2004.
subsections: section_title: GAO Comments
paragraphs: 1. During the course of our work, we considered whether changes had  been made to HUD’s processes and procedures. For example, we  identified HUD’s over reliance on a support services contractor in the  payment process for fiscal year 2002 payments and determined that this  practice continued through the conclusion of our work. In addition, in  November 2003, we updated our work to determine whether HUD had  made changes to its internal controls to address the cause of the  potentially fraudulent payments that we had identified in June 2003.  Again, no changes had been made. 2. See “Agency Comments and Our Evaluation” section.  3. We understand that it may be necessary to pay for services provided  before HUD owned the properties in order to avoid liens. However,  given the unusually large amounts involved and the nature of the  properties and time period covered by the bill, we continue to believe  that HUD officials should have questioned these charges before  payment. As stated in our report, we found no indication that HUD  attempted to find out why these charges were so large, or why they had  not been identified at the time of settlement and acquisition of the  properties. We also found no indication that the contractor or HUD had  pursued negotiating a settlement with the water authority or recovery  from other parties who may have been responsible for the charges.  4. The draft of this report sent for agency comment included 6 payments  totaling $169,800 that were paid to a contractor for developing a lead  based paint abatement program that we classified as questionable  because they were not adequately supported at the time the payments  were made. Based on recently provided HUD documents, we shifted  $99,000 previously included in the “other” questionable payments  category to this category (lead based paint abatement program). We  had originally classified it as “other” because we had received no  support for the payments and thus had no basis for knowing that the  $99,000 related to the paint abatement program. We initially requested  support for 2 payments totaling $99,000 in October 2003. On   February 17, 2004—for the first time—HUD provided some  documentation for these two payments which indicated that these were  made to the same contractor for developing the lead based paint  abatement program. On this basis, we changed our report to clarify that  8 payments totaling $268,800 is the amount of questionable payments to  a single contractor for developing a lead based paint abatement  program.
None of the $268,800 in payments were adequately supported because,  among other things, there was no evidence of a contract modification  or other agreement for the contractor to develop such a program. In  addition, there was no indication of the total amount to be paid by HUD  to satisfy the amount claimed by the contractor, or the basis for  reimbursing the contractor for these types of costs that, according to  written provisions in HUD’s management agreement with the  contractor, were not allowable unless approved by HUD in advance.  5. Our review found no indication of the emergency nature of the charges  in HUD’s supporting documentation for any of these payments. The  payments we identified took place over an extended period of time in  fiscal year 2002 and were not limited to a narrow “emergency” period.  Our stated concerns about duplicate invoices used to support payments  and invoices not matching amounts paid also are unresolved. Further,  we continue to question why local supply sources were not considered,  which would have avoided the incurrence of significant airfreight  charges.  6. Each of the five payments we tested were made not only without  documentation of the competitive bids, but also without any indication  by the reviewing, approving or certifying official that they were even  aware of the possible existence of competitive bids, or whether the  billing contractor had in fact been the successful bidder. Therefore we  continue to view these payments as questionable.  7. HUD provided us with a copy of the signed modification on January 26,  2004, more than 3 months after our initial request for documentation to  support the payments totaling $296,087 that HUD paid for records  management services. As stated in the report, there was no contract (or  modification) included with the support for these payments or any  indication that the payment had been compared to a contract (or  modification) prior to payment to confirm that HUD had authorized  these services at the amount charged. Rather, HUD regional staff  advised us that the “OK to pay” notation on one of the invoices by the  division director was sufficient to process the payment. Such action  represents circumvention of HUD’s payment process controls and  therefore these payments continue to be questionable. 8. HUD’s response does not address the points raised in our report  regarding the lack of proper documentation to support the validity of  the payment including whether HUD owned the property or a related  FHA loan existed at the time of payment.  9. As described in the report it is the actions of the management  contractor that are at issue, not the actions of a subcontractor.  10. Regarding HUD’s statement that “it is important to note that in these  two Centers, two of the three internal controls reviews did occur”, our  view is that internal controls over payments are not one event, but  rather a sequential process with each action being dependent on the  preceding steps having been satisfactorily performed. The flaw we  identified in these cases relates to a fundamental control for  authorizing payments whether in the public or private sector. Without  confidence that payment requests are justified based on contracts or  other agreements for those specific services at the prices billed and  that the work has been satisfactorily completed, there is no basis for  payment. 11. It is unclear what HUD means by “detailed analytical reviews of  vouchers.” Our point is that detailed analytical reviews of expenses did  not take place. As stated in our report, such reviews would be an  efficient and effective way of analyzing expenses to identify anomalies  and cost saving opportunities. It was just such review that alerted us to  potential improprieties in payments related to the New York City  properties.  12. Neither our report nor our recommendations address the timing for  completion of construction and rehabilitation of the MF program.  However, given that the program has now extended over 10 years and  the costs are in excess of $500 million dollars through fiscal year 2003,  we agree with HUD’s stated goal to complete the program by the end of  this year.
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: Staff members who made key contributions to this report include Sharon  Byrd, Stephanie Chen, Lisa Crye, Bonnie Derby, Carmen Harris, Kelly Lehr,  Sharon Loftin, Julia Matta, Irvin McMasters, Andrew O’Connell, Lien To,  Estelle Tsay, and Brooke Whittaker.
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subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs