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

Letter

Background

Under the U.S. Housing Act of 1937, as amended, Congress created the public housing program to provide decent and safe rental housing for eligible low-income families, the elderly, and persons with disabilities. HUD provides subsidies for operating and maintaining public housing units through the Operating Fund. HUD also provides funds to modernize and develop public housing units through the Capital Fund. Public housing agencies administer these formula grant programs on HUD’s behalf. In using these funds, the agencies are responsible for ensuring that the housing is affordable to eligible low-income households. In 1992, Congress established the Urban Revitalization Demonstration Program, commonly known as HOPE VI, which provides grants to housing agencies to rehabilitate or rebuild severely distressed public housing.

The Single Audit Act, as amended, requires state and local governments and nonprofit organizations that expend $500,000 or more in federal awards in a fiscal year to have either a single audit or a program-specific audit. Under a single audit, the auditor must report its opinion on the presentation of the entity’s financial statements and schedule of federal expenditures, and on compliance with applicable laws, regulations, and provisions of contracts or grant agreements that could have a direct and material effect on the financial statements and, when applicable, on any major program of the audited entity. The auditor must also report the results of its review and testing of internal control related to the financial statements and major programs as well as a schedule of any audit findings and questioned costs. Public housing agencies subject to the act must submit audit reports to HUD and to the Federal Audit Clearinghouse. Single audit is a key assurance process used by HUD in its oversight of public housing agencies. Single auditors are required by the act to identify and test programs for compliance with specific program requirements and report identified findings (or the lack thereof), which can include those of inappropriate use and mismanagement of funds. HUD’s Real Estate Assessment Center (REAC), which is responsible for reviewing housing agencies’ financial data, began tracking the status of single audit findings in 2007 using the Monitoring and Planning System (MAPS) Audit Tracking Module. Through this tracking system, HUD monitors the resolution of audit findings. HUD maintains an additional system, the Audit Resolution and Corrective Action Tracking System (ARCATS), to monitor the status of management and financial findings issued by our or OIG’s recommendations.

HUD’s PHAS is another key oversight process. While single audits may identify specific instances of inappropriate use or mismanagement of public housing funds, PHAS was developed to evaluate the overall condition of housing agencies and measure performance in major operational areas of the public housing program. These include financial condition, management operations, and physical condition of the housing agencies’ public housing programs as well as resident satisfaction with the programs (see fig. 1).

The Financial Assessment Subsystem (FASS) component score is based on six financial data analyses that HUD has determined to be key in evaluating housing agencies’ financial condition. These include the following: the current ratio, which measures the housing agency’s ability to cover its short-term obligations; the months expendable funds balance ratio, which measures the housing agency’s reserves for unexpected expenses; the tenant receivables outstanding, which measures how well the housing agency manages rent collections; the occupancy loss, which measures how well the housing agency maximizes its revenue by renting out vacant units; the expense management, which measures whether the housing agency has adequate cost controls to manage expenses; and the net income, which measures whether the housing agency is spending more than it makes.

Housing agencies with scores of less than 60 percent in either the overall PHAS score (less than 60 points out of a total 100 points) or in any one of the major subcomponents, including the FASS (less than 18 points out of 30 points), are designated as substandard performers, also known as troubled. For example, points may be deducted from housing agencies’ FASS scores if the six financial analyses indicate that housing agencies are experiencing overall financial difficulties that may threaten the stability of the housing agency. According to HUD officials, although housing agencies’ financial data are usually audited, REAC analysts also review financial data to ensure the accuracy of information that is used to calculate the FASS scores. For example, REAC analysts examine specific line items in the financial data, investigate changes or discrepancies in amounts reported, and review auditors’ notes.

HUD field offices establish mechanisms to identify and correct deficiencies if a housing agency is designated as a troubled performer in either the PHAS overall score or the FASS subcomponent. Such mechanisms may include the development of an improvement plan or a memorandum of agreement. If technical assistance and sanctions fail to result in significant improvement within a year, the housing agency is referred to the HUD Enforcement Center, which may institute proceedings to place the agency in receivership and remove failed agency management. Receiverships generally result from long-standing, severe, and persistent management problems that have led to the deterioration of the public housing stock.

HUD’s Primary Oversight Processes Could Be Better Focused to Detect Housing Agencies at Risk of Inappropriate Uses or Mismanagement of Public Housing Funds

Persistent Problems with Audit Quality and Gaps in What Audits Cover Can Limit HUD’s Ability to Detect Misuse or Mismanagement of Public Housing Funds

Single audits, HUD’s primary tool for overseeing the use of public housing funds, are intended to, among other things, promote sound financial management by serving as a key accountability mechanism in the oversight and monitoring of recipients’ use of federal funds. Single audits provide federal agencies with information on the use of federal funds, internal control deficiencies, and compliance with federal program requirements. The Single Audit Act that mandated the audits does not require the auditors to perform procedures that focus specifically on all federal programs that housing agencies administer. Instead, auditors are to select and closely audit “major” programs administered by the recipient of the funds—typically large or risky programs—for compliance with specific program requirements, including the appropriate use of funds. In addition to single audits, OIG selects various housing agencies to audit as part of its oversight of HUD’s public housing program. HUD’s strategic goals for its public housing program call for the department to resolve issues identified by these audits and improve its management of internal controls to, among other things, eliminate fraud, waste, and abuse.

However, both HUD’s quality assurance office and a recent study conducted by PCIE have identified problems with single audits of housing agencies. OIG also identified problems with single audits after conducting detailed reviews of housing agency operations as part of its oversight process. Both OIG’s audits and quality assurance reviews by HUD have, in some cases, resulted in disciplinary action for single auditors. HUD quality control reviews cover housing agency audits as well as audits of other entities that receive HUD financial assistance. According to data from HUD’s Quality Assurance Subsystem, 52 of the 247 quality assurance reviews it conducted between 2000 and 2008 resulted in referrals for firms auditing entities receiving HUD funding. According to HUD, many of these included public housing agency audits. Examples of problem public housing agency audits include the following: Single audits for the Miami-Dade Housing Authority (MDHA) did not identify significant instances of inappropriate use and mismanagement of funds. In 2006, a media investigation provided extensive coverage of problems with public housing funds at the agency. HUD stated that MDHA’s single audits should have alerted the department to these problems, but they did not. Instead, HUD stated that it learned about the allegations of misuse and mismanagement of funds from the Miami Herald newspaper in 2006. In response to these allegations, HUD ordered a detailed review and new single audit of the housing agency that found serious and pervasive financial and management problems, including deficiencies in financial management, mismanagement of development funds, and several apparent conflicts of interest. MDHA went into receivership in 2007, with HUD taking possession and control of all of MDHA’s activities, including public housing.

In 2007, OIG found that the Dallas Housing Authority had inaccurate, unreliable, and altered records. Further, OIG noted that the firm conducting the 2006 single audit had failed to meet professional auditing standards. State authorities took disciplinary action against the auditing firm in 2007. According to HUD, the Dallas Housing Authority engaged this firm after it had removed an earlier auditing firm that had identified problems with the housing agencies’ financial management.

Also in June 2007, PCIE issued its Report on National Single Audit Sampling Project, which concluded that there were problems with audit quality that needed to be addressed and made recommendations. Specifically, PCIE reviewed a nationwide sample of 208 out of more than 38,000 single audits performed on various grant recipients that were submitted for the period between April 1, 2003, and March 31, 2004. According to the HUD OIG, the PCIE sample included single audits of 11 housing agencies, of which 6 were determined to be unacceptable, 1 was found to have limited reliability, and 4 were determined to be acceptable, but with deficiencies.

In a 2007 GAO testimony at a congressional hearing on the PCIE study, we noted that problems with the quality of single audits were unacceptable and that we were concerned that audits were not being conducted in accordance with professional standards and requirements. We also noted that such audits could mislead users of audit reports, causing them to incorrectly conclude that agencies were in compliance with program requirements or did not have weaknesses in internal controls when in fact such problems might exist but had gone undetected. However, we also noted continued support for single audits as a key oversight mechanism over federal awards.

Compounding the problems with the quality of audits is the fact that many housing agencies’ public housing programs may not have to undergo the detailed major program compliance testing that could potentially uncover inappropriate use and mismanagement of public housing funds. Only entities expending $500,000 or more in federal funding annually are required to receive single audits that assess compliance with specific program requirements and associated internal controls that have a direct and material effect on each major program. Furthermore, even when housing agencies receive single audits, not all public housing programs will be designated as major programs by independent public accountants conducting the single audit. For example, although about 76 percent of operating fund dollars were designated by the housing agencies’ independent auditors as major in 2006, less than a third of the housing agencies submitting approved financial data to HUD for that year underwent a single audit and had their operating funds audited as major programs. Without compensating monitoring tools, gaps in coverage at many housing agencies in any one year could allow emerging problems to go undetected and unreported by single audits in a timely manner.

HUD has attempted to improve the quality of these audits but has faced significant challenges. As noted above, HUD performs quality assurance reviews of the independent public auditors who perform the audits. In some cases, these quality assurance reviews have led to investigations and actions against substandard auditors. HUD officials said that the agency could pursue debarment or suspension of poorly performing auditors but noted that such remedies were costly and time-consuming. Further, efforts to improve audit quality will not address gaps in coverage that leave some housing agencies and programs unaudited for more than a year. In light of these limitations, fully leveraging other useful information becomes key to ensuring more consistent monitoring of public housing funds.

HUD Does Not Systematically Summarize the Results of Audits to Understand Problems and Address Vulnerabilities in Its Oversight Processes

Although the quality and coverage of single audits can be problematic, the single audit continues to be an important oversight mechanism. Yet, HUD has not fully leveraged how it uses the results of audits to fully understand emerging or persistent problems at housing agencies. Understanding commonly occurring audit findings could be useful for identifying housing agencies that are at greater risk of inappropriate use or mismanagement of public housing funds and assessing vulnerabilities in HUD’s oversight processes. In 2002, we reported that summarizing information about the results of single audits and identifying commonly occurring issues could be valuable in helping management evaluate agency oversight, monitor activities, and identify problem areas. Further, the Domestic Working Group’s Guide to Opportunities for Improving Grant Accountability states that agencies can summarize the results of internal and external audits for program managers to help identify problems with grantees’ financial management and program operations. For example, officials from one federal grant program within the Department of Transportation stated to us that they had taken such an approach to using audit data by summarizing the results of audits to identify recurring issues and direct their oversight policies. These officials stated that their analysis had identified procurement-related problems as a recurring finding area, which resulted in staff conducting grantee workshops and technical assistance on federal procurement requirements.

HUD does track the resolution of individual audit findings for each housing agency. Specifically, HUD uses its ARCATS to track the resolution of the HUD Inspector General’s audit findings. In addition, HUD recently developed MAPS to track the resolution of single audit findings. However, on the basis of our discussions with HUD officials, HUD has not used either ARCATS or MAPS to summarize and systematically evaluate the results of audits to understand problems that may commonly occur at multiple housing agencies, identify programwide problems of inappropriate use and mismanagement of public housing funds, detect emerging issues, or address possible vulnerabilities in its oversight processes. HUD’s systems contain data that categorize the findings of single audits in a manner that would allow the agency to identify commonly occurring problems across housing agencies. Yet, on the basis of our discussions with HUD, the department has not used these data for this purpose.

We conducted an analysis of a sample of 81 OIG and 56 single audit reports of housing agencies from 2002 through 2007 and categorized the 526 audit findings we identified into major categories of inappropriate use and mismanagement of public housing funds that we developed. Examples of these categories and the number of findings in our sample included: accounting issues, including internal control and documentation findings (150); inappropriate transfer of operating funds to other HUD programs and non-HUD entities, including affiliated organizations that were not used for public housing purposes (98); and other management issues (41). We also noted that for 14 housing agencies where audits identified commonly occurring problems with internal control, documentation, and other management issues, 27 of the findings reported involved management of cash resources. These findings included inadequate separation of duties, fraudulent check writing, and theft of cash.

Such a systematic evaluation of audit results could be useful for program managers, helping them to understand commonly occurring problems, identify and monitor emerging issues, and address limitations in HUD’s overall monitoring and oversight processes. Such information could also be useful for HUD field offices, housing agency auditors, and the housing agencies themselves by alerting them to persistent or emerging problems of potential inappropriate use and mismanagement of public housing funds. HUD public housing managers in headquarters and field offices stated that summarized results of audits would aid in helping them carry out their oversight activities. Not effectively using readily available information on the results of audits will continue to hamper these managers’ efforts to monitor housing agencies for misuse and mismanagement of funds.

PHAS and HUD’s Internal Analyses of Financial Data Could Be Better Focused to Identify Housing Agencies at Risk for Misuse and Mismanagement of Public Housing Funds

PHAS and HUD’s internal analyses of data from housing agencies’ financial data could be better focused to identify housing agencies that are at greater risk of potential inappropriate uses or mismanagement of public housing funds. As a result, these oversight processes may not alert HUD to potential problems and allow for timely monitoring and additional oversight activities that may be warranted. PHAS primarily assesses data on management operations and the financial health and physical condition of the housing agencies’ public housing programs and alerts HUD to potentially troubled agencies. For example, as noted earlier, PHAS was developed to alert HUD to liquidity problems at housing agencies. However, PHAS was never intended to identify individual instances of inappropriate use of public housing funds, and some potential indicators of liquidity problems may not be detected by PHAS. As a result, housing agencies have continued to receive passing PHAS scores even when their financial data may indicate that the housing agency is at greater risk of inappropriately using funds or experiencing serious financial difficulties. HUD has stated that it would primarily rely on single audits to identify such problems.

HUD’s policies state that the agency conducts analyses of financial data to help improve public housing agencies’ financial health and provide guidance in identifying possible fraud, waste, and abuse. However, HUD told us that it primarily used its analysis of housing agencies’ financial statements to ensure the mathematical reasonableness and completeness of the financial data used to calculate housing agencies’ PHAS scores. However, we analyzed housing agencies’ financial data and found that many of these agencies showed signs that they may be at greater risk of inappropriately using or mismanaging public housing funds, even though the agencies in question received passing PHAS scores.

Potential Inappropriate Use—Improper Advances of Low-Income Public Housing Operating Funds

Our analysis of data from housing agencies’ financial statements indicates that many housing agencies receive passing PHAS scores even though an analysis of their financial data indicates that these agencies are at greater risk of inappropriately advancing their public housing program’s operating funds to other programs or affiliated entities that may not use the funds for public housing purposes. Both we and OIG found that financial data could be used to identify housing agencies that were potentially at greater risk of inappropriately advancing funds in this manner. Specifically, using financial data, we identified 837 housing agencies that reported balances in their public housing program of over $100,000 as due from other programs—that is, operating funds that were advanced or loaned to other programs or entities and were potentially not used for public housing purposes—between 2002 and 2006. The prior HUD OIG work noted that housing agencies showing balances in excess of $100,000 as due from other programs in their public housing program often inappropriately advanced or loaned public housing program funds to other programs or affiliated entities—such as nonprofit organizations—without these funds being repaid to the public housing program. For example, OIG noted instances where public housing funds were advanced inappropriately and used for private housing development. In response to these OIG audits, HUD reported that it had taken steps to resolve audit recommendations and had made referrals for administrative action to be taken against those housing agencies. HUD further recognized that housing agencies showing large amounts in their due from other funds accounts may warrant greater scrutiny and analyses of transactions.

Our analysis of housing agencies’ due from other program accounts shows that from fiscal years 2002 through 2006, about 15 to 17 percent of housing agencies exhibited this indicator of possible inappropriate advances ($100,000 or more as due from other programs). (See fig. 2.)

While these housing agencies’ financial data were showing that these agencies were at greater risk of inappropriately advancing operating funds, their PHAS scores may not have provided HUD with any indication of this potential risk. PHAS assesses the overall management operations and the financial and physical condition of the housing agencies’ public housing programs, but it was not developed to identify potential inappropriate use of funds, such as inappropriate advances of operating funds. Our analysis found that about 80 percent of the housing agencies that reported balances in excess of $100,000 in the operating fund’s due from other program from fiscal years 2002 through 2006 received passing scores in PHAS (see fig. 3). Thus, the PHAS score by itself would not identify or trigger any further oversight of housing agencies that may be at risk of potential improper advancement of funds.

HUD officials stated that they would continue to rely on single audits to identify improper advances of this nature despite concerns about the quality of single audits and gaps in the number of housing agencies and programs covered and that they do not conduct specific financial analyses to identify housing agencies at risk of inappropriate advances of their operating funds. However, HUD does perform analyses of financial data to help it identify housing agencies that are at risk of improper advances for a HUD rental housing program—the Housing Choice Voucher program. Specifically, HUD conducts an assessment of housing agencies’ financial data to identify housing agencies reporting transfers of voucher program dollars that warrant additional oversight. Analyzing operating fund financial data as it has with the Housing Choice Voucher program illustrates how the department could leverage opportunities to identify and monitor housing agencies at greater risk of inappropriate advances of public housing funds.

Potential Mismanagement of Funds—Poor Cash Management

Our analysis also indicated that some housing agencies showed signs that they are at greater risk of mismanaging public housing funds. For example, we found that some housing agencies reported check overdrafts in their financial data. Our analysis of housing agencies’ financial data for fiscal years 2002 through 2006 showed 200 housing agencies reporting average bank overdrafts of $25,000 or more, and 10 housing agencies reporting average bank overdrafts of more than $1 million. The vast majority of housing agencies do not show this indicator of potential funds mismanagement. In fact, over 92 percent of all housing agencies reported no check overdrafts during this period. According to HUD’s OIG, writing checks in excess of funds available in a housing agency’s bank account is of concern and could indicate serious cash and financial management problems or indicate that the housing agency is prone to potential fraud. MDHA provides an example of how check overdrafts could have been used as an indicator of serious liquidity problems. Specifically, HUD audits noted that MDHA was consistently holding checks in a safe after it had written them and reported the millions of dollars in these checks as bank overdrafts in the housing agency’s financial data. HUD officials overseeing the receivership of MDHA stated that the housing agency was taking this action because it did not have the funds available to meet its financial obligations. MDHA’s single audits for this period were later determined to be substandard, in part because they did not identify an accounting misclassification of cash that may have masked the agency’s liquidity problems.

HUD officials stated that housing agencies’ PHAS and FASS scores were used to alert the agency to potential issues with finances and liquidity. However, we found that housing agencies’ PHAS and FASS scores did not reflect the large bank overdrafts that we identified. Of the 10 housing agencies reporting bank overdrafts in excess of $1 million, 7 (including MDHA) received passing PHAS scores. Only 1 had a PHAS score indicating that the agency was troubled. Further, MDHA received a passing FASS score for 3 of 5 years included in our analysis. The remaining 2 agencies were exempted from reporting PHAS scores because of their participation under the Moving to Work program. As shown in figure 4, when we looked at the 200 housing agencies reporting an average bank overdraft of $25,000 or more from 2002 through 2006, we found that nearly 75 percent of these housing agencies received passing PHAS and FASS scores.

HUD officials stated that they were concerned about housing agencies with substantial bank overdrafts but added that overdrafts were not flagged for further monitoring because PHAS and single audits were expected to detect such poor financial management. However, as we have seen, single audits, PHAS, and the department’s current approach to analyzing financial data do not always detect or alert HUD to housing agencies at greater risk of potential inappropriate use or mismanagement of public housing funds. This shortcoming underscores the importance of leveraging the financial data HUD collects to focus on housing agencies at risk of these potential problems. For example, HUD could use financial indicators to identify housing agencies that are at greater risk of such problems. HUD could then use the information to alert its field offices, auditors, and the housing agencies themselves to potential problems. Developing such indicators of potential inappropriate use and mismanagement could also be a particularly useful compensating mechanism for monitoring housing agencies that are not subject to single audits and a valuable monitoring tool to mitigate the limitations of PHAS. Not fully leveraging the information it already has limits HUD’s ability to identify potential waste and abuse of its resources.

Conclusions

HUD relies on single audits to identify potential misuse and mismanagement of public housing funds, and many single audits as well as those of OIG have identified such problems. However, concerns about the quality of single audits and gaps in the coverage of these audits have limited HUD’s confidence that single audits will consistently identify inappropriate use and mismanagement of public housing funds at every housing agency. Although HUD has faced difficulty in making improvements to the quality of audits and is aware that many housing agencies’ public housing programs may not receive annual single audit coverage, it has not adapted the way it uses information it collects to develop mechanisms to mitigate these limitations. Specifically, HUD does not systematically summarize and analyze the types and causes of misuse and mismanagement that single and OIG audits do successfully identify. Understanding the attributes of these commonly occurring problems that single and OIG audits have found could be useful to public housing program managers in identifying emerging issues and evaluating HUD’s overall monitoring and oversight processes. Promising practices identified by the Domestic Working Group’s Guide to Opportunities for Improving Grant Accountability call for such efforts. In fact, our review of over 130 audits conducted between 2002 and 2007 showed almost 100 findings related to inappropriate advancement of public housing operating funds to non-HUD programs or entities. Summarized results could also be useful to HUD’s field offices, auditors, and the housing agencies themselves, helping them understand emerging and persistent issues in HUD’s national portfolio of housing agencies and carry out their responsibilities in monitoring public housing programs.

HUD currently uses PHAS to monitor housing agencies, but this system has not always identified housing agencies at risk of problems such as cash management issues and was not intended to identify inappropriate use of public housing funds. Although HUD has developed automated checks of housing agencies’ financial information to help ensure its completeness and accuracy for PHAS, the department has not used these checks as a mechanism to identify housing agencies at greater risk for potential misuse and mismanagement of public housing funds. HUD itself uses such checks to identify potential inappropriate use of its Housing Choice Voucher Program funds. Fully utilizing data HUD collects—for example, by developing financial indicators to help identify housing agencies at greater risk of inappropriately using or mismanaging public housing funds—would help in developing tools to compensate for the limitations of key oversight processes.

Recommendations for Executive Action

In order to strengthen its oversight of housing agencies administering the public housing program and better leverage information that it already collects, we recommend that the Secretary of the Department of Housing and Urban Development: Regularly summarize and systematically evaluate the results of OIG and single audits of public housing agencies to allow program managers to identify and understand problems of potential inappropriate use and mismanagement of public housing funds, identify emerging issues, and evaluate overall monitoring and oversight processes. Summarized results of audits should be disseminated to field offices, housing agencies, and their auditors to help make them aware of emerging or persistent problems and assist them in monitoring and administering HUD’s public housing programs.

Develop mechanisms—such as financial indicators—to identify housing agencies that are at greater risk of inappropriately using or mismanaging public housing funds. Such mechanisms may be developed based on the department’s evaluation of commonly occurring and emerging issues identified in OIG and single audits of housing agencies and developed by leveraging financial information that the department currently collects. Once such indicators are developed, the department should use them as part of its ongoing monitoring and review of housing agencies’ use of public housing funds.

Agency Comments and Our Evaluation

In written comments from the General Deputy Assistant Secretary for Public and Indian Housing (see app. II), HUD stated that the draft report contains useful information, but that the agency did not believe that our recommendations would achieve the objectives of strengthening oversight of housing agencies that administer the public housing program and of better leveraging information that it already collects. Although it provided no specific explanation for why it thought our recommendations would not achieve its objectives, HUD stated that more analysis of its existing oversight mechanisms and information collected from housing agencies should be performed in order to evaluate and develop possible alternatives and indicated that it would involve Public and Indian Housing parties in developing a more creative and comprehensive approach to addressing the issues raised in our report. We welcome efforts by HUD to reconsider the mechanisms and data it uses to oversee housing agencies and to identify opportunities for improving its oversight. However, we disagree with HUD’s statement that our recommendations do not help achieve the objectives of strengthening its oversight and better leveraging the audit and financial information it already has. We believe the recommended actions present a reasonable first step in leveraging its existing information and permit HUD to better focus its limited resources. In fact, as noted in the report, the mechanisms that we are recommending for identifying potential problems to identify housing agencies that are at risk of inappropriate use of funds are already being used by another key HUD rental assistance program and by the HUD OIG. Moreover, HUD has in place systems that capture the information needed for such analysis. As HUD reevaluates its oversight mechanisms and seeks the input of its new Assistant Secretary, we believe that thinking about ways of leveraging the information it receives from single audits and financial data will be helpful in identifying emerging issues related to inappropriate use and mismanagement of funds and in providing the oversight necessary to address these issues.

We will send copies of this report to the Secretary of the Department of Housing and Urban Development and other interested parties. In addition, the report will be available at no charge on our Web site at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report.

If you or your staff has any questions about this report, please contact me at (202) 512-8678 or sciremj@gao.gov. GAO contact information and staff acknowledgments are listed in appendix III.

Appendix I: Objective, Scope, and Methodology

This report evaluates the Department of Housing and Urban Development’s (HUD) oversight of public housing agencies’ use of federal funds to operate, modernize, and develop public housing units through the Operating Fund, Capital Fund, and HOPE VI programs—the three main sources of funding for the public housing program. In 2008, the Operating Fund, Capital Fund, and HOPE VI programs provided approximately $6.7 billion to housing agencies for capital asset management. The objective of this report was to examine the oversight processes HUD uses to understand and detect instances of inappropriate use and mismanagement of public housing funds.

We reviewed applicable federal laws and regulations to describe permissible uses for the public housing funds within the scope of this report—specifically, funds available under the Operating Fund, Capital Fund, and HOPE VI programs. To describe HUD processes to ensure that housing agencies use public housing funds for statutorily allowable uses, we reviewed pertinent federal laws, agency notices, and program guides, and other job aids or documents. We interviewed program officials in the Office of Public and Indian Housing, including administrators from the Offices of the Deputy Secretary for Field Operations and of the Deputy Secretary for Public Housing Investments in Washington, D.C. We obtained information on the Public Housing Assessment System (PHAS) and financial management assessment procedures from officials responsible for this system at HUD’s Real Estate Assessment Center (REAC). In addition, we reviewed key documents that describe the annual single audit process as applicable to housing agencies that receive federal funds, such as the Office of Management and Budget’s (OMB) Circular A- 133: Audits of States, Local Governments, and Non-Profit Organizations and HUD program documents.

We also interviewed officials from four HUD field offices and obtained additional documentary and testimonial information to summarize the oversight processes. We selected field offices for review. We selected the HUD field office in Miami-Dade because it oversaw the Miami-Dade Housing Authority, which had been the most recent housing agency to go into receivership pursuant to a settlement agreement resolving allegations of financial mismanagement. We also met with officials from three other HUD field offices: Baltimore, San Francisco, and Washington, D.C. Within their portfolios, these field offices all have housing agencies with active Operating Fund, Capital Fund, and HOPE VI programs, with a range of housing agencies of different sizes, and in proximity to cities near GAO offices. Although the results of our discussion with these field offices may not be generalized across all field offices, our discussions provided important context on HUD’s implementation of its oversight processes and corroboration of information we collected. We also obtained information on HUD’s oversight procedures with staff from selected public housing agencies in each of the HUD field office locations: the Housing Authority of the City of Alameda, Housing Authority of the County of Monterey, Richmond Housing Authority, and San Francisco Housing Authority in California; the Miami-Dade Housing Authority and Housing Authority of the City of Fort Lauderdale in Florida; the District of Columbia Housing Authority; and the Housing Authority of Baltimore City and Prince George’s County Housing Authority in Maryland.

To understand commonly occurring reported findings of inappropriate use or mismanagement of public housing funds by housing agencies, we conducted a content analysis of findings in HUD’s Office of Inspector General (OIG) audit and single audit reports of housing agencies. Through this analysis we developed a number of categories and subcategories of common findings reported in these audits, including instances of noncompliance and internal control deficiencies. We took steps to ensure that the categories and subcategories we developed were consistently applied across both OIG and single audit reports, which included independent verification that the established categories and subcategories in the OIG reports were applicable to the findings we analyzed in the single audit reports. To select OIG audits for our analysis, we obtained a list of all audit reports with findings related to the three public housing funds (Operating Fund, Capital Fund, and HOPE VI) from 2002 through 2007. This list contained 144 audit reports. We also determine whether these audits met the following additional criteria for inclusion in our content analysis sample: (1) The audit findings were related to inappropriate use of funds and mismanagement issues, and (2) the audits were initiated by OIG or entities other than HUD program officials. We identified 81 OIG audits that met these criteria and constituted our final sample.

Single audit reports for our analysis were selected from audits conducted from audit years 2002 through 2005. This period differs from one for our analysis of OIG audit report because single audit reports are not due to HUD or to the Federal Audit Clearinghouse—the source from which we drew our sample—until 9 months after a housing agency’s fiscal year end. As a result, some housing agencies had not yet submitted their 2006 or 2007 single audit reports by the time we performed our analysis. Using HUD financial data on housing agencies, we created a list of 129 single audit reports with findings related to the three public housing funds from audit years 2002 through 2005. We ensured that these single audit and OIG reports related to financial management issues within the scope of our review. Our final sample of 56 reports included 8 reports in 2002, 10 in 2003, 18 in 2004, and 20 in 2005.

To identify potential cases of housing agencies at greater risk of inappropriately using or mismanaging funds across the HUD housing agency portfolio, we reviewed financial information from REAC’s financial data schedule (FDS) database for approximately 3,300 housing agencies. We reviewed HUD’s Financial Data Schedule Line Definition and Crosswalk Guide on the data fields available in this system and analyzed certain data line items. Specifically, we identified those FDS line items that could be used to assess potential areas of inappropriate use and financial mismanagement. In particular, we looked at FDS information on advances of public housing funds as a potential indicator of improper use and on cash management (bank overdrafts) as a potential indicator of financial mismanagement. At the time that we obtained these data from HUD, fiscal year 2006 was the last year for which a full year of financial data schedules was available.

We assessed the reliability of the data by (1) reviewing existing information about the systems and the data, (2) interviewing agency officials knowledgeable about the data, and (3) examining data elements used in our work by conducting electronic edit checks and comparing actual with anticipated values. For the FDS data, we analyzed the most current available data from the system for the years within the scope of our review. We obtained explanations on inconsistencies we found in the data from agency officials. We determined that the data were sufficiently reliable for the purposes of this report.

Analysis of potential inappropriate use of funds: As a potential indicator of inappropriate use, such as improper advances of funds, we analyzed balances of funds due from other program (FDS line item 144) for all housing agencies’ operating funds from fiscal years 2002 through 2006. We selected this line item because HUD’s OIG has identified housing agencies that have inappropriately advanced public housing operating funds by analyzing FDS for housing agencies that reported balances in excess of $100,000 on line item 144 for the operating fund. OIG found that housing agencies often used the public housing general fund bank account as the payment account for various other activities of the housing agency. When these other activities did not repay the operating fund account, a balance was reported on line 144 of the FDS. When housing agencies did this for activities requiring substantial amounts of cash, the balance in line 144 tended to grow, indicating an inappropriate use of funds. Similarly, we identified housing agencies showing amounts due from other program balances in excess of $100,000 for its operating fund as an indicator of potential inappropriate advances of funds.

Analysis of potential mismanagement of funds: To identify housing agencies that may have fund mismanagement problems, such as poor cash management, we analyzed amounts reported as bank overdrafts in FDS (line item 311). This line item on FDS represents checks written in excess of funds available in bank accounts. In identifying this line item as an indicator of potential fund mismanagement, we interviewed HUD officials to determine if there were sound or legitimate operational reasons for a housing agency writing checks in excess of funds available in a housing agency’s bank account. HUD officials could not provide such reasons. Further, OIG agreed that using bank overdrafts as an indicator of potential funds mismanagement was reasonable.

We conducted this performance audit from January 2007 through March 2009 in Alameda, Monterey, Richmond, and San Francisco, California; Miami and Fort Lauderdale, Florida; Baltimore and Prince George’s County, Maryland; and Washington, D.C. in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on the audit objectives.

Appendix II: Comments from the U.S. Department of Housing and Urban Development

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Daniel Garcia-Diaz (Assistant Director), Emily Chalmers, May Lee, John Lord, Marc Molino, Jasminee Persaud, Carl Ramirez, Linda Rego, Suneeti Shah, and Julie Trinder made key contributions to this report.