STATEMENT OF
SUSAN GAFFNEY, INSPECTOR GENERAL
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

BEFORE THE HOUSE OF REPRESENTATIVES
COMMITTEE ON GOVERNMENT REFORM
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION AND TECHNOLOGY
MARCH 22, 2000

[ NOTE: This webpage contains pages 1-4 of the HUD IG's testimony, up to and
including her statement regarding the missing $59 billion. This testimony can
be read in its entirety at http://www.hud.gov/offices/oig/data/reform.pdf ]



     Chairman Horn, Ranking Member Turner, and Members of the Subcommittee, I appreciate the opportunity to appear before you today to give you my perspectives on the status of financial management at the Department of Housing and Urban Development (HUD). I am accompanied by Kathryn Kuhl-Inclan, Assistant Inspector General for Audit; James Heist, Director of the Financial Audits Division; and Benjamin Hsiao, Director of the Information Systems Audit Division. As the subcommittee is aware, the Office of Inspector General (OIG) reported on March 1, 2000 on our efforts to audit HUD’s fiscal year 1999 consolidated financial statements and issued a disclaimer of opinion. OIG also issued reports on audits of the Government National Mortgage Association (GNMA) and the Federal Housing Administration (FHA), on February 24 and 29, 2000, respectively. Those audits were performed by the independent accounting firm of KPMG LLP, under contract with the OIG. KPMG LLP’s reports included unqualified opinions on GNMA’s and FHA’s fiscal year 1999 financial statements.

     Before I address issues at HUD, I’d first like to take a moment to discuss the broad purposes of the Chief Financial Officers (CFO) Act and our perspectives on the emphasis being placed on agencies’ success in having auditors express unqualified opinions on their financial statements. In passing the CFO Act nearly 10 years ago, the Congress laid out three broad purposes:
  1. Bring more effective general and financial management practices to the Federal Government through statutory provisions which would establish in the Office of Management and Budget a Deputy Director for Management, establish an Office of Federal Financial Management headed by a Controller, and designate a Chief Financial Officer in each executive department and in each major executive agency in the Federal Government.


  2. Provide for improvement, in each agency of the Federal Government, of systems of accounting, financial management, and internal controls to assure the issuance of reliable financial information and to deter fraud, waste, and abuse of Government resources.


  3. Provide for the production of complete, reliable, timely, and consistent financial information for use by the executive branch of the Government and the Congress in the financing, management, and evaluation of Federal programs.
     Nowhere in these broad purposes does the CFO Act list obtaining an unqualified opinion, yet this has become the one measure that is pointed to frequently as a measure of success in improving agencies’ financial management. Indeed, the President’s fiscal year 2001 budget put forth a performance goal for 18 of the 24 CFO Act agencies to receive unqualified opinions on their fiscal year 1999 financial statements. While we understand that goals are important, what is missing here is a set of goals that speak more directly to the purposes of the CFO Act.

     We believe that HUD’s success in addressing the material weaknesses and reportable conditions in our Report on Internal Controls, which is an integral part of the financial statement audit, would be a more meaningful CFO Act performance measure than receipt of an unqualified opinion. As we pointed out in our March 1,2000 report, HUD’s ability to obtain an opinion for fiscal year 1998, while noteworthy,required extensive contractor support along with ad hoc analyses and special projects to develop account balances and necessary disclosures. This was due to continued weaknesses in HUD’s internal controls and financial management systems. For fiscal year 1999, we reported a total of 17 reportable conditions, 5 of which we also classified as material weaknesses. We describe in our fiscal year 1999 report the deterioration of the internal controls relating to HUD’s core financial management systems that resulted from the implementation of a new Departmental general ledger and ultimately led to our decision to disclaim an opinion on the fiscal year 1999 financial statements.

     HUD continues to rely on extensive contractor support to overcome limitations in the preparation of financial statements that are brought about by poor internal controls. These efforts are in large part directed at obtaining unqualified opinions, and not correcting the systems that continue to adversely impact our ability to audit HUD’s financial statements in a timely and efficient manner.

     In the following paragraphs, we (i) explain the reasons for our disclaimer of opinion,(ii) summarize the Report on Internal Controls, and (iii) summarize the Report on Compliance with Laws and Regulations. The latter two reports are integral parts of the financial statement audit.

DISCLAIMER OF OPINION:

     We were unable to issue an opinion on HUD’s financial statements for fiscal year 1999, and as a result, we issued a disclaimer of opinion. Our decision to issue a disclaimer considered the CFO Act statutory date of March 1 to complete the audit. Both the Congress and OMB had emphasized the importance of meeting the March 1 date this year. Indeed, we understand that only four OIGs missed the deadline compared to ten last year. We considered this in reaching our decision to stop the audit. That decision also considered the prospects of our being able to complete the audit in a reasonable period of time after the deadline. We assessed the amount of work that, first of all, needed to be completed by the Department to reconcile their "fund Balance with Treasury" accounts (analogous to cash in a bank account) and finish the financial statement preparation process. Secondly, we considered the effort required for us to finish our audit work. It was clear to us that, optimistically, the best we could hope for would be to complete the audit sometime in April 2000 and this was not acceptable. We were one of the agencies that missed the deadline last year. However, last year the audit process had not been as significantly delayed by the systems conversion effort as was the case this year. Moreover, at March 1 last year, we could reasonably anticipate being able to complete the audit and issue our opinion before the end of the month and, indeed, we were able to so.

     HUD criticized our decision to stop the fiscal year 1999 audit and has alleged that we did not follow professional standards by not notifying them of our decision to disclaim an opinion in time for them to take corrective action. We disagree that we violated any standards relating to timely communication. We made it clear throughout the audit process that we intended to issue our report in time to meet the March 1, 2000 statutory due date and that our inability to complete the audit could affect the opinion. We would also point out that the conclusions with respect to HUD’s internal control weaknesses, which led to the restriction of our audit scope, were formally communicated to the Department on February 9, 2000. It was only after we informed HUD officials on February 23, 2000 that those same issues were causing us to disclaim an opinion, that HUD initiated a concerted effort to accelerate the completion of the fund balance with Treasury reconciliations. This effort included contractor support to perform a basic accounting function that should have been completed by HUD staff months earlier. We can only conclude that HUD was motivated to take this action primarily because of a desire to obtain an opinion, rather than acting immediately to address the material weakness with HUD’s corefinancial management system that was included in our draft report on internal controls. We began the fiscal year 1999 consolidated audit in June 1999 and spent nearly 20 staff years performing the audit.

     For the fiscal year 1999 audit, the limitation in our audit scope was caused by the following factors:

  • the undetermined effects of the conversion problems during the fiscal year of the general ledger from the Program Accounting System (PAS) to HUD’s Central Accounting and Program System (HUDCAPS),


  • the inadequate state of HUD’s reconciliation efforts and their documentation for the general ledger accounts for the fund balance with Treasury, and


  • the late manual posting of numerous and significant adjustments (some as late as February 25, 2000) directly to the financial statements, for which we lacked sufficient time to test their legitimacy.

     HUD implemented a major change to its accounting system in fiscal year 1999, including a new Department-wide general ledger system using HUDCAPS. The attached "FY 1999" chart illustrates the major accounting systems used to account for the vast majority of HUD funds, and how those systems relate to one another and ultimately provide information needed to prepare the financial statements. The "FY 1998" chart illustrates the system relationships before the conversion of the general ledger to HUDCAPS. Prior to that conversion, PAS, one of HUD’s "legacy" mainframe systems, served as HUD’s general ledger for HUD’s grant, subsidy and loan programs. Systems maintained for the Federal Housing Administration (FHA) and the Government National Mortgage Association (GNMA) were separate and those entities maintained and continue to maintain separate general ledgers.

     As illustrated in the "FY 1999" chart, the Department decided to implement HUDCAPS as its Department-wide general ledger. While we agree that the Department needs to integrate its general ledger systems, the implementation was problematic in three areas.

  • HUD had to develop an interface and needed to convert existing data from PAS. The general ledger system was migrated from PAS to HUDCAPS during fiscal year 1999; however, as we note in our report, the transition was a significant undertaking and is still not complete. The interface filter and the general ledger posting models resulted in numerous rejected or incorrectly posted transactions that had to be manually researched and corrected. In addition, the migration was done without development of an automated program to help reconcile the general ledger cash accounts to Treasury’s figures.

  • Summary level data from the separate FHA and GNMA general ledger systems were to be periodically transferred to HUDCAPS. This should occur at least monthly. However, as we note in our report, the transfer of fiscal year 1999 FHA data was done once after year end and required inefficient manual processes.

  • HUD used a financial statement report consolidation software called Hyperion Enterprise to prepare the financial statements. Reconciliation processes to identify discrepancies with Treasury fell behind schedule, and HUD had to make numerous adjustments to the general ledger fund balance with Treasury balances to make them agree with Treasury records. These adjustments were not made via the normal general ledger posting process. Rather, they were made directly to Hyperion Enterprise.
    At the time we discontinued our audit work, a total of 42 adjustments totaling about $17.6 billion had been processed in this manner to adjust fiscal year 1998 ending balances. An additional 242 adjustments totaling about $59.6 billion, were made to adjust fiscal year 1999 activity.


REPORT ON INTERNAL CONTROLS:

     In reporting our findings on HUD's systems of internal controls, our report distinguishes between material weaknesses and reportable conditions. Reportable conditions are matters coming to our attention relating to significant deficiencies in the design or operation of internal control that, in our judgment, could adversely affect HUD's ability to record, process, summarize, and report financial data consistent with the assertions by management in the financial statements. Certain of the reportable conditions were also considered to be material weaknesses. Material weaknesses are reportable conditions in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. The following paragraphs summarize the material weaknesses in our report on our attempt to audit HUD's fiscal year 1999

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Source: http://www.hud.gov/offices/oig/data/reform.pdf (pg 1-4)