Process for Payment of SF Property Expenses Relied Extensively on Contractor

HUD delegated oversight functions in a manner that weakened its control  environment and resulted in established controls not being followed. 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. Lack of Controls Contributed To Questionable and Potentially Fraudulent Payments

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. 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. 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. For example, HUD paid $2,060 for  “emergency repairs” to a bathroom and $1,082 for repairs to a stairway. As evidenced by the photograph (fig. HUD paid  this contractor $2 million in fiscal year 2002 and over $2.5 million in fiscal  year 2003 for SF property expenses. Insufficient Monitoring of a Major Multifamily Program

We found HUD’s monitoring of a major multifamily pilot program with a  state housing agency to be insufficient. 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. 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. Scope and Methodology

	Single-Family Property Program

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. 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. 5. Therefore we  continue to view these payments as questionable.
Why GAO Did This Study

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.

What GAO Found

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.