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FHA Audit

Urbach, Kahn & Werlin cite budget issues

November 21, 2006


photo of Coco Salazar

The Federal Housing Administration has been closing out some contracts as many as three years late -- hampering the budget and management processes, according to an audit of the agency. But FHA's own subsequent analysis of the contracts found otherwise, though it did acknowledge it may not be in compliance with the HUD Handbook.

Urbach, Kahn & Werlin LLP cited three main reportable conditions in its FHA audit report for the year ended Sept. 30, 2006. But, unlike other years, a "material weakness" was not cited.

FHA should improve its funds control processes in order to effectively monitor and control budgetary resources and ensure full compliance with the funds control requirements of the Department of Housing and Urban Development, according to one of the cited reportable conditions. While HUD requires each FHA allotment holder to submit a funds control plan each year, FHA has operated without an approved plan for the past three years, according to the audit report.

The external auditing firm acknowledged that the Office of the Chief Financial Officer conditionally approved FHA in a July 2003 memo and did not require the agency to submit an annual funds control plan pending completion of the FHA Subsidiary Ledger Project. Amongst the things the approval was conditional upon was a continuation of FHA's interim control processes with further documentation of those controls in 2004 plans and continued progress in developing and implementing improved funds control capabilities under the ledger project, the report said.

Despite that the CFO conditionally approved FHA's fiscal year 2003 fund control plan, FHA was required to submit its plan for subsequent periods, the auditors said.

The auditors also noted that even though HUD requires FHA to annually review obligations over certain threshold limits to ensure excess obligations are deobligated for budgeting purposes, FHA reviewed contract obligations in 2006 but did not do so for the previous two fiscal years.

The auditors sampled 95 contracts and found 51 contracts totaling close to $122.0 million should have been closed out one to three fiscal years earlier. While FHA deobligated over $14.8 million, it left a balance of nearly $107.2 million to be deobligated in fiscal year 2007, according to the report.

One of the essential functions of funds control is to prevent authorizing or making expenditures exceeding the amount obligated for a particular contract or grant activity, the auditors noted. As of June 2006, a review of management and marketing contracts revealed that management controls were not sufficient to identify and correct for two contracts when the obligations were insufficient to cover the expenditures.

"Because of a lack of a Funds Control Plan to annually review the validity of open obligations, excess funding was not deobligated timely and thus, FHA was unable to put these funds to better use to support other FHA program activities," the auditors wrote. "FHA should establish interim funds control policies and procedures while the funds control module in the FHASL Project is being enhanced to ensure funds are properly managed and controlled at a transaction level in compliance with HUD's funds control policies."

The auditing firm suggested that FHA implement interim headquarters and field control policies and procedures to ensure that effective funds control is maintained until the subsidiary application systems are fully in accomplished. It also recommended that FHA effectively coordinate with HUD to ensure expired or inactive contracts are promptly closed out and for any excess funds, including the $107.2 million, to be timely deobligated.

In a response letter to the auditors, FHA said that it does have funds control policies and procedures to ensure funds are properly managed and controlled, and that the ledger is currently working as designed with appropriate funds controls in place. As the primary funds control mechanism, Commitment Control is used within the ledger to ensure the transactions are "budget checked" daily, FHA said, adding that it will update its funds control plans to incorporate these policies and procedures.

FHA noted that following its 2006 review of unliquidated obligations, certain contract balances were closed out and deobligated. As part of the review, FHA said it found that two contracts may have exceeded obligations, but further analysis determined the expenditures did not exceed the obligations.

FHA also responded that it would work with HUD to identify contracts eligible for close out, and that it will conduct an annual review of unliquidated regulations not covered under the CFO's annual review.

The auditing firm assessed FHA's responses and commended the agency because the proposed actions were responsive to recommendations. However, the firm said FHA management should enhance the specific components of its transaction level funds control procedures and highlight how and where the key funds control points are at various levels, such as the commitment and allotment levels, and how the control of funds is reported.

FHA said it may not be in compliance with the HUD Handbook since it has not submitted updated funds control plans for the past two years, but such does not constitute noncompliance with laws and regulations. This because the CFO, under authority given by the Appropriations Act, waived the requirement of annual funds control plan, allowing it to operate under the interim control process until the agency moved further along with systems implementation.

The auditing firm's assessment of such was that it did not believe this waiver was intended to be in effect beyond fiscal 2003.

"We also appreciate the efforts undertaken by FHA to improve its funds control procedures," the auditors added. "However, we do not believe these efforts have been part of a coordinated comprehensive annual plan to meet the funds control improvement objectives as anticipated by the FY2003 Appropriations Act. Given the significance of the potential impact of potential Antideficiency Act violations, we continue to believe this matter is reportable."

Despite the reportable condition, the auditors said FHA resolved the two material weaknesses from 2005. One of these was solved by incorporating downpayment assistance as a risk factor in the 2005 Mutual Mortgage Insurance fund actuarial review and incorporating a sample of borrower credit history into the claims and prepayment rate calculations in the 2006 review and loan guarantee liability calculation.

Coco Salazar is an assistant editor and staff writer for MortgageDaily.com.

e-mail: [email protected]

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