[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
RESULTS OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT'S FISCAL
YEAR 1999 FINANCIAL STATEMENTS AUDIT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 22, 2000
__________
Serial No. 106-167
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
__________
U.S. GOVERNMENT PRINTING OFFICE
67-313 WASHINGTON : 2001
_______________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Lisa Smith Arafune, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Randy Kaplan, Counsel
Bryan Sisk, Clerk
Trey Henderson, Minority Counsel
C O N T E N T S
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Page
Hearing held on March 22, 2000................................... 1
Statement of:
Gaffney, Susan, Inspector General, Department of Housing and
Urban Development, accompanied by Kathryn Kuhl-Inclan,
Assistant Inspector General for Audit; James Heist,
Director of the Financial Audits Division; Benjamin Hsiao,
Director of the Information Systems Audit Division; and
Saul Ramirez, Deputy Secreary, Department of Housing and
Urban Development, accompanied by Victoria Bateman,
Comptroller for FHA........................................ 7
Letters, statements, etc., submitted for the record by:
Gaffney, Susan, Inspector General, Department of Housing and
Urban Development, prepared statement of................... 10
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Ramirez, Saul, Deputy Secreary, Department of Housing and
Urban Development, accompanied by Victoria Bateman,
Comptroller for FHA, prepared statement of................. 27
Turner, Hon. Jim, a Representative in Congress from the State
of Texas, prepared statement of............................ 5
RESULTS OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT'S FISCAL
YEAR 1999 FINANCIAL STATEMENTS AUDIT
----------
WEDNESDAY, MARCH 22, 2000
House of Representatives,
Subcommittee on Government Management, Information,
and Technology,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Biggert, Ose, Turner, and
Maloney.
Staff present: J. Russell George, staff director and chief
counsel; Randy Kaplan, counsel; Louise DiBenedetto, GAO
detailee, Bonnie Heald, director of communications; Bryan Sisk,
clerk; Ryan McKee, staff assistant; Trey Henderson, minority
counsel; and Jean Gosa, minority assistant Clerk.
Mr. Horn. A quorum being present, the Subcommittee on
Government Management, Information, and Technology will come to
order.
This hearing is the fourth in a series of hearings to
examine the results of the financial audits of selected Federal
agencies. We began this series in February and have since heard
from witnesses representing the Internal Revenue Service, the
Health Care Financing Administration, and the Department of
Agriculture.
Today, we will focus on financial management practices at
the Department of Housing and Urban Development [HUD].
On March 1, 2000, HUD's Inspector General issued a report
entitled, U.S. Department of Housing and Urban Development
Attempt to Audit the Fiscal Year 1999 Financial Statements.
In her report, the Inspector General noted that she could
not express an opinion on the financial statements because of
the Department's inability to produce verifiable financial
statements in a timely manner.
It is no secret that management weaknesses have plagued HUD
over the years. The General Accounting Office lists HUD as a
high-risk agency because its programs are at high risk to
fraud, waste, and mismanagement. Last year, the Inspector
General gave HUD its first--and only--unqualified opinion.
However, the Inspector General noted that verifying the 1998
statements required extensive work and contractor support.
Many of the same deficiencies continued to exist in fiscal
year 1999. In addition, however, HUD's effort to develop a new
financial management system led to the Inspector General's
disclaimer of opinion for 1999.
HUD provides rent and operating subsidies that benefit more
than 4 million lower-income households through a variety of
programs, including public and Section 8 housing. Eligibility
for these programs depends directly on self-reported income.
The Inspector General found that HUD's financial control
structure did not provide the agency with sufficient
information to verify whether tenant incomes were accurate,
which often leads to overpayments. Today, we want to learn what
the Department is doing to resolve these serious problems.
[The prepared statements of Hon. Stephen Horn and Hon. Jim
Turner follow:]
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Mr. Horn. We welcome our witnesses and look forward to
their testimony.
Today's witnesses are Susan Gaffney. She is accompanied by
Kathryn Kuhl-Inclan, Assistant Inspector General for Audit;
James Heist, Director of the Financial Audits Division;
Benjamin Hsiao, Director of the Information Systems Audit
Division; and Saul Ramirez, Deputy Secretary, Department of
Housing and Urban Development; and he is accompanied by
Victoria Bateman, Comptroller for FHA.
If you will stand and raise your right hands.
[Witnesses sworn.]
Mr. Horn. The clerk will note that all six witnesses have
affirmed the oath, and we will now start with the distinguished
Inspector General, Susan Gaffney.
For those of you who haven't been here before, once we
introduce somebody, their full statement is in the record. We
want you to summarize it in maybe 5 to 10 minutes and look us
in the eye and tell us what this is all about and try to cut
out the bureaucratic labels. That is for keeping in the
buildings but not on Capitol Hill. I want to have a dialog here
and not bureaucratic lingo.
Ms. Gaffney, it is all yours.
STATEMENTS OF SUSAN GAFFNEY, INSPECTOR GENERAL, DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT, ACCOMPANIED BY KATHRYN KUHL-
INCLAN, ASSISTANT INSPECTOR GENERAL FOR AUDIT; JAMES HEIST,
DIRECTOR OF THE FINANCIAL AUDITS DIVISION; BENJAMIN HSIAO,
DIRECTOR OF THE INFORMATION SYSTEMS AUDIT DIVISION; AND SAUL
RAMIREZ, DEPUTY SECREARY, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT, ACCOMPANIED BY VICTORIA BATEMAN, COMPTROLLER FOR
FHA
Ms. Gaffney. Thank you, Mr. Chairman.
When the CFO Act was enacted in 1990, I had some questions
about whether this good management legislation was really going
to have substantive results. Now, looking back, there is a lot
of good news. The Congress, OMB, agency CFOs, and IGs, I think,
have made progress governmentwide in improving financial
management, although that progress has been slow.
But the CFO's Act has kept the spotlight on financial
management and the importance of financial management in the
agencies. That is very good.
The bad news, from my perspective, is that this spotlight
has narrowed increasingly to look at the importance of
unqualified opinions on agency financial statements. There is
significant pressure from OMB and from the Congress, I believe,
for agencies to get unqualified opinions on their financial
statements. There seems to be an assumption that an unqualified
opinion equates to what I read in the media last week, the
``good housing seal of approval'' on agency financial
management. Mr. Chairman, that is simply not the case, and
there are a couple of reasons for that I would like to point
out.
What the CFOs Act is about is having reliable, accurate
financial information on an ongoing basis. Financial statements
are prepared once a year at a particular point in time. They
don't give you any necessary indication of how well the agency
is doing in terms of ongoing financial management. The second
thing that is important to understand is that virtually any
entity, given enough time and resources, can get an unqualified
opinion on its financial statements.
My concern is that, with this obsession with unqualified
opinions on financial statements, we are essentially gaming the
CFO's Act. This is not what the CFOs Act was about, but we
seemed to have stopped our measurement of success with the
opinion. So, let me tell you how this plays out.
Last year, HUD produced financial statements. Their
financial systems were not capable of producing auditable
financial statements, and so they hired contractors and spent
more than $2 million in getting their financial statements in
shape. We audited them and gave HUD an unqualified opinion.
That was last year.
In the intervening year, HUD tried to do something very
good. They tried to implement a standard general ledger for the
Department, in order to overcome a real weakness that they had.
That is great news. But they had difficulty in implementing the
standard general ledger and couldn't produce financial
statements, so this year we issued a disclaimer of opinion.
Now the irony of the situation is that if HUD had not tried
to do something good, which was to implement the standard
general ledger, if they had just done what they did last year,
which was not implement the standard general ledger and hire
consultants for $2 to $3 million to put together financial
statements, they probably would have gotten another unqualified
opinion.
What we should be looking for is agency ability to produce
financial statements in the course of various ongoing
operations, and I suggest to you that a once-a-year opinion on
financial statements is not an adequate measure of an agency's
abilities to do this. I am telling you, this compulsion with
that opinion has become counterproductive.
HUD is now extremely motivated to get an unqualified
opinion. What I suggest to you is that we need some different
and/or additional performance measures, and I am not just
talking about HUD, I am talking governmentwide. We need somehow
to be assessing whether it is the agency financial systems that
are producing the financial statements without the need for
extensive additional manipulation. We also need performance
measures that look at the report on internal controls.
Each one of these audits has three parts: the opinion, the
report on internal controls, and the report on compliance with
laws and regulations, but no one ever talks about the report on
internal controls or the report on compliance with the laws and
regulations, and the reason is that they are boring, they lack
the pizazz of the opinion. But it is the report on internal
controls that outlines all those boring systemic problems that
need to be fixed before you have financial systems that can do
what we want to do on an ongoing basis. I think we also need to
measure institutional/organizational things like do the
agencies have CFOs in place, do they have CIOs in place, and do
the CIOs and CFOs have sufficient authority and responsibility
to get the job done in the agencies.
In the case of HUD, in spite of the fact that they got an
unqualified opinion, the material weaknesses and reportable
conditions that we have been reporting have essentially
remained unchanged. HUD has not had a CFO in place for a year
now. Further, HUD has a CIO who has no operational authorities
or responsibility. In HUD, the CIO has been defined as a policy
role. The information technology people are under a separate
organizational unit, the Office of Administration, and in a
recent reorganization of the Office of Administration the
standing of that information technology staff has, in my
opinion, been reduced.
So, my plea to you is let us look more broadly at these
things, let us develop additional measures, and let's get at
the institutional problems rather than just the pizazz.
Thank you, Mr. Chairman.
Mr. Horn. Thank you for that testimony.
[The prepared statement of Ms. Gaffney follows:]
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Mr. Horn. We now turn to the Deputy Secretary, Mr. Saul
Ramirez, Department of Housing and Urban Development. Welcome.
Mr. Ramirez. Thank you, Chairman Horn and Ranking Member
Turner, for allowing us to testify on this issue of the audit
and where we currently stand as far as our financial condition.
I would like to request that my written testimony which was
provided be submitted for the record, and I will summarize my
comments working off of it.
Let me say first that the Department's financial house is
in order. HUD has received a $26 billion budget for the
delivery of decent, safe, and sanitary housing to over 5
million Americans, and we have invested those funds in sound
policies and programs that have assisted homeless people, low-
income families, and first-time home buyers in communities
across the country.
FHA and its Mutual Mortgage Insurance Fund are the
healthiest they have been in decades. The total value of the
fund stands at an all-time record high at over $16.6 billion,
an increase of $5.3 billion from the economic value reported in
fiscal year 1998. The Clinton administration's fiscal year 2001
budget proposal has already projected over $20 billion to be
returned to the Treasury by FHA from 2002 to 2006. When
combined with the current economic value of $17 billion, this
amount is more than sufficient to assure the safety and
soundness of FHA's $450 billion portfolio of outstanding
mortgage insurance.
Building on their successes, HUD has been working very hard
to improve our management controls, including our financial
management systems, in order to rebuild public confidence in
our ability to administer housing funds. Last year, for the
first time, HUD received an unqualified opinion for its fiscal
year 1998 financial statements. We regarded that as a
significant achievement, but we did not rest on our laurels. We
proceeded with the implementation of an ambitious new financial
management system called HUDCAPS which, when completed, will
result in a significant consolidation of the agency's financial
reporting protocols from over 80 different systems to a handful
of systems.
We have a multiyear conversion plan that we have put in
place and is under way. The technical and logistical challenges
that were posed are as a result of the task of transferring
nearly 1 trillion transactions from our old general ledger
system, the PAS system, to the new HUDCAPS system,
significantly complicating the task of preparing and auditing
our financial statements. Each of these 1 billion transactions
have been converted from PAS to HUDCAPS, and the funds reported
had to be reconciled to the fund balances as reported to
Treasury. The audit occurred in the middle of this conversion
and reconciliation process.
Mr. Horn. Just so we can understand that chart, obviously
the FHA is Federal Housing Administration. And what is GNMA?
Mr. Ramirez. GNMA is Ginnie Mae. LOCCS is our payment
system for our grantees and customers.
Mr. Horn. What does it do?
Mr. Ramirez. It tracks their spending rates. CDBG grant
money, in order for a grantee to draw down on their
entitlement, they need to file their request through the LOCCS
system, which is the payment system.
Mr. Horn. What is L-O-C-C-S? Can anybody explain that?
Mr. Ramirez. The acronym is Letter of Credit--the acronym
itself----
Mr. Hsiao. Line of Credit Control System.
Mr. Ramirez. It is a drawdown system. I thought we were
going to stick to plain English, not bureaucratic jargon.
Mr. Horn. Exactly. HUDCAPS is what?
Mr. Ramirez. It is our recapture system for the agency. The
general ledger for all of the different activities that take
place within the Department through the different programs that
we administer.
Mr. Horn. What is P-A-S?
Mr. Ramirez. That is the PAS system, which is the current
ledger system which is our primary accounting system.
Mr. Horn. What is Hyperion?
Mr. Ramirez. That is the equivalent of a Lotus system, but
for financial reporting systems that produces the actual
financial statements that you see that they are pointing to at
the end.
Ms. Gaffney. To be fair to Mr. Ramirez, just for the
record, that is our chart. I just wanted to make sure that the
chairman knew that you were being put on the spot with our
chart.
Mr. Ramirez. Thanks.
Let me just continue, Mr. Chairman. If you have any
questions, I will try to answer them.
Each of these transactions, the trillion transactions that
we do a year that are currently booked through the principal
accounting system or primary accounting system, the PAS, were
being converted to HUDCAPS. The audit occurred in the middle of
that conversion, and so what we were doing is running
simultaneously in order to be able to make sure our system
would hold the transactions when we went into HUDCAPS, the PAS
system and our HUDCAPS system. Ultimately, what happened was
the HUD Inspector General's office informed us that they were
unable to complete their task, as the Inspector General
mentioned, of auditing our financial statements for 1999 by the
March 1 deadline which had been accelerated under the new
requirements.
We are working with the OIG to enable a complete review of
our financial statements, and I am proud to say that we are
working well in that endeavor. The retention of a clean audit
opinion on HUD's consolidated financial statements is an annual
goal that we are working at.
Closely related and even of greater importance, and I agree
with what the Inspector General stated, is to deal with our
corrective actions, with our long-standing material internal
control and systems weaknesses which led to the GAO designating
HUD as a high-risk agency in 1994. HUD's efforts to correct
these weaknesses were recognized just last month by GAO's David
Walker, the Comptroller General, who testified before the House
Budget Committee that HUD had made credible progress toward
improving its management and that HUD's management team had
given top priority to addressing the Department's management
deficiencies.
Some of the HUD reforms referenced by Mr. Walker are worth
noting here, particularly those relating to modernizing our
financial systems.
As the committee is well aware, several long-standing
agency weaknesses related to HUD's inability to manage our
housing portfolio. We did not know exactly what properties we
were funding and how to maximize the public dollars for
investments and improvements to public and assisted housing. To
address this, HUD developed and tested a four-part Public
Housing Assessment System which evaluates our public housing
authorities on their physical condition, financial soundness,
management capacity, and resident satisfaction. As a result, we
now have the Nation's first computerized record detailing the
condition of our housing stock.
As part of these assessment protocols, HUD also developed a
state-of-the-art tenant income verification, a fraud prevention
system that uses computer-matching technology to identify
potential underpayments of tenant income and ensures that only
income qualified households receive housing subsidies to
benefit tenants and property administrators by streamlining the
verification process.
We are now in a position to perform front-end risk analysis
for new housing programs, provide regulatory relief to the
public and assisted housing properties that score exceptionally
well on their assessments, and target our resources to those
who need to elevate their delivery of decent, safe, and
sanitary housing to our residents.
The results are reflected not only in our communities but
in HUD's financial and audit reports as well.
Turning our attention to the audit reports, I am pleased to
report that although we started fiscal year 1999 with eight
material weaknesses, one material weakness, management and
control of staff resources, was downgraded to a reportable
condition. This was accomplished because HUD completed
organizational changes, provided greater management
accountability for achieving program and operating goals, and
enhanced the Management Control Program structure and
activities, as well as increased risk-based management control
techniques.
In addition, the Federal Housing Administration
accomplished significant progress in addressing its three
reported material weaknesses, eliminating one of them and
downgrading another to a management concern.
In this year's FHA audit, the material weakness relating to
the FHA Resource and Asset Management Strategy has been
completely eliminated. In addition, the real estate assessment
tools I just described have enabled FHA to monitor its insured
multifamily portfolio such that the material weaknesses related
to our early warning and loss prevention for FHA insured
mortgages was downgraded to a management concern. Only one
material weakness remains open--that is the FHA Federal basis
and budgetary reporting. Even here, significant actions have
been taken to account for FHA's financial commitments, such as
routine procedures to analyze contracts and purchase orders as
well as reviews of loan guarantee commitments and endorsements
to ensure that all our credit subsidy amounts have been
properly recorded.
We have dedicated resources to address each and every
material weakness and reportable condition cited in the audit.
Already, we are in the process of completing the HUDCAPS
conversion and reconciling process by compiling documentation
to support the reconciliation which was a weakness and I
believe the principal reason that the Inspector General felt
that they needed to file the disclaimer on our finances.
We are hopeful, though, that we will yet receive a clean
audit for the fiscal year 1999 and in particular our financial
statements. Our goal is to ensure that our statements merit
unqualified opinions year after year, but, more importantly,
that we do address in a very concrete and measurable way the
internal controls and system controls that have traditionally
plagued the agency in the past which we are addressing today to
deal with them and eliminate those material weaknesses that we
have. With the final implementation of our HUD 2020 management
reform plan, I feel very confident that we will be able to
address the remaining concerns that are addressed in the audit,
Mr. Chairman.
Thank you very much.
Mr. Horn. Thank you very much.
[The prepared statement of Mr. Ramirez follows:]
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Mr. Horn. We have three opening statements, maybe four
here. Do you have one, the gentlewoman from Illinois?
Mrs. Biggert. I do, but if you would just include it in the
record.
Mr. Horn. Mr. Turner has an opening statement. We will put
it at the beginning as if read. That will save us some time.
Let me ask, we are going to go 5-minute rounds here, and
that will get more questions on the table.
We are nearly halfway through the fiscal year 2000, and the
question is, has the Department adequately addressed the
problems that resulted in your disclaimer of opinion, Ms.
Gaffney, on the fiscal year 1999 financial statements?
Ms. Gaffney. I am going to ask Mr. Heist, who is in charge
of the financial audit, to answer that question.
Mr. Heist. What I can say to that point, as the Deputy
Secretary said, they are working hard to document what they
need to do to support the reconciliation process. I can only
speak to where we were when we stopped the audit. They had
significant differences that were unexplained to us with
respect to their reconciliations. They brought in an accounting
firm to help them work through those issues; and, as they
indicated, they will be making that information available for
our review as we proceed with our responsibility to audit the
fiscal year 2000 financial statements. We have to establish
opening balances for that audit anyway, so the logical way to
proceed is to finish our audit work related to fiscal year
1999.
Mr. Horn. The Deputy Secretary asked the Inspector General
to extend her March 1 reporting deadline to June 2000, so she
may be able to render an opinion on the Department's fiscal
year 1999 financial statements. Is that true?
Mr. Ramirez. We didn't ask for an extension of the date.
What we asked for is that they would work with us to come back
by June to come out with an opinion on our 1999 financial
statements, Mr. Chairman.
Mr. Horn. Moving that date would not be in compliance with
the Chief Financial Officer Act of 1999. I guess I would just
ask, how do you justify not meeting the statutory March 1
deadline?
Mr. Ramirez. We felt confident that we could have reached
the March 1 deadline and had documentation that we feel could
have effectively answered the major concerns that led to the
disclaimer that was filed by the Inspector General and that the
numbers that remained after us answering the concerns that they
had specific to the amounts that they were claiming caused the
disclaimer would be immaterial in accountant terms for me. A
lot of money still but in accountant percentages would have
dictated that it would have been an immaterial amount.
That information, unfortunately, was not reviewed before
March 1 because the auditors felt that they had completed their
work prior to that day, which is their prerogative certainly.
Our wish would only be, as Mr. Heist has mentioned, that as
they continue to work with us now to review this information
and additional information to be able to effectively show what
occurred when we were running the dual systems because what
basically happened was we were very aggressive in trying to
convert our general ledgers into the HUDCAPS system. Again, let
me reiterate for the system that this is a multi-year effort.
It is an activity that is consolidating, as I mentioned, 80
systems into just a handful and creating some standardization
along the way.
We ran the PAS system, which was the system that got us a
clean opinion last year, at the same time. We focused the
Inspector General's attention to HUDCAPS and neglected to--as
equally emphasize the PAS system to track back the actual
transactions. And so when it went down to this Hyperion
statement that was coming out of HUDCAPS, they were unable to
reconcile certain transactions that had occurred between the
PAS system and the HUDCAPS system that threw off the Hyperion
financial statements that came out, referring back to the
chart.
We tried to address those prior to the March 1 deadline.
Again, regrettably, they did not review this information at the
same time because they felt that the majority of their work was
complete and, as I understand, in their opinion would push them
past the March 1 deadline.
I would like to just again concur and reiterate what Mr.
Heist has said, that they are working to get the fund balances
close for 1999 so that we can then properly account for 2000,
and my only request was that we will try to get this work done
before June 1. We feel very confident that we can provide the
information to get this work done before June 1.
Mr. Horn. Vicky.
Ms. Bateman. We have not asked for an extension of the
March 1 deadline because we know that is the OIG's prerogative.
We have three technical issues that caused the disclaimer. What
we have done at this point is obtain the supportable
documentation that we need to satisfy them. We have since met
with the OIG, showed them what we have done and asked them to
come and work with us. What we are asking for is that they
allow us to restate our 1999 statements based on the supporting
detail that we have been able to adjust our cash balances with
Treasury, come back now and not next year to finish the 1999
audit, and save the taxpayers money instead of repeating this
next year. By June--initially, they said it would be 6 to 8
weeks to complete the audit. We are saying, come back now, we
are ready for you. Let us restate the 1999 and render an
opinion as part of your 2000 audit and let's move on.
Mr. Ramirez. By way of introduction, Mr. Chairman, this is
Victoria Bateman. She is the comptroller for FHA.
FHA did garner a clean opinion from the Inspector General's
books. When this issue came up 2 weeks out of the March 1
deadline that was brought to my attention by the CFO's office,
I put together a team to address it as expeditiously as
possible, and Ms. Bateman has been leading that team for me to
clear up these specific issues as they relate to what led to a
disclaimer, sir.
Mr. Horn. On my sheet here it says Victoria Bateman, Acting
Chief Financial Officer.
Mr. Ramirez. That is not correct, sir. Dave Gibbons is the
Deputy CFO. We have over the last year aggressively tried to
recruit a CFO candidate and twice we have been at the point of
making offers only to be countered on both offers by the
private sector for substantially more money to both candidates
and as a result lost the opportunity to hire them. We are
aggressively seeking to hire our CFO and working to get a
candidate that would meet also with the pleasure of the Senate
committee that would confirm the nomination for CFO.
Mr. Horn. Will that CFO be exclusively in the position of
CFO or is he or she going to be doing other things?
Mr. Ramirez. No, exclusively CFO.
Mr. Horn. Mr. Turner, you have 8 minutes. I went over, but
I wanted to finish that up.
Mr. Turner. Ms. Gaffney, since HUD was placed on the high-
risk list back in 1994, is it fair to say that HUD has made
significant progress in getting its financial house in order?
Ms. Gaffney. What I think is fair to say is that HUD has
recognized its areas of systemic weakness to a degree that it
never did before and that, in each of these areas, it has plans
in place, and activities under way to address the problems; and
I think what you are hearing is this situation, this disclaimer
of opinion resulted from HUD trying to correct one of its
systemic weaknesses. So that is a good thing. But we are not at
the end of any of these processes. We are not to the point
where we can say the corrective actions have been taken.
Mr. Turner. So what you are saying is that the problem that
resulted in your failure to be able to issue an opinion by
March 1, that problem was created by the fact that they are
converting this payment system, which is a good thing?
Ms. Gaffney. Exactly. It is unfortunate the implementation
didn't go smoother, but you have to recognize that this was an
attempt to solve a problem that we have been identifying for
years.
Mr. Turner. OK. So we missed a deadline because we were
trying to correct a problem that everyone agreed needed to be
corrected?
Ms. Gaffney. Correct.
Mr. Turner. I have heard a little conversation about the
failure to meet the deadline. It seems that we may be making
too much of that, even though it is statutory. If I understand
the sequence of events, we basically had a week before the
March 1 deadline when you gave HUD notice that you didn't think
that you were going to be able to issue an opinion, and they
tried to get all of the things together you needed, and yet
time was running out, and you didn't take those things into
account, and you ended up passing the March 1 deadline unable
to issue an unqualified opinion. Is it fair to say that we
shouldn't make too much of what went on during that period of
time with regard to the failure to meet the March 1 deadline?
This doesn't represent any severe financial problem that is in
question that has resulted in the failure to meet the March 1
deadline, it is a matter of basically communication and the
furnishing of adequate information?
Ms. Gaffney. No, I don't agree with that. I don't mean to
repeat myself, Mr. Turner. I don't know if you were here for my
opening statement. What I agree with you about is we are all
making too much out of the opinion on the audit on the
financial statements.
I think we are attributing to the opinion, the unqualified
opinion, the disclaimer of opinion, the adverse opinion,
importance that is not warranted.
Given that, my plea to you today is, let's look at the more
important stuff. We should be concerned about getting that
general ledger implemented, and we should be doing everything
to help HUD get it implemented. And if HUD gets a disclaimer of
opinion in the process, so what? The problem is that the
opinion is being used as the sole measurement.
With respect to the March 1 deadline, you know, we worked
on this audit since June--June through February. We devoted 20
staff years to this audit. At some point, the preoccupation and
the focus of resources on the financial statements and the
audit I think becomes counterproductive. We should be trying to
get the real stuff done.
Mr. Turner. I think we all understood the point you made,
and I think there is probably general agreement that the
emphasis should be on a broader range of issues, including
internal control, which is what they were trying to address in
implementing the HUDCAPS system.
The only point I was trying to make is that the dispute
over whether or not the data was provided by March 1 and
whether or not you got the opinion done by March 1 is not a
reflection of any severe financial problem. It is more of an
internal thing between you and HUD that perhaps will now be
resolved by June 1, as I understand it. And so I don't want
there to be a misimpression that somehow HUD has a severe
financial problem simply because that March 1 deadline was not
an unqualified opinion, was not reached or given by you by
March 1. I don't think that is what you intended for that
action to say.
Ms. Gaffney. HUD did not have the financial statements in
shape and we didn't have a chance to finish our audit of them
by March 1. I am convinced that, as Mr. Ramirez and Ms. Bateman
have said, that by June that undoubtedly will take place. Which
is not to say that HUD doesn't have serious financial
management problems, but I agree that they will be able to do
that.
Mr. Turner. I think that is important for us all to
understand.
With regard to your criticism of the emphasis on the
financial audit, I am not sure what the answer to that is,
other than what you just said, and that is for us to think
about the broader range of issues that we should be concerned
about.
The law does say we have got the March 1 deadline. You do
it every year. It is something we all look to. I think as a
committee we certainly can be sensitive to the fact that we
shouldn't make too much of that process, but it is statutory
and it is important to try to meet the deadline.
Mr. Chairman, I have no further questions.
Mr. Ramirez. May I?
Mr. Horn. Yes, please.
Mr. Ramirez. In our efforts--and I can appreciate the
Inspector General's overall emphasis on condition, entire
condition of the agency, but the measuring stick is the
financial audit and the condition of the report that comes out
from this audit.
As we were getting close to this deadline--and, yes, the
work did start in June. It came down out of these trillion
transactions that we did a year that we transferred and ran
simultaneously. And, again, shame on us for not focusing the IG
on both systems during that period and just on HUDCAPS, that it
came down to three transactions and we were prepared to explain
those three transactions prior to that March 1 deadline.
Apparently, there was a great deal of work that had already
gone into preparing this audit that the Inspector General had
done; and, yes, they did invest 20 man years to this audit; but
we did work with them to adjust for their vacation schedules
during the holidays and other periods that were critical coming
into the closure of this audit to try to get to a resolution in
this regard. That is behind us, and we accept that, and we
appreciate the acknowledgment from the Inspector General to
resolve the issue by June if not sooner. We believe we can do
it sooner and with their help and cooperation we feel very
confident that we will be able to report back together to this
committee and the Nation as a whole as to an accurate read of
our financial condition.
But I would like to also quickly state that, in addition to
our financial statement and perhaps coming out with a clean
opinion prior to this June date from 1999, that we still have
internal controls and system weaknesses that we are addressing
to try to resolve and these have been weaknesses that have been
systemic over the last 2 decades. And so old habits are hard to
break, but we are breaking them. It is clearly indicated by
many of these weaknesses or several of these weaknesses, to be
more accurate, that have already been downgraded by the
Inspector General to just management concerns for the
Department.
Mr. Turner. Well, I appreciate those remarks and I think it
is probably incumbent upon this committee to continue to
encourage the IG and the agency to meet the March 1 deadline. I
agree that audit report is looked to as a significant indicator
of your financial standing. But I gather from the interchange
that we have had this morning that the fact that it was not
issued by that date did not reflect any significant financial
difficulties within the agency but rather reflected the fact
that you are in the midst of this conversion and it created
some problems between the two offices that apparently for
whatever reason, it didn't happen and you are going to do it
and we would urge you next year to try to meet the deadline.
Mr. Ramirez. Just to quickly wrap that up, and thank you
very much for those comments, Congressman Turner, we are
already preparing to start generating not an annual report but
quarterly reports so that we can better work together to assess
the financial conditions of the agency and we are quickly
getting to that particular point.
I would like to just conclude by again reassuring this
committee and the taxpayers that we know better than ever at
the Department where our money was spent and are prepared to
provide any auditor the audit trail of how the bulk of our
resources were spent there at the Department of Housing and
Urban Development.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Horn. Let me pursue some of these fiscal matters.
Was Mr. Gibbons in charge of clearing this particular
audit?
Mr. Ramirez. The financial management of the organization
under the CFO's operation has several points, but he was
responsible for shepherding the entire effort from the
different divisions that are responsible for compiling the
information that the Inspector General needs in order to
conduct an audit.
Mr. Horn. What was his title at this point?
Mr. Ramirez. Deputy Chief--Deputy Financial Officer and
acting in essence Financial Officer because of the vacancy.
Mr. Horn. Was he able to give full attention to that?
Mr. Ramirez. Yes. He was giving his full attention. We were
focusing on material weaknesses ironically and the period of
discussions with the auditors between June and their disclaimer
in March, and as a result a great deal of our effort went into
trying to resolve those material weaknesses and management
concerns that were in our previous audits. It didn't focus----
Mr. Horn. Was he on vacation during this time and was that
why the whole thing was late?
Mr. Ramirez. No. When Mr. Gibbons left the country for a
couple of weeks and it was--it was the 2 weeks before this was
completed, the Inspector General's auditing team and our team
had been meeting on a weekly basis. Prior to that they had been
meeting on a biweekly basis. It was his impression as a result
of the last biweekly and checking with his staff primarily and
getting a general indication of the different activities that
the Inspector General had been focusing their work on till
prior to the week before that we were in sound condition. That
does not, though, excuse the fact that we did not do as good an
effort of focusing the Inspector General's attention on both
our HUDCAPS and PAS system at the same time, Mr. Chairman.
Mr. Horn. In implementing the new system, why didn't you
consider the need for a backup plan to ensure that you could
produce all of the reliable financial statements?
Mr. Ramirez. We did, sir, and that was the PAS system. We
ran concurrent systems.
Mr. Horn. And did that satisfy you, Inspector General?
Mr. Ramirez. It is unusual but in defense of the Inspector
General we focused their attention on the HUDCAPS system and
general ledger as the principal source of documents and amounts
for their audit work and did not refer them back to the PAS
system as----
Mr. Horn. That is the system used in 1999?
Mr. Ramirez. It got us a clean opinion. If we said don't
look at HUDCAPS because we are going to conversion, look at
PAS, I think we would have been in better condition. All of the
Treasury reports came back fine through our PAS system.
Mr. Horn. Mr. Hsiao.
Mr. Hsiao. My name is Ben Hsiao, Director of the
Information Systems at HUD OIG, and I have been reviewing and
looking at HUDCAPS for a number of years for the financial
statement audit.
I want to clarify something. HUDCAPS is kind of like LOCCS
but it pays for another set or programs besides the grants, it
pays the Section 8, what they call the voucher program, which
is essentially payments to the housing authorities. That system
was envisioned to be the general ledger. That decision was made
a year and a half or 2 years ago back in 1997. They never
envisioned that PAS would go away, but they would translate all
of the numbers in PAS into HUDCAPS. One of the difficulties
they had was that PAS data did not contain the source year
along with a bunch of other variations, which by the way we are
going to look at in depth to make sure and figure out why this
conversion went awry.
The conversion was very problematic. And in the interface
between PAS and HUDCAPS they were rejecting transactions
hundreds a day. They finally got it working somewhat, but as I
understand it, it is still problematic and we have to work on
it. In fact, I was informed yesterday that we plan to do
extensive work on this so we can come up with recommendations
to correct the problems in HUDCAPS. There are lots and lots of
problems. Many are technical, but it has not been an easy
implementation. There are a lot of difficulties, many of which
I think can be overcome but it takes management effort and it
takes a tremendous effort on the part of the CFO and CIO and
the IT.
I want to set the record straight that HUDCAPS is not the
only system. PAS has always been there, but translating the
data was the major problem in not producing a financial
statement.
Mr. Horn. The Inspector General testified the most critical
need faced by HUD in improving its internal controls is to
complete development of adequate financial systems.
Mr. Hsiao. Absolutely.
Mr. Horn. Mr. Ramirez, when do we expect those systems to
be in place and operating properly?
Mr. Ramirez. I don't disagree, it is a complex, messy
process when you have to convert 80 some odd systems into a
handful of systems and a trillion transactions a year and I
challenge anybody who has a checkbook which has a trillion
transactions that does not have to go through an in-depth trial
and error. The important thing to note is that the PAS system
was accounting for our resources. We did not go into this first
phase of major conversion, and I think the Inspector General
would agree that this was the first major conversion into
HUDCAPS, without making sure that we kept track of the
resources that we are appropriated to administer.
I would say that in our HUDCAPS effort, I would venture to
say that we will be well in control of the HUDCAPS operation
and conversion within the next 18 months or so. We are looking
forward to the work that the Inspector General, in particular
Ben here was a great computer technician, to get their advice
and recommendations as we move through this process, sir.
Mr. Horn. I am glad to see your optimism on that, but Ms.
Gaffney reported that the HUDCAPS does not fully comply with
the Federal financial system requirements. Will the Inspector
General elaborate on what she means by that?
Ms. Gaffney. HUDCAPS does not comply. The easiest example
is that FHA and GNMA are supposed to be feeding summary data
into HUDCAPS on a monthly basis. FHA, because of problems that
it had in its own system inputs their data into HUDCAPS only
once, and that was after the close of the fiscal year.
Obviously one of the government financial system standards is
that you have accurate, timely information. In this case the
failure to post into HUDCAPS meant that there was no such
information.
Ms. Bateman. Mr. Chairman, as the FHA Comptroller at the
time, the IG is correct. FHA did not supply its data by year
end close. I was very concerned at that point with the
conversion of HUDCAPS, and I was aware of the fund balance of
Treasury reconciliations. I didn't want to take my data and put
it into HUDCAPS and risk FHA getting an unclean opinion. We put
a corrective action plan in place to make the general ledger
good within the next 12 months. We are working to get the
summary data, we have dedicated resources to get files out of
the FHA legacy systems and treat it at summary level into
HUDCAPS.
Keep in mind, FHA is a subsidiary of HUD, a very large
subsidiary of HUD, and we have a commercial package and we have
to do Federal reporting at this point. I am summarizing that
data at a very high level because you don't want a million
transactions going into your general ledger, which is HUDCAPS.
In order to get through the audits I want to make sure that
FHA has a clean opinion and not make the conversion from PAS to
HUDCAPS even worse. We thought we made a good decision not to
put more data into HUDCAPS. But we do have auditable data going
from the HUDCAPS back to FHA. It is supportable and auditable.
KPMG tells you it is a clean opinion.
The real issue came down to when we converted from PAS to
HUDCAPS, we took those trillion transactions and put it in. We
knew that we couldn't get any reporting out HUDCAPS, it is a
brand new system. We didn't get the reports that we needed to
reconcile to Treasury. We are now getting those reports and we
are able to support the 224s and reporting to Treasury, and we
have invited the IG to come back in and work with us to get the
clean opinion.
But Ben is right, we have more issues than just this
conversion. The IG pointed out three reasons that they had
disclaimer. They were right. We acknowledge that we have these
problems. We made a lot of adjustments to Hyperion outside the
system. Shame on us for doing that. It is lessons learned.
I think the IG has been very gracious to work with us
instead of waiting a whole year. But there are internal control
issues. We have stopped all system conversions based on the
IG's recommendation. The Deputy Secretary has tasked me to make
sure that we have the controls in place before we do any more
conversions. So our No. 1 priority is to get auditable to get
to the clean opinion, let's take our time and do it right. Look
at the cost of doing this, and the last thing I want to do is
put FHA detail into HUDCAPS, a million transactions a day.
Mr. Horn. We thank you for that perspective. We have a vote
on the floor now. We are delighted to see the gentlewoman from
New York. You are free to use all of the time you wish on
questioning while we are going over to vote and we will keep
the door open for you.
Mrs. Maloney [presiding]. Thank you very much, Mr.
Chairman. I thank you for your persistent and ongoing
commitment to better financial management not only in HUD but
all financial agencies. I have been watching the progress at
HUD from my position on the subcommittee and on the Banking
Committee as well, and I have been particularly interested in
some of the strides made under Secretary Cuomo not only because
he is a fellow New Yorker from my State but because he has set
out to tackle what seems to be an impossible task improving
HUD's management and organization and by most accounts these
efforts are well on their way to success.
Like many of my colleagues, I am especially pleased last
year when HUD received its first ever clean audit and all of us
know HUD has a history of mismanagement, so the fact that HUD
did receive a clean audit is really noteworthy and I would like
to ask Mr. Ramirez, do you expect to receive a clean audit for
this fiscal year in the near future when it is completed?
Mr. Ramirez. We believe that we have the supporting
documentation that upon review by the Inspector General will in
all probability lead us to a reflection of sound financial
condition and a clean opinion on their part. We will work with
them to be able to justify our reasons as to why, and so we
feel very comfort about that.
Mrs. Maloney. Well, an issue I am very interested in, and I
know that the chairman is as well, is how we can help the
government operate more efficiently by making sure that the
right people get the right benefits. I understand that HUD is
taking steps in this direction by implementing a nationwide
income verification program so that tenants pay their fair
share of rent. Could you discuss what HUD is attempting to
accomplish with this effort, and what sort of progress you have
made?
Mr. Ramirez. We have made substantial progress in that
area, and it has been one of the major weaknesses that has been
highlighted by the Inspector General in their reports. Based on
a sampling of approximately 1,000 residents, they compulate and
trend out an amount of potential lost revenues as a result of
underpayments.
We have now modernized our income verification process by
linking with Social Security and IRS to get information on
residents, and when there is a discrepancy, an $8,000
discrepancy on the public housing side or a $4,000 discrepancy
on the multifamily side, the resident receives a letter or will
be receiving a letter as soon as we send them out to go back to
their respective landlord or housing authority to recertify
their income. We have done a $4 million-plus survey of that
information out of our new system and we have found it to be
very effective and impacted residents about 280,000, or so we
estimate.
We are working with the industry quite closely, as well as
resident groups to make sure that the notice that goes out is
crafted in such a way that it would encourage individuals to go
back and get their incomes recertified but at the same time not
make it one that would be in essence the gotcha game. We feel
by doing this we will greatly enhance our estimate of
underpayments and to some smaller degree overpayments that
actually occur within our system and better narrow that
estimate which has been put out by the Inspector General of
close to in some instances $900 million-plus.
Mrs. Maloney. I am going to give two more questions and at
the completion of them the hearing would stand in recess and
then I am going to dash to vote.
I am interested and you may have already answered this, but
I am interested in the fact that GAO has listed all of HUD's
programs on its high risk list. Do we have anybody here from
GAO?
Ms. Gaffney. No.
Mrs. Maloney. What progress is HUD making to address the
specific problems that were raised in the GAO report that they
brought up?
I am also very interested in what is your followup in
inspecting properties which receive financial assistance from
HUD in making sure that those dollars are allocated properly
and spent properly?
Those two questions and I would like them in the record. I
may have to dash because I walk slower than the chairman, and
he has already left. Answer those two questions.
Mr. Ramirez. For the record what we have done with GAO have
worked closely in establishing a working protocol which has
been very effective in trying to address not just prior audits
and recommendations that they made but current audits that they
have initiated. Mr. Walker, the Comptroller, has stated here
before Congress that we have made considerable progress. On our
continuing relationship with him we feel very comfortable with
the work we are doing that by January 2001 that we will be
prepared to have GAO make a recommendation that HUD as an
agency be taken off the high risk list.
On our inspection protocols, we have for the first time
gone out and assessed the physical condition of our entire
portfolio, over 40,000-plus properties. We are currently
assessing all of their financial statements to make sure that
finances are in order and that they are sound.
Third, taking into consideration the residents alone as
well as the condition and circumstances that they live in, and
for the first time we can accurately assess the physical,
financial, and also resident approval of our properties.
So thank you very much for those questions, Congresswoman.
Mrs. Maloney. You are in recess until the chairman returns.
[Recess.]
Mr. Horn [presiding]. The recess is over and we will
continue the questioning.
I want to ask just one question of the Inspector General.
Given this late date, wouldn't it be more productive for your
office to focus its resources on the fiscal year 2000 audit?
Ms. Gaffney. We are going to focus our efforts on the
fiscal year 2000 audit. However, we need opening balances for
fiscal year 2000, which means they need to do the
reconciliation work that they are talking about and we will
need to look at that work. But our work will be in the context
of the fiscal year 2000 audit.
Mr. Horn. I think we are a little unclear as to whether you
are going to issue an opinion on the fiscal year 1999 financial
statements in June?
Ms. Gaffney. We have not made that decision. Certainly that
is the request that HUD is making. We haven't made that
decision.
Mr. Heist. One of our options, since HUD in fiscal year
2000 will also be reporting on 1999 and including comparative
financial statements, we could change our opinion when we issue
the report for fiscal year 2000. That is one of our options.
Ms. Gaffney. To go back to our position, what we should not
be doing is diverting time and energy from our 2000 audit at
this point.
Mr. Horn. I yield 10 minutes to Mr. Ose and if he needs
more, we will give him another 10.
Mr. Ose. Mr. Chairman, thank you. Procedurally, if I
understand correctly, we had an audit and an opinion expressed
on that audit in previous years to the current year, and what I
am trying to figure out is for some reason we have not been
able to get to a similar point on the current year that would
otherwise comply with the reporting date requirement with the
CFO act. That is some opinion as to the financial condition of
the agency issued on or before March 1; am I correct on that?
Were we able to achieve that goal last year?
Ms. Gaffney. Yes.
Mr. Ose. I have read the testimony and I can't pick out
what happened? Why are we unable to issue an audit or an
opinion on the audit? Is it because the audit is not completed?
Ms. Gaffney. The financial statements were not completed;
therefore, the audit was not completed. The answer to your
question is HUD tried something new in 1999. They tried to
overcome a weakness and implemented this new HUDCAPS system and
that created a whole new set of difficulties for HUD that they
had not experienced the previous year.
Mr. Ose. From a processing side?
Ms. Gaffney. Right.
Mr. Ose. That is the reference to the trillion
transactions?
Ms. Gaffney. Right.
Mr. Ose. Well, I must say--I am at least partially
entertained by the----
Ms. Gaffney. Irony, right?
Mr. Ose [continuing]. The consequence of an agency not
responding to a statutory requirement laid out by the Congress.
Are there sanctions, Mr. Chairman, to such a failure? I mean,
I----
Mr. Horn. Well, the sanction we try to think is the law,
and that has not been obeyed in several administration areas
because they have made the Chief Financial Officer, say the
Assistant Secretary for Management and Treasury sort of
subsumes everything, the CIO, CFO. That wasn't the intent of
the Republicans or Democrats. Those are full-time jobs, 18
hours a day, if you are doing it right. That is where some of
the mess has been, is they haven't focused on it within their
own administration.
Mr. Ose. In a situation like we are confronted with today,
which is we don't have all the balances on which to move
forward, in that situation recognizing what the law is, what
are Congress's--I guess I should ask----
Mr. Horn. If you think they are really playing games, you
shorten the amount of appropriations granted. That is not a new
task. For example, when the Federal Elections Commission was
given $3 million to get their computers moving because they
weren't able to respond to thousands of people with the press
and candidates, they completely violated what Congress had
specified. Needless to say, they took a whack out of that
budget the next year. That is your one penalty when you think
one agency is messing around and thumbing their nose at
Congress.
Mr. Ose. The concern that I have is if the agency directed
to perform this audit, whether that be the Office of the
Inspector General or the HUD itself, is not in compliance to
the statutory requirement for whatever reason, I would think
that they would have come back to us and asked for additional
resources or assistance to expedite solving that problem.
My question would be: Has such a request been received from
the administration or any of these--particularly HUD in this
case--any of the agencies that are so affected?
Mr. Horn. I am unaware of any but if you are a cabinet
officer or a Deputy Secretary who is here today, you have to
reprogram money at the end of the year. And if you are serious
about this, you move some of that reprogrammed money----
Mr. Ose. Discretionary money?
Mr. Horn. Absolutely. When Dr. Raines came in as Director
of OMB, I told him what we had been urging the cabinet to do,
reprogram it; and he said I agree with you. That is how Y2K was
dealt with so they didn't have to spin their wheels for 1 year
between the budget office in the executive branch and the
legislative branch.
Ms. Gaffney. Mr. Chairman, there was a brief discussion
when you were asking questions about who was the acting CFO. In
point of fact, Mr. Gibbons was our point of contact for this
audit. He was the acting CFO. I have known Dave Gibbons for a
long time, and I have enormous respect for him. But he is not
an accountant. He doesn't know accounting. He is a budget
person. He worked in OMB for many years. So, Mr. Gibbons was
very ill equipped to deal with this situation.
If you want to know how I think the Congress should help;
Mr. Ramirez has said it is now a year since they have had a
qualified CFO in place and my bet is everyone is now saying it
is too late in this administration, we are going to give up on
it for--how long do we have to go, 10 months?
Mr. Horn. You are right about that. I happened to have
joined an administration in the last year and a half and it is
almost impossible to get people.
Mr. Ose. Let me explore that a little bit. Let me digress
first. Is it you, Mr. Ramirez, or whomever, who would I ask the
question of, has the agency asked for additional resources from
Congress in order to address this problem?
Mr. Ramirez. No, we haven't but we have utilized the
discretion that the chairman alluded to that was talked about
when Dr. Raines was head of OMB and we have redirected
resources to remediate the matter.
Prior to that there has been talk about us hiring an
accounting firm to come in last year to help us get a clean
audit. Their sole purpose was not to help us get a clean audit
but to help us clean up the data to be able to get a clean
audit.
Mr. Ose. That was the Hyperion people?
Mr. Ramirez. No, that was Arthur Andersen.
What we have done is, taking into account what led to us
being classified as a high risk agency, was that over the last
two decades, approximately 80 systems, accounting systems, were
built within the Department and there was little communication
between these systems. Three and a half years ago or so, a
little less than that, we took the position that our effort was
to consolidate these systems into a handful of systems that
could talk to each other and could better account for our
resources. We have made significant progress, but we have not
completed the task. There is still internal controls that need
to be dealt with.
This year, and the reason that there was a disclaimer filed
by the Inspector General on March 1, and I need to remind the
committee members, although I don't think you need reminding,
this was reduced by 30 days from last year's deadline as well.
What we did this year was we went through a significant
conversion, ran dual systems during this conversion but focused
primarily our attention as it related to the audit that was
being done on the financial piece. Let me say that was the only
piece that led to a disclaimer. All of their other work has
been done.
So again, our hope is as a result of that, and that being
the only piece, we are prepared to move ahead with the
Inspector General to clear up the 1999 finances. We know where
the dollars were spent, we can show them where they were spent,
and we are prepared to do that. We would hope that it would be
sooner than June that we could come to terms. They have
indicated back to us that it will take them approximately 6
weeks to review this one last piece of information, and that is
fine because I can appreciate their efforts primarily being
focused, as the chairman has said, on their 2000 audit but we
will also in order to facilitate the 2000 audit work which
actually technically does not start for them until June any way
to come in here, is that we will now have quarterly reports
that in the past were not being generated that can help
facilitate and deal with whatever workload they may have.
We are looking forward to working that through, but to get
back to your specific question, we did not see a need to come
to Congress for additional resources. We appreciate the
discretion that was allowed to us based on the leadership of
the chairman to allow us to dedicate the necessary resources to
be able to resolve the issues that were highlighted as the
reasons for the disclaimer in our financial statements.
Ms. Bateman. Keep in mind that we don't agree with the
disclaimer. We felt as if we had the resources and the
statements were prepared, and we were ready to address their
concerns. And that February 21, the OIG said they had to issue
an opinion by March 1. We felt that we had the supportable
detail to refute the disclaimer. We felt that if we did do as
Congress mandated, which was prepare the statements and be
subject to the audit.
Mr. Ose. You mentioned that 3\1/2\ years ago, Mr. Ramirez,
you undertook the--started the effort to allow this system, the
new system to come into place?
Mr. Ramirez. No. Our efforts are capitalized in our HUD
2020 reform. They are a comprehensive effort to deal with not
just the financial systems, which are a weakness that had been
outlined for years as a material weakness in the Department,
but also dealt with a more comprehensive approach to solving
other weaknesses like management and----
Mr. Ose. When did that program become initiated?
Mr. Ramirez. We went through approximately 12 months of
setting up the system.
Mr. Ose. Beginning in?
Mr. Ramirez. Beginning in 1997. We went through a full
cycle of our 2020 structure in place already for a year. We are
into the second year of a full--of now the second year of a
cycle of our management structure in place to deal with the
specific concerns. In fact, Mr. Walker from GAO has alluded to
the fact that our staffing, our structure, and our placing of
staff have led us to make credible progress in getting us off
the high risk list and is no longer an issue as it related to
us getting on the high risk initially.
We still have more work to do, don't misunderstand me,
Congressman, and we are working quite diligently to get it
done. But we, and I say it in all candor as the Deputy
Secretary, our financial house isn't where it needs to be, but
it is in the best condition it has ever been in the history of
our Department and us going from an agency that basically went
out there and built boutique systems of accounting that
couldn't talk to each other to consolidating them now to an
effective accounting system to deal with a full financial
integration of our Department.
Mr. Ose. Let me just share with you the difficulty I have
here.
Mr. Ramirez. Yes, sir.
Mr. Ose. Fifteen months ago I was on the private side. Now
I have the privilege of serving here in Congress. My affairs
continue. If I can't get an opinion from my auditor or a clean
set of books then I have to stay in Sacramento and fix my
business. I cannot come back here and do the job that I was
elected to do, and believe me, this weekend was not a lot of
fun at my house in Sacramento. Unless we can solve this
problem, unless we can get a clean opinion, Congress has no
evidentiary basis on which to make decisions related to the
funding that you all are requesting of us.
Mr. Ramirez. Let me reassure you, and if you look at the
audit and the substance outside of the actual reconciliation
with Treasury, which was the item that led to this disclaimer
that our financial house is in order. The biggest operator
within the Department is FHA. FHA got its own independent audit
that came out with a clean opinion. We still have material
weaknesses within FHA but I am happy to note that the Inspector
General withdrew one completely, downgraded another one, and we
are working diligently to solve the third within FHA.
Within our overall accounting system what we have been able
to do is that we believe that the disclaimer that was issued on
March 1, recognizing the statutory requirement primarily placed
on the Inspector General to produce this audit, caused us to
not work with the Inspector General over the last week because
that was when this particular issue was raised to management as
an issue that would lead to a disclaimer within our financial
statements to clear up the concerns that they had. And out of
the trillion transactions it came down to three, and we were
prepared to document those three transactions to show that it
did not produce a materiality to cause a disclaimer to take
place. That did not occur and that is behind us.
Mr. Ose. Does the Office of Inspector General agree with
that?
Ms. Kuhl-Inclan. We respectfully disagree with that, sir.
It wasn't just an issue of a fund balance with Treasury. It
first began that any good business has a general ledger that
you can depend on. And so when you process these transactions
that flow through PAS, the 1 trillion transactions, and so many
are rejected on a day-to-day basis, we had to be comfortable
with why those transactions were being rejected. That was the
one thing that we were trying to get the Department to do and
for us to understand the reason for the rejection.
The next issue was the fund balance with Treasury. If you
don't reconcile your cash balances on a monthly or even
quarterly basis, then you don't know where you stand. That is
good business sense. That was not being done.
The third issue, when you prepare financial statements,
they must be based on the general ledger. They had some 264
entries that didn't go through the general ledger. That was
over $60 billion worth of entries that didn't go through the
general ledger. We cannot rely on financial statements where
the general ledger is not the source document.
Mr. Ose. You are referring to Ms. Gaffney's written
testimony on page 4 as it relates to the adjustments to the
general ledger?
Ms. Kuhl-Inclan. Exactly. You can't run those adjustments
outside of the general ledger. We didn't know what the
adjustments meant, nor did we have the proof to show the
documentation for those entries. Any good business runs on a
general ledger. And then we had the issue of material
weaknesses. The material weakness and reportable conditions
have not really changed. Some have been downgraded, some have
been upgraded, but there has been no change since we started in
1991.
The issue of resource management, yes, we took it off. That
is why you have problems monitoring your multi-family
portfolio. It became an issue why these material weaknesses are
occurring versus standing alone analyzing your basic resources.
We have not really altered our opinion or our ideas about what
are material weaknesses and reportable conditions since we
began the audit. Those conditions still remain. There have been
some changes, yes.
Mr. Ose. I want to make sure that I understand you
correctly. These are material weaknesses that were pointed out
in 1991?
Ms. Kuhl-Inclan. Yes.
Ms. Gaffney. Yes.
Ms. Kuhl-Inclan. Some are more serious than others. But
that group of reportable conditions has basically been in
effect since we started doing the audit. There has not been any
significant change.
Mr. Ose. So we still suffer those same material weaknesses
in the opinion of the Inspector General?
Ms. Kuhl-Inclan. Yes, sir.
Mr. Ose. Mr. Ramirez.
Mr. Ramirez. First, let me address the issue of 200-some
odd entries that were made. We made it clear at the hearing
that this was a conversion year. All of those 200 entries were
specifically related to conversion. If they would have just
audited the PAS system, which was the one that got us a clean
opinion last year, we would probably have gotten a clean
opinion this year.
Ms. Kuhl-Inclan. But that is not the general ledger.
Mr. Ramirez. They didn't, and that is where the supporting
documentation is to the HUDCAPS. We were prepared prior to
March 1 on the $63 billion that she is talking about that were
material were two entries that we had the supporting document
prior to March 1 that they refused to receive until after March
1.
Mr. Hsiao. From a systems perspective, last year they had a
little program called CRS which really summarizes PAS data into
a financial statement. That is real key. You can't get
information, that is why we have Hyperion. These systems are
old. You and I, even me with my knowledge and my experience, it
would be very difficult to get any data out of it. You need a
set of essentially COBOL programmers to get anything out of it.
Mr. Ose. We did COBOL when I was in college. Seriously?
Ms. Gaffney. Yes.
Mr. Hsiao. This is over 20-plus years old. That is very
difficult to get data. That is why they had these reporting
systems so you can easily produce the financial statements. It
is not easy to go in and produce financial statements from PAS.
CRS--when they converted, CRS did not work. They did not
produce financial statements from PAS into CRS, it went
straight to HUDCAPS, converted and then went to Hyperion, and
that is how the financial statement gets produced.
Mr. Ose. Mr. Chairman, if I might, I am trying to approach
this methodically and I think the first question I might ask,
and unfortunately I am not sure that we will get an answer
here, is that from 1991 to the present we have had no apparent
change in the material weaknesses. Now, if I understand
correctly, perhaps the CRS system did not lend us the
information to create the solutions by virtue of its antiquated
nature but the reality is that this has been every year
tolerated.
Ms. Gaffney. Right.
Mr. Ose. I don't understand why we tolerate it. Mr. Ramirez
is the Deputy Secretary, who is the Deputy of HUD. Why is it
that we are not doing anything about this? Why does it take us
8 years to address these material weaknesses that we kicked up
by virtue of the good work previous Congresses did.
Ms. Gaffney. You know what I am going to say.
Mr. Horn. Have any problems come in terms of corruption,
pilfering, and embezzlement because of that general ledger
being so useless?
Ms. Gaffney. I have no evidence of that.
Mr. Horn. You have no evidence of that, OK. Because that is
a field day for anyone who figures gee, they will never figure
these books out.
Ms. Gaffney. Right. I would like to answer you by saying
what is remarkable is the guts of what is wrong is the material
weaknesses. HUD has plans, HUD always has plans to correct
material weaknesses, but the problem in the government,
generally, is nobody talks about the material weaknesses. They
talk about the unqualified audit opinion and what is happening
is agencies are jury rigging financial statements and getting
unqualified opinions, and then that is the end of the story. If
you got an unqualified opinion, you are a success. It is really
very problematic.
Mr. Horn. You are telling me the corporate culture rests on
what, on simply saying you have an unqualified opinion?
Ms. Gaffney. That's it. You get an unqualified opinion and
you are a success, so agencies will do anything to get an
unqualified opinion. And it actually doesn't take that much.
All you have to do is hire a bunch of consultants from
accounting firms, have them jerry-rig financial statements,
take enough time to do it and have them audited, and you will
get an unqualified opinion no matter what your material
weaknesses are.
Mr. Horn. I can guarantee you that the Federal Government
and the California State government, which is the second
largest entity in this country in government, they have old
timers for years that balanced the numbers and they plugged in
a little number here and there and somehow they all balanced.
Ms. Gaffney. Right.
Mr. Ramirez. I would counter by saying that the accounting
expertise that we brought in was to clear up a system that had
been sorely lacking improvement for years. We are taking the
most aggressive stand ever to do that and I would venture to
say that the very same kind of experts and consultants that the
Inspector General hired to do the audit for FHA did not jerry-
rig any numbers to come out with a clean opinion for FHA.
So these are the top five financial accounting firms in
this country that do primarily the work for the Federal
Government and the reason that we hired them was not to do our
financial statements but to get to the heart of what we believe
is the problem, and I think the Inspector General would concur,
which is that the data that was in those systems needed to be
cleaned up in order for it to be quality accounted for and
booked. I would say that all financial statements, corporate or
government, should seek and strive for a clean opinion because
that truly is the benchmark of what we want to do. As equally
important is to take into consideration and implement those
recommendations that are made by auditors even when they issue
clean opinions to deal with weaknesses that they have found in
your systems. We are convinced that the disclaimer issued was
issued because of a timing concern and the lack of effort of
review to deal with the three items out of a trillion by the
Inspector General.
That is behind us, Mr. Chairman. I believe in working
productively and proactively to resolve our differences and our
issues. I am looking forward to hopefully resolving sooner than
the 6 weeks that the Inspector General has indicated to us it
will take them to review these specific items that they
mentioned as a disclaimer to come back to you and quality
report the financial condition of our finances.
And finally, let me just say that I would ask the
Congressman to look at the substance of the entire financial
report that was prepared by the Inspector General because she
is correct, although we focus on a clean opinion, there is a
lot of good material that still highlights our weaknesses but
also captures the strengths that have come into being as a
result of our efforts, and we want to work collaboratively to
resolve these issues that are before you at this time, Mr.
Chairman.
Mr. Horn. Has the Department looked at an off the shelf
general ledger in updating itself? What do your consultants
say?
Mr. Ramirez. What we have had again, the dynamics of the
problem that was a material weakness even before Inspector
General Gaffney came in as Inspector General and it is
Secretary Andrew Cuomo from New York, the Secretary of Housing
and Urban Development, and those weaknesses when Jack Kemp was
there, and in fact were trying to be resolved as a result of
the debacle that was had by the leadership of Samuel Pierce
that led to the scandals in the eighties.
To bring a little history to that, that is when we had
these different systems that weren't talking to each other. We
felt it important to get to what the IG was recommending, what
GAO is recommending as well, that we integrate our financial
systems. We are striving for that. What led to the disclaimer,
as the Inspector General has stated before this committee, is
that as a result of us trying to do something right and being
caught in a time-consuming difficult conversion but yet running
a parallel system to make sure. As the Congressman has said and
quite correctly, that if we can't show you how we spent our
money we should not be getting money, we are prepared to show
you how and where we spent our money. It didn't get into the
general ledger HUDCAPS, as was mentioned earlier by the
Inspector General, and that is correct, too. But what we were
saying is that when this issue was brought up and this was an
issue that led to her coming out with saying that there would
be a disclaimer came to our attention a week before the March 1
deadline. By the next day within 12 hours we were prepared to
sit down with the Inspector General and outline what these
numbers were and what they meant. They did not receive this
information and refuse to acknowledge this information until
after March 1. I can appreciate that. They are under a
statutory requirement to file something by the first, but it
was a week before and it was three items out of a trillion.
Yes, there were a lot of other things that could be brought
up as weaknesses. Yes, they were there and they were there last
year when we got a clean opinion from the Inspector General. We
have reduced some. Some have been highlighted even more. That
has also been acknowledged by the Inspector General. That
wasn't what was discussed over that period of time that the
audit occurred. The incident that led to the disclaimer was
brought to management's attention a week before the first and
we were prepared within 12 hours to respond to that but it was
not accepted.
Mr. Horn. Well, you have mentioned the tenant income
verification system to address the problem of subsidy payments.
Do you think that will eliminate the problem?
Mr. Ramirez. That will eliminate, we believe, after we have
run the system and have run one survey, and we are in the
process of getting these letters out, but we will run another
cycle and it will be an annual verification process. It will
clearly be able to point to a more accurate number than the one
that has been derived out of a sampling of a thousand
households, as it currently is being done under the method that
the Inspector General has employed for the last several years.
We will be able to get to a more accurate number and to the
person who is underpaying to be able to either get them to
their fair share of rent or to get families or individuals that
are qualified into those housing units and reduce that waste
that is currently being outlined as a weakness.
Ms. Kuhl-Inclan. One point, we agree with the tenant
verification process, but it is a back-end process. They are
reviewing the income of tenants after they are in the units.
One of the material weaknesses is the up-front issue--
overseeing the multifamily projects which receive payments and
Section 8 moneys. What kind of monitoring is HUD doing to make
sure that the owners and housing authority executive directors
are ensuring that the right tenants get in in the first place?
Yes, they are doing tenant income verification, and we
agree with that, but it doesn't exclude the up front issue,
which is a material weakness of overseeing and monitoring
multifamily efforts at the beginning of the process, not the
end.
Mr. Horn. Mr. Ramirez, you testified that the Department's
financial house is now really in order?
Mr. Ramirez. No, I said it is in the best condition it has
been in the history of the Department, sir, and we still have
work to do.
Mr. Horn. Yes, I think you have a lot of work to do and you
do too and you know it, and I appreciate your comments on that.
So we agree you can't really make an assertion when the
Inspector General continues to report material weaknesses and
you won't produce financial statements in a timely manner.
Mr. Ramirez. We can dispute it. We believe that, sir, is
behind us. We don't want to bog down our work in the present as
a result of what occurred in the past. We are hopeful, as
indicated by the Inspector General, that we resolve this 1999
disclaimer based on what got the financial statements
disclaimed, and be able to report back to you in a timely
manner the financial condition, overall financial condition of
the Department, sir.
Mr. Horn. Well, you say in your first full paragraph that
the Department's financial house is in order.
Mr. Ramirez. Mr. Chairman, we have not reached management
nirvana, and we are not going to get there any day soon, but we
are making credible progress, as Mr. Walker has said from the
GAO.
Mr. Horn. I don't know that we can beat this poor old dog
any more. It kept going through my mind that Hyperion is a
facility in El Segundo, CA, of the city of Los Angeles, a waste
water and water treatment facility.
Mr. Ramirez. Isn't it a shame that they use that throughout
the Federal Government?
Mr. Horn. And any good parochial student here probably
studied mythology, Greek and Roman, and I think that is it,
too. We have an analogy on the West Coast.
Mr. Ramirez. Yes, we agree.
Ms. Gaffney. Mr. Chairman, may I just say one thing?
Mr. Horn. Go ahead.
Ms. Gaffney. HUD did want an extension of the March 1 date.
The other thing is that OMB tried very hard. They said that we
should extend by a couple of days, a couple of weeks, a month
because of the importance of getting an unqualified opinion. We
should do whatever. So I just wanted you to be aware that that
kind of pressure exists.
Mr. Ramirez. Let me say by a matter of days, four agencies
did delay their report through their Inspector General's
office, and it did produce in a quite expeditious manner, as we
believe it would have for us, a clean opinion, sir.
Mr. Horn. Well, I am worried about the possibility for
corruption.
Mr. Ramirez. We all are.
Mr. Horn. Do you have your own investigative unit within
the Department?
Mr. Ramirez. We leave all of the criminal investigation
work to the Inspector General. Our focus through the
enforcement center is to deal specifically with civil
violations of law. In particular, what has been set statutorily
and regulatorily through the agency by way of landlords,
grantees and recipients, sir.
Mr. Horn. Well, you have a major mandate without question.
It is a very difficult Department. Historically you are talking
about decentralization all over the place and it will be a real
gold medal if somebody pulls that together.
Mr. Ramirez. Thank you.
Mr. Horn. Let me thank the staff that put this hearing
together, J. Russell George, the staff director and chief
counsel for the subcommittee; Randy Kaplan, counsel, and he is
to my left and your right; and Louise DiBenedetto is from GAO
and a professional staff member working for us. Bonnie Heald,
director of communications; Bryan Sisk, clerk; Ryan McKee,
staff assistant. The minority staff, Trey Henderson is counsel
and Jean Gosa is minority clerk, and the court reporter today
is Doreen Dotzler. We thank you very much, and with that we are
adjourned.
[Whereupon, at 11:55 a.m., the subcommittee was adjourned.]