BEFORE THE HOUSE OF REPRESENTATIVES
including her statement regarding the missing $59 billion. This testimony can
be read in its entirety at http://www.hud.gov/offices/oig/data/reform.pdf ]
Chairman Horn, Ranking Member Turner, and Members of the Subcommittee, I appreciate the opportunity to appear before you today to give you my perspectives on the status of financial management at the Department of Housing and Urban Development (HUD). I am accompanied by Kathryn Kuhl-Inclan, Assistant Inspector General for Audit; James Heist, Director of the Financial Audits Division; and Benjamin Hsiao, Director of the Information Systems Audit Division. As the subcommittee is aware, the Office of Inspector General (OIG) reported on March 1, 2000 on our efforts to audit HUDís fiscal year 1999 consolidated financial statements and issued a disclaimer of opinion. OIG also issued reports on audits of the Government National Mortgage Association (GNMA) and the Federal Housing Administration (FHA), on February 24 and 29, 2000, respectively. Those audits were performed by the independent accounting firm of KPMG LLP, under contract with the OIG. KPMG LLPís reports included unqualified opinions on GNMAís and FHAís fiscal year 1999 financial statements.
Before I address issues at HUD, Iíd first like to take a moment to discuss the broad purposes of the Chief Financial Officers (CFO) Act and our perspectives on the emphasis being placed on agenciesí success in having auditors express unqualified opinions on their financial statements. In passing the CFO Act nearly 10 years ago, the Congress laid out three broad purposes:
We believe that HUDís success in addressing the material weaknesses and reportable conditions in our Report on Internal Controls, which is an integral part of the financial statement audit, would be a more meaningful CFO Act performance measure than receipt of an unqualified opinion. As we pointed out in our March 1,2000 report, HUDís ability to obtain an opinion for fiscal year 1998, while noteworthy,required extensive contractor support along with ad hoc analyses and special projects to develop account balances and necessary disclosures. This was due to continued weaknesses in HUDís internal controls and financial management systems. For fiscal year 1999, we reported a total of 17 reportable conditions, 5 of which we also classified as material weaknesses. We describe in our fiscal year 1999 report the deterioration of the internal controls relating to HUDís core financial management systems that resulted from the implementation of a new Departmental general ledger and ultimately led to our decision to disclaim an opinion on the fiscal year 1999 financial statements.
HUD continues to rely on extensive contractor support to overcome limitations in the preparation of financial statements that are brought about by poor internal controls. These efforts are in large part directed at obtaining unqualified opinions, and not correcting the systems that continue to adversely impact our ability to audit HUDís financial statements in a timely and efficient manner.
In the following paragraphs, we (i) explain the reasons for our disclaimer of opinion,(ii) summarize the Report on Internal Controls, and (iii) summarize the Report on Compliance with Laws and Regulations. The latter two reports are integral parts of the financial statement audit.
DISCLAIMER OF OPINION:
We were unable to issue an opinion on HUDís financial statements for fiscal year 1999, and as a result, we issued a disclaimer of opinion. Our decision to issue a disclaimer considered the CFO Act statutory date of March 1 to complete the audit. Both the Congress and OMB had emphasized the importance of meeting the March 1 date this year. Indeed, we understand that only four OIGs missed the deadline compared to ten last year. We considered this in reaching our decision to stop the audit. That decision also considered the prospects of our being able to complete the audit in a reasonable period of time after the deadline. We assessed the amount of work that, first of all, needed to be completed by the Department to reconcile their "fund Balance with Treasury" accounts (analogous to cash in a bank account) and finish the financial statement preparation process. Secondly, we considered the effort required for us to finish our audit work. It was clear to us that, optimistically, the best we could hope for would be to complete the audit sometime in April 2000 and this was not acceptable. We were one of the agencies that missed the deadline last year. However, last year the audit process had not been as significantly delayed by the systems conversion effort as was the case this year. Moreover, at March 1 last year, we could reasonably anticipate being able to complete the audit and issue our opinion before the end of the month and, indeed, we were able to so.
HUD criticized our decision to stop the fiscal year 1999 audit and has alleged that we did not follow professional standards by not notifying them of our decision to disclaim an opinion in time for them to take corrective action. We disagree that we violated any standards relating to timely communication. We made it clear throughout the audit process that we intended to issue our report in time to meet the March 1, 2000 statutory due date and that our inability to complete the audit could affect the opinion. We would also point out that the conclusions with respect to HUDís internal control weaknesses, which led to the restriction of our audit scope, were formally communicated to the Department on February 9, 2000. It was only after we informed HUD officials on February 23, 2000 that those same issues were causing us to disclaim an opinion, that HUD initiated a concerted effort to accelerate the completion of the fund balance with Treasury reconciliations. This effort included contractor support to perform a basic accounting function that should have been completed by HUD staff months earlier. We can only conclude that HUD was motivated to take this action primarily because of a desire to obtain an opinion, rather than acting immediately to address the material weakness with HUDís corefinancial management system that was included in our draft report on internal controls. We began the fiscal year 1999 consolidated audit in June 1999 and spent nearly 20 staff years performing the audit.
For the fiscal year 1999 audit, the limitation in our audit scope was caused by the following factors:
HUD implemented a major
change to its accounting system in fiscal year 1999, including a new Department-wide
general ledger system using HUDCAPS. The attached "FY 1999" chart illustrates
the major accounting systems used to account for the vast majority of HUD funds,
and how those systems relate to one another and ultimately provide information
needed to prepare the financial statements. The "FY 1998" chart illustrates
the system relationships before the conversion of the general ledger to HUDCAPS.
Prior to that conversion, PAS, one of HUDís "legacy" mainframe systems, served
as HUDís general ledger for HUDís grant, subsidy and loan programs. Systems
maintained for the Federal Housing Administration (FHA) and the Government National
Mortgage Association (GNMA) were separate and those entities maintained and
continue to maintain separate general ledgers.
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Source: http://www.hud.gov/offices/oig/data/reform.pdf (pg 1-4)