HUD Proposes an Independent Public Accountant Roster.  On February 6, 2008, HUD issued a proposed rule titled, Independent Public Accountant Roster, that may have an effect on your firm, if you perform certain audits under the HUD Consolidated Audit Guide or of governments or not-for-profit organizations that receive HUD funding and are subject to a single audit. The proposed rule would modify HUD's existing regulations in 24 CFR Part 5 to establish a roster (that is, the IPA Roster) of approved independent public accountants and public accounting firms (IPAs) that would be permitted to perform audits or related services on covered entities. The proposed rule would also establish eligibility, application, and removal procedures for IPAs listed on the IPA Roster. GAQC Alert #68 contains a summary of the HUD proposal for your information. The comment deadline for the proposal has expired.  See item above for information on the GAQC comment letter issued in response to the proposal.

HUD Updates Illustrative Internal Control Reporting for SAS No. 112 Terminology.  HUD updated the illustrative internal control reporting that appears in the HUD Consolidated Audit Guide for SAS No. 112, Communicating Internal Control Related Matters in an Audit.  Click here for more information. 

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Background[1]

The HUD mission is to increase homeownership, support community development and increase access to affordable housing free from discrimination. To fulfill this mission, HUD plays both a direct and indirect role in the arena of housing in the United States and its territories.

• First, HUD is directly involved in the underwriting of multifamily housing for low and moderate income families, elderly and disabled families, and a broad array of housing for older Americans, including congregate facilities, intermediate care facilities, nursing homes, and hospitals. In this capacity, HUD functions as an insurance company and a hands-on underwriter of the insurance commitment for mortgage loans funded by commercial lenders.
• Second, HUD is the funding source for the capital advance programs, primarily through multifamily loans and capital advance programs.

In addition to its two key direct roles, HUD is indirectly involved in the single family mortgage market, providing approximately $120 billion/year in insurance commitments to families who purchase, rehabilitate or refinance a single family house subject to a HUD-insured loan. These insurance commitments are authorized under Titles I and II of the National Housing Act, and are underwritten and administered by approximately 7,500 mortgage lenders and loan correspondents (as HUD defines that term) throughout the country. All of the lenders and loan correspondents are subject to oversight by HUD, which includes a requirement for financial statement audits and additional compliance and internal control reporting by the independent auditor. The extent of the required reporting oversight depends on the nature and level of activity of the lender or loan correspondent.

HUD is also the primary debt, capital, and operating funding source for approximately 3,400 public housing agencies (PHAs) and Indian housing entities in the United States and its territories. These entities are subject to the Single Audit Act and Office of Management and Budget (OMB) Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and the breadth and depth of compliance requirements for these entities have some common characteristics with HUD-assisted multifamily borrowers.

The following key concepts are important to the understanding of the operating environment for owners and projects with HUD insured mortgages, direct loans or capital grants:

• The regulatory agreement focuses on the project. HUD’s authority to regulate the activities of a HUD-assisted project is limited to items of project income, expenses, project assets, and project liabilities. HUD does not have the authority to regulate entity (versus project) activities, except with respect to transactions between the project and the entity. This means the focus on the audit is on operations of the project and any transactions between the project and the entity, rather than the entity.
• It is helpful to think in terms of a two-tier organization: the partnership (by example) as the top tier and the project as a second tier.
• HUD’s motivation is to reduce the risk of default on an insured or direct loan.
• Because HUD is often the lender (or insurer) of last resort, HUD must place constraints on the owner/manager of the HUD-assisted project to protect HUD’s interests.
• Controls over the use of cash provide HUD with some assurance that if the project has been properly underwritten, constructed, and managed, then HUD’s insurance commitment or direct loan is not significant jeopardy.
• Distribution also means distribution of non-cash assets. Control over the disposition of non-cash assets is equally important to HUD and the mortgagee, since those assets (realty and chattel) constitute the only sources of tangible security for the mortgage note.
• HUD loans and insured mortgages are uniformly non-recourse to the owners. So, except in the case of misuse of funds, HUD and the mortgagee’s only security is the chattel and realty.
• HUD pays special attention to those situations involving “identity of interest” relationships (i.e. related parties involved in ownership and management of projects).

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Office of Inspector General (OIG)

The OIG's mission is independent and objective reporting to the Secretary and the Congress for the purpose of bringing about positive change in the integrity, efficiency, and effectiveness of HUD operations. The staff is charged specifically with combating waste, fraud, and abuse in the administration of HUD programs and operations. Its goal is to ensure that the taxpayers' dollars appropriated by the Congress for HUD programs are used effectively to provide safe, decent, and sanitary housing for millions of Americans.

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Real Estate Assessment Center (REAC)

Background

The Real Estate Assessment Center's  mission is to provide and promote the effective use of accurate, timely and reliable information assessing the condition of HUD's portfolio; to provide information to help ensure safe, decent and affordable housing; and to restore the public trust by identifying fraud, abuse and waste of HUD resources.

Among REAC’s responsibilities are the following:

• To standardize the way HUD evaluates the condition of PHAs, multifamily properties and HUD-regulated lenders.
• To continuously assess PHA and housing property performance and to refer problem indicators to other HUD components for program intervention or enforcement action.

There are three subsystems within REAC which are of interest to the multifamily industry:

• Financial Assessment Subsystem (FASS): FASS is an automated system that supports the collection, validation, and assessment of financial data, including financial statement information, for multifamily housing properties insured and/or subsidized by HUD. This financial data is used by Office of Public and Indian Housing, REAC, and other HUD program offices, including the Office of Housing, and the Enforcement Center (EC), to assess multifamily properties for noncompliance and poor performance. The FASS supports this goal by automating the submission of annual financial data for properties with HUD subsidies, grants, and/or FHA-insured mortgages. It also facilitates management and prioritization of the multifamily housing portfolio by performing automated assessments of the financial data, highlighting projects for which compliance deficiencies are identified. REAC sets and applies uniform financial reporting standards for HUD’s multifamily housing programs, including a standard chart of accounts and supplemental compliance data, and annual audits of financial statements prepared in accordance with generally accepted accounting principles (GAAP). See the section below titled, “Guidelines for Reporting and Attestation Requirements of Uniform Financial Reporting Standards,” for more information. Click here to access documents and guidance relating to the FASS (including User Guides for both multifamily housing and PHAs) and click here to access frequently asked questions.
• Quality Assurance Subsystem (QASS): The REAC QASS conducts reviews of workpapers of participating independent auditors for compliance with generally accepted auditing standards (GAAS) and the HUD Consolidated Audit Guide (see section below). Further, the reviewers read the financial statements for disclosures required by the HUD financial accounting handbook (4370.2, REV-1). QASS staff also recommends sanctions for practitioners whose work is determined to be substandard as the result of workpaper review.
• Physical Assessment Subsystem (PASS): PASS collects and assesses data on the physical condition of HUD properties via the REAC Physical Inspection Protocol. The protocol defines the process for properly completing an assessment. All assessments must follow the protocol to be accepted by REAC. This guarantees a standard and objective approach.

Guidelines for Reporting and Attestation Requirements of Uniform Financial Reporting Standards

Financial statement and other information must be submitted to REAC electronically by PHAs or multifamily program participants on FASS using templates (referred to as FASS templates) specifically designed for them.  Auditors participate in this submission process.  In order to insure accuracy and consistency of financial data in the assessment process, REAC requires the following as the basis for electronic submission:

• Audited annual basic financial statements prepared in conformity with GAAP (PHAs submit basic financial statements and certain auditor’s reports electronically to REAC as well as maintain a hard copy of all financial statements and audit reports for three years; however, multifamily program participants maintain a hard copy of the basic financial statements and audit reports for three years but do not submit the statements or reports electronically.)
• Report by auditors on the hard copy of the FASS templates as to their “fair presentation in relation to audited basic financial statements” in accordance with the audit provisions of the AICPA Statement on Auditing Standards (SAS) No. 29, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents, (PHAs must electronically submit the required FASS template and related SAS 29 reporting to REAC; multifamily program participants must electronically submit the required FASS templates to REAC, however, are not required to electronically submit the related SAS 29 reporting; PHAs and multifamily program participants must both maintain a hard copy of the SAS 29 reporting for three years); and
• A separate (i.e., not part of the above two requirements) attestation agreed-upon procedures engagement under AICPA Statement on Standards for Attestation Engagements where the auditor compares the electronically submitted data in the REAC staging database (the FASS template information) to the related hard copy documents (the attestation report is prepared and submitted to REAC electronically by the auditor).

REAC requires owners to engage a licensed CPA or CPA firm to perform the agreed-upon procedures (see previous bullet) enumerated in a document titled, Guidelines for Reporting and Attestation Requirements of Uniform Financial Reporting Standards For Public Housing Authorities, Not-for-Profit Multifamily Program Participants, For-Profit Multifamily Program Participants, and their Independent Accountants.  The main purpose of this Guideline is to provide guidance to PHAs and multifamily participants and their auditors in meeting the above requirements.

Office of Lender Activities and Program Compliance

• Lender Assessment SubSystem (LASS): There are approximately 7,500 nonsupervised Title I and Title II lenders and loan correspondents who use the LASS system to submit their annual CPA prepared audit and financial statement to renew their FHA lender approval as part of the recertification process. The LASS system is used by both lenders and their CPAs (and works similarly to the FASS system and electronic submission descriptions above). To obtain further instructions on accessing the LASS system you can access the User Manual for LASS. The Financial Data Template (FDT) Line Definition Guide is also available and defines each of the line items on the FDT and Data Collection Form (DCF) and provides a list of required fields, by line number, on the FDT and DCF. Finally, for frequently asked questions and answers regarding the LASS, click here.

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HUD Consolidated Audit Guide

The purpose of this Guide is to assist independent auditors in performing program-specific audits of participants in selected HUD Housing and Ginnie Mae programs. The auditees that generally are audited under this Guide are for-profit entities (note that not-for-profit and governmental organizations that participate in HUD housing programs would fall under the requirements of the Single Audit Act and Circular A-133 and not this Guide).

Audits under the Guide must also be performed in accordance with the standards for financial audits in Government Auditing Standards, issued by the Comptroller General of the United States. The objectives of a HUD program-specific audit under the Guide are to assist the program managers in HUD in determining whether the auditee has: (a) provided financial data and reports that can be relied upon; (b) internal control in place to provide reasonable assurance that it is managing HUD programs in compliance with applicable laws and regulations; and (c) complied with the terms and conditions of federal awards and guarantees, and thus expended federal funds properly and with supporting documentation.

During 2007, the HUD OIG and REAC continue to work on a revision of the Consolidated Audit Guide. The revised guide is being issued on a chapter-by-chapter basis. Your GAQC Team will continue to keep member firms informed of HUD's progress. Below is a list of the status of each chapter.

Chapter	Description	Updated	Effective
1	General Audit Guidance
2	Reporting Requirement and Sample Reports
2	Transmittal letter - Exhibits B and B-1	3/14/2007	3/31/2007
2	Exhibit B - Internal Control Reporting - Significant Deficiency	3/14/2007	3/31/2007
2	Exhibit B-1 - Internal Control Reporting - No Significant Deficiency	3/14/2007	3/31/2007
3	Reserved
4	HUD Multifamily Housing Programs
5	Transmittal Letter