We are required to audit the consolidated financial statements of the U.S. Department of Housing and Urban Development (HUD) annually in accordance with the Chief Financial Officers Act of 1990 as amended.  Our objectives were to evaluate HUD’s internal controls over financial reporting and compliance with applicable laws, regulations, and government wide policy requirements and provisions of contracts and grant agreements.  This audit report is an interim report on internal controls over financial reporting.  It is being issued to provide an interim assessment of HUD’s internal controls over financial reporting and compliance.  Our final report on HUD’s internal controls over financial reporting and compliance, and our opinion on the fair presentation of HUD’s principal financial statements will be issued by March 1, 2015. 

Our interim assessment disclosed 11 findings.  The most significant findings relate to (1) CPD’s formula grant accounting not in compliance with GAAP, (2) continued weaknesses in PIH’s cash management process, (3) lack of validation of grant accrual estimates, and (4) HUD’s continued financial management system weaknesses.  The findings have root causes stemming from weaknesses in HUD’s internal controls which have been identified and reported in previous years.  These weaknesses are due to HUD’s inability to establish a compliant control environment, implement adequate systems, recognize required changes, and identify appropriate accounting principles and policies.

The most significant recommendations included in this report are those in which we recommend that HUD (1) transition at least $423 million in excess Section 8 funding held in public housing agencies’ net restricted asset accounts to HUD, (2) validate its grant accrual estimates to ensure reasonable and accurate financial reporting, and (3) review and if necessary deobligate $237.8 million in excess obligations.