Housing and Urban Development (HUD) FY2018 Audit Opinion

Updated January 10, 2019

Housing and Urban Development (HUD) FY2018 Audit Opinion

The Department of Housing and Urban Development

(HUD) is the cabinet-level federal agency responsible for

national housing and community development policy and

programs. As required by the Chief Financial Officers Act

of 1990 (CFO Act; 31 U.S.C. §902), as amended, HUD and

other federal government agencies annually issue audited

financial statements. Under the CFO Act, audits of federal

agencies are the responsibility of the agency’s inspector

general (IG).

HUD’s consolidated financial statements include the

activities of the Federal Housing Administration (FHA) and

Government National Mortgage Administration (Ginnie

Mae), both of which are part of HUD. FHA is a mortgage

insurer, and Ginnie Mae guarantees mortgage-backed

securities backed by federally insured or guaranteed loans.

In addition to their inclusion in HUD’s consolidated

statements, FHA and Ginnie Mae also release standalone

financial statements that are separately reviewed by the

HUD IG.

For FY2018, the HUD IG was unable to express an opinion

on HUD’s combined financial statements or Ginnie Mae’s

standalone statements (disclaimer of opinion). FHA

received an unmodified opinion. (Types of audit opinions

are explained later in this In Focus.)

The U.S. government is currently unable to obtain an

unmodified opinion on its unitary Financial Report of the

United States Government because agencies—such as HUD

and the Department of Defense (DOD)—with significant

assets and budgetary costs received disclaimers of opinion

on their FY2018 financial statements. Although these

agencies have significant budgetary costs, their size varies

greatly; for example, HUD’s annual spending is less than

one-tenth that of DOD.

Why an Audit?

Government entities, including the U.S. government as a

unitary entity, issue annual reports that present their current

financial position and condition, and discuss key financial

topics and trends of the reporting entity. An audit of the

government’s financial information provides accountability

to Congress, oversight bodies, and the public about

government agencies’ use of public resources. Financial

audits aim to provide reasonable assurance that the financial

statements of an entity are free of material misstatements,

whether caused by error or fraud.

Annual audits of federal agencies, including HUD, (1)

provide critical insight into the reliability of financial data

and the efficiency and effectiveness of internal operations;

(2) review compliance with statutes and financial

regulations; and (3) uncover potential problems. With such

information, HUD and Congress may be better equipped to

improve HUD’s performance in these areas.

How Are Audits Done?

For each line item on an entity’s financial statement and

notes to the financial statement, an auditor will examine a

sample of the underlying economic events to determine the

accuracy of the information reported. The auditor is

expected to give an unbiased professional opinion on

whether the financial statements and related disclosures are

fairly stated in all material respects for a given period of

time in accordance with Generally Accepted Accounting

Principles (GAAP). Although the Federal Accounting

Standards Advisory Board (FASAB) promulgates financial

reporting and accounting standards for federal government

entities, GAO is responsible for establishing auditing

standards for federal government agencies, including

federal grant recipients in state and local governments.

Material misstatement in financial reporting can be

defined as information on a financial statement that

could potentially affect the reader’s decision or the

conclusions drawn by a reader about the financial

status of an agency.

Audit Standards

GAO issues the Generally Accepted Government Auditing

Standards (GAGAS), also commonly known as the “Yellow

Book,” which provides a framework for conducting federal

government audits. The Yellow Book requires auditors to

consider the visibility and sensitivity of government

programs in determining the materiality threshold. Similar

to requirements in the private sector, GAGAS requires

federal financial reporting entities to disclose compliance

with laws, regulations, contracts, and grant agreements that

have a material effect on the entities’ financial statements.

Some organizations within the federal government use a

hybrid of external and internal auditors. Whether external

or internal auditors perform the function, they are required

to adhere to the standards established under GAGAS.

In addition to examining financial information, an audit

evaluates the agency’s management assertion of internal

control over financial reporting. Audit of internal control

includes the audit of computer systems at the entity-wide,

system, and application levels. GAGAS recommends using

specific frameworks for internal control policies and

procedures, including certain evaluation tools created

specifically for federal government entities. An effective

internal control framework may help an organization

improve its performance and governance.

https://crsreports.congress.gov

Housing and Urban Development (HUD) FY2018 Audit Opinion

Types of Audit Opinions

Auditors form audit opinions by first examining the types

of risks an organization might face and the types of controls

that exist to mitigate those risks. Once the risks and controls

to mitigate those risks have been determined, the auditors

are to examine the supporting evidence and determine

whether management is presenting the financial statements

fairly in all material respects. Although many entities

usually receive an unmodified opinion in the federal

government, the auditor may express other types of

opinions based on the circumstances. There are four types

of audit opinions an auditor may express:

Unmodified Opinion. An unmodified opinion (clean

opinion) states that the financial statements present fairly,

in all material respects, the consolidated balance sheets, the

related consolidated statements of net cost and changes in

net position, the combined statements of budgetary

resources, and the related notes to the consolidated financial

statements in accordance with GAAP. This is the opinion

expressed in the standard report. In certain circumstances,

explanatory language might be added to the auditor’s

standard report, but not affect the auditor’s unmodified

opinion on the financial statements.

Modified Opinion. A modified opinion states that, except

for the effects of the specific matter(s) identified in the

opinion, the financial statements present fairly in all

material respects in conformity with GAAP.

Adverse Opinion. An adverse opinion states that the

financial statement(s) do not present fairly in accordance

with GAAP.

Disclaimer of Opinion. A disclaimer of opinion states that

the auditor is unable to express an opinion on the financial

statements. The auditor’s report should give all of the

substantive reasons for the disclaimer. Reasons for a

disclaimer of opinion include financial statements that do

not conform to GAAP and financial management systems

that are unable to provide sufficient evidence for the auditor

to express an opinion.

Limitations of Audits

Independent audit opinions provide reasonable assurance

that financial statements present fairly in all material

respects, but for the following reasons do not fully

guarantee:

 The auditors use statistical methods for random

sampling and look at only a fraction of the economic

events or documents during an audit. It is cost—and

time—prohibitive to recreate or examine all economic

events at an entity;

 Some line items on the financial statements involve

Results of FY2018 HUD Audit

For FY2018, the HUD IG issued a disclaimer of opinion on

HUD’s consolidated financial statements and Ginnie Mae’s

standalone financial statements, whereas FHA received an

unmodified opinion on its standalone financial statements.

Although the IG identified a material weakness and

significant deficiencies with FHA’s internal controls and

information technology systems, these issues did not

prevent the IG from being able to issue an unmodified

opinion on FHA’s financial statements.

The IG identified material weaknesses, significant

deficiencies, and instances of noncompliance with

applicable laws and regulations in its audits of HUD’s and

Ginnie Mae’s financial statements. Some of these issues

were specific to certain activities, offices, or accounts,

whereas others were related to HUD’s and Ginnie Mae’s

processes and systems more broadly. The specific issues the

IG cited as the basis for its disclaimer of opinion on the

HUD audit were (1) several issues related to the accounting

for certain formula grant and disaster relief grant programs

administered by HUD’s Office of Community Planning and

Development (CPD), as well as for HUD’s property, plant,

and equipment; and (2) the disclaimer of opinion on Ginnie

Mae’s standalone financial statements. In regard to Ginnie

Mae, the basis for the disclaimer of opinion included

questions about its reporting of nonpooled loan assets and

FHA reimbursable costs.

Considerations for Congress

Congress may use the findings of the HUD audit to inform

or enhance its oversight of HUD’s efforts to remediate

these identified areas. Possible policy responses could

include the implementation of process improvements,

investments in information technology systems, changes in

accounting practices, and implementing effective internal

controls. As noted in the IG’s audit report, HUD has taken

steps to address some of the issues the IG identified. For

example, Ginnie Mae is in the process of implementing a

new database project in response to previous IG findings,

but it was not fully implemented by the end of FY2018.

CRS Products

CRS Report R44894, Accounting and Auditing Regulatory

Structure: U.S. and International, by Raj Gnanarajah

CRS In Focus IF10701, Introduction to Financial Services:

Accounting and Auditing Regulatory Structure, U.S. and

International, by Raj Gnanarajah

Other Resource

HUD CFO Reports, Fiscal Year 2018 (FY2018) Agency Financial

Report, November 2018

subjective decisions or a degree of uncertainty as a

result of using estimates; and

 Audit procedures cannot eliminate potential fraud,

although it is possible that an auditor may find fraud

during the audit process.

Raj Gnanarajah, Analyst in Financial Economics

Katie Jones, Analyst in Housing Policy

Maggie McCarty, Specialist in Housing Policy

IF11066

https://crsreports.congress.gov

Housing and Urban Development (HUD) FY2018 Audit Opinion

Disclaimer

This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to

congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.

Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has

been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the

United States Government, are not subject to copyright protection in the United States. Any CRS Report may be

reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include

copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you

wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11066 · VERSION 3 · NEW