Financial Management:

Improvements Needed in National Flood Insurance Program's Financial Controls and Oversight

GAO-10-66: Published: Dec 22, 2009. Publicly Released: Jan 21, 2010.

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Due to the federal government's role as guarantor, floods impose an enormous potential financial burden on the federal government. Consequently, decision makers at the Department of Homeland Security (DHS), the Federal Emergency Management Agency (FEMA), and the Congress need accurate and timely financial information to assess the effectiveness of the National Flood Insurance Program (NFIP). This report assesses whether controls in place during the 2005 to 2007 time frame were effective and whether actions to improve controls are likely to address identified weaknesses. The Government Accountability Office (GAO) reviewed and analyzed FEMA/NFIP guidance, data, and financial reports, reviewed prior audit reports, interviewed FEMA officials and contractors, and selected a sample of claim losses paid to determine whether claim files contained key documents.

Weaknesses in internal controls impaired FEMA's ability to maintain effective transaction-level accountability. These weaknesses limited FEMA's ability to assure accurate NFIP financial data during the 3-year period from fiscal year 2005 through 2007, which included the financial activity related to the 2005 Gulf Coast hurricanes. FEMA relies heavily on Write Your Own (WYO) insurance companies to carry out NFIP financial activities such as documenting and maintaining claim files. FEMA's Bureau and Statistical Agent (BSA) serves as a liaison between the government and WYO insurance companies. GAO identified weaknesses at three levels of the NFIP transaction accountability and financial reporting process. First, at the WYO level, our internal control testing of a statistical sample determined that almost 71 percent of WYO company claims loss files did not have the necessary documents to support the claims, or reports were filed late. Second, incomplete BSA-level premium data files (lacking key information such as insureds' names and addresses) prevented an assessment of the reliability of reported NFIP premium amounts. Further, BSA-level internal control activities were ineffective in verifying the accuracy of WYO-submitted data. Lastly, FEMA's financial reporting process uses summary data that is overly reliant on error-prone manual data entry. GAO found that FEMA's broader oversight structures were also of limited effectiveness. Specifically, GAO found weaknesses in three key structures FEMA relies on to provide oversight over NFIP and monitor financial activity: (1) WYO company audits--specifically, we found that FEMA did not collect the results of state insurance department audits related to flood insurance activity and did not perform any audits for cause; (2) triennial operational reviews of WYO insurance companies--we found that FEMA did not perform operational reviews at almost one third of all WYO companies over the 3-year period; and (3) FEMA's claims reinspection program--we found that FEMA used flawed sampling procedures in the claims reinspection program. These findings are consistent with weaknesses GAO has previously identified. These oversight weaknesses limited FEMA's ability to identify and address financial transaction control breakdowns resulting from the 2005 hurricanes. FEMA's initiatives to improve specific internal control weaknesses and the overall NFIP control environment since the 2005 Gulf Coast hurricanes have done little to address many of the NFIP financial data deficiencies highlighted by these catastrophic events. FEMA has made improvements such as revising its claim reinspection selection methodology to provide for review of a random selection of a statistically representative sample of claim files. However, the modified reinspection methodology still does not include all claims. FEMA has also implemented a tracking system to monitor the number of WYO biennial audits obtained and reviewed. Further, FEMA has a system modernization development and implementation effort under way. It is too soon to determine the extent to which these efforts will achieve program efficiencies.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: FEMA officials do not plan to develop procedures to analyze WYO company financial reports in relation to transaction-level information submitted for statistical purposes.

    Recommendation: To improve the financial reporting process and strengthen internal controls, the Secretary of Homeland Security should direct the Acting Assistant Administrator, FEMA Mitigation Directorate, to augment NFIP policies to require the BSA to develop procedures to analyze financial reports in relation to the transaction-level information that WYO companies submit for statistical purposes.

    Agency Affected: Department of Homeland Security

  2. Status: Closed - Implemented

    Comments: Federal Emergency Management Agency (FEMA) has verified and validated the reliability of Write Your Own (WYO) reported financial information through independent audits of WYO companies. As of February 2013, FEMA records indicate that, over 90 percent of the WYO companies submitted the required biennial audit reports and the remaining companies had yet to submit the most recent year's audit report.

    Recommendation: To improve the financial reporting process and strengthen internal controls, the Secretary of Homeland Security should direct the Acting Assistant Administrator, FEMA Mitigation Directorate, to revise required internal control activities for the BSA to provide for verifying and validating the reliability of WYO-reported financial information based upon a review of a sample of the underlying transactions or events, or obtain verification that these objectives have been met through independent audits of the WYO companies.

    Agency Affected: Department of Homeland Security

  3. Status: Closed - Implemented

    Comments: Based upon their feasibility study, Federal Emergency Management Agency officials have entered into a contract to replace their existing National Flood Insurance Program financial system with a system that will automate their financial and reporting process. Although the new system has not yet been implemented, by conducting the feasibility study and entering into a contract to automate their financial and reporting processes, they have implemented the intent of this recommendation.

    Recommendation: To improve the financial reporting process and strengthen internal controls, the Secretary of Homeland Security should direct the Acting Assistant Administrator, FEMA Mitigation Directorate, to determine the feasibility of integrating and streamlining numerous existing NFIP financial reporting processes to reduce the risk of errors inherent in the manual recording of accounting transactions into multiple systems.

    Agency Affected: Department of Homeland Security

  4. Status: Closed - Implemented

    Comments: Federal Emergency Management Agency (FEMA) has established and implemented procedures that require the review of available information on Write Your Own companies. The National Flood Insurance Program Financial Control Plan identifies the required review procedures and available information such as biennial audits, and operation and underwriting reviews are tracked in a database. FEMA also documents in their database, the results of overall assessments of available information.

    Recommendation: To improve the financial reporting process and strengthen internal controls, the Secretary of Homeland Security should direct the Acting Assistant Administrator, FEMA Mitigation Directorate, to establish and implement procedures to require reviewing available information such as the results of biennial audits, operational reviews, and claim reinspections to determine whether the targeted audits for cause managerial tool should be used.

    Agency Affected: Department of Homeland Security

  5. Status: Closed - Implemented

    Comments: According to Federal Emergency Management Agency (FEMA) officials, state audits do not typically address the National Insurance Program. However, FEMA has taken other steps to gather and consider information from independent sources including the establishment of a new liaison with the State Insurance Commissioner, as well as attendance and panel participation at National Association of State Insurance Commissioner meetings. Information from meetings with State Insurance Commissioners and from attendance at National Association of Insurance Commissioner Meetings is documented and forwarded to Federal Insurance & Mitigation Administration's Deputy Associate Administrator for review and inform determinations on audits for cause. These steps address the intent of our recommendation.

    Recommendation: To improve the financial reporting process and strengthen internal controls, the Secretary of Homeland Security should direct the Acting Assistant Administrator, FEMA Mitigation Directorate, to establish and implement procedures to require maintaining and considering current information from an independent source regarding state audit results to gather pertinent information such as customer service issues and inform determinations about when to conduct audits for cause.

    Agency Affected: Department of Homeland Security

  6. Status: Closed - Implemented

    Comments: Federal Emergency Management Administration's (FEMA) National Flood Insurance Program Financial Control Plan Monitoring tool identifies procedures FEMA has established to conduct claims operation reviews within the three year time period. Other documents FEMA provided indicate that over 90 percent of WYO companies had claims operation reviews performed in the last three years. FEMA provided reasonable explanations for not conducting operational reviews for the remaining companies.

    Recommendation: To improve the financial reporting process and strengthen internal controls, the Secretary of Homeland Security should direct the Acting Assistant Administrator, FEMA Mitigation Directorate, to establish and implement procedures to schedule and conduct all required operational reviews within the prescribed 3-year period.

    Agency Affected: Department of Homeland Security

  7. Status: Closed - Implemented

    Comments: The Federal Emergency Management Agency's (FEMA) Federal Insurance and Mitigation Administration (FIMA) has established and implemented procedures to statistically select claims for reinspection procedures. FIMA's claims reinspection procedures, dated June 11, 2012, include a statistical sampling of reported flood claims for a given Flood Insurance Claims Office (FICO) designated event. Specifically, FIMA's claims reinspection procedures include a process for the random selection of claims for large claim volume companies (400 or more claims for a FICO event) and a process for the random selection of claims from a pool of small claim companies.

    Recommendation: To improve the financial reporting process and strengthen internal controls, the Secretary of Homeland Security should direct the Acting Assistant Administrator, FEMA Mitigation Directorate, to establish and implement procedures to select statistically representative samples of all claims as a basis for conducting reinspections of claims by general adjusters.

    Agency Affected: Department of Homeland Security

 

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