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entitled 'Department of Housing and Urban Development: Status of 
Efforts to Implement an Integrated Financial Management System' which 
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April 9, 2003:



The Honorable Paul S. Sarbanes:



Ranking Minority Member,



Committee on Banking, Housing and:



Urban Affairs:



United States Senate:



The Honorable Jack Reed:



Ranking Minority Member,



Subcommittee on Housing and Transportation:



Committee on Banking, Housing and Urban Affairs:



United States Senate:



Subject: Department of Housing and Urban Development: Status of Efforts 

to Implement an Integrated Financial Management System:



Weaknesses in the Department of Housing and Urban Developmentís (HUD) 

financial management systems have been a long-standing challenge for 

the department and have contributed to our designating two of its major 

programs areas as high-risk and the financial management information 

systems in particular as a major management challenge. While some 

progress has been made, both we and the HUD Office of the Inspector 

General (IG) have reported extensively on weaknesses related to HUDís 

financial management systems. In audits of HUDís consolidated financial 

statements, the IG has consistently identified several material 

internal control weaknesses resulting from inadequate financial 

management systems. In recent audit reports, the HUD OIG also noted 

that the completion of the development of adequate financial management 

systems is the most critical need faced by HUD in improving its 

financial management control environment. Responsive financial 

management systems are particularly critical to HUDís ability to meet 

its mission, deliver key services, and establish sufficient management 

control over its operations.



In light of these issues, you asked that we (1) summarize HUDís past 

efforts to implement an integrated financial management system, (2) 

identify the challenges HUD faces with its current financial management 

systems, and (3) determine the status of HUDís current efforts to 

identify and address its financial management systems needs.



Results in Brief:



HUDís past efforts have not resulted in the implementation of a modern 

integrated financial management system to carry out its core accounting 

functions and meet other needs. HUDís current Central Accounting and 

Program System (HUDCAPS), as implemented in fiscal year 1999, is the 

product of its Financial System Integration (FSI) effort, which began 

in 1991. While this effort did result in the development and deployment 

of various modules and systems to support several key programs and 

processes, it did not result in an integrated financial management 

system, which was a stated goal of the project. In 1998 we 

reported[Footnote 1] that even though HUD spent hundreds of millions of 

dollars, the FSI effort was not fully successful because of the lack of 

(1) adequate project management, (2) finalized project plans that 

provided an integration roadmap, and (3) adequate cost-benefit analyses 

that properly estimated the costs to achieve the objectives of the plan 

and how long it would take to achieve these objectives.



HUD uses HUDCAPS as its core financial management and general ledger 

system. However, this system is not efficient, has become outdated, and 

has high annual maintenance costs. HUDCAPS requires numerous manual 

adjustments at year-end and cannot provide HUD managers with accurate, 

timely, and useful information to manage the agency on a day-to-day 

basis. HUDCAPS is not used across the department as originally intended 

by the FSI effort. The Federal Housing Administration (FHA) and the 

Government National Mortgage Association (Ginnie Mae) continue to 

maintain their own general ledger/financial management systems that are 

not integrated with HUDCAPS. HUD also continues to maintain the Program 

Accounting System (PAS), which it uses to perform funds control and 

other functions for the department. To help address ongoing 

deficiencies with its general ledger, FHA recently implemented the 

general ledger module of a commercial-off-the-shelf (COTS) software 

package that automates the interface with HUDCAPS. However, it is too 

early to determine whether this new general ledger system will address 

FHAís reported deficiencies in this area.



HUD is currently in the early stages of deciding whether to upgrade 

HUDCAPS or acquire and deploy a new financial management system. 

According to HUD officials, the department has submitted a procurement 

request for the initial study of the HUD Integrated Financial 

Management Improvement Project (HIFMIP). The study is expected to 

document and analyze business functions of the department and the 

feasibility, risks, and costs of core systems options. Since September 

2002, HUDís plans for awarding a contract to conduct a feasibility 

study have been postponed twice. The latest delay came with the recent 

hiring of an Assistant Chief Financial Officer for Systems (ACFO), who 

made a decision to broaden the scope of the Needs Statement to include 

the financial management needs of FHA and Ginnie Mae, which we view as 

a sound decision. Proper planning is an essential element to the 

success of the project and therefore to HUDís effort to correct its 

long-standing financial management systems problems. HUD now plans to 

award the contract for the study in May 2003 and to complete the study 

by July 2004. Given the nature of HUDís long-standing financial 

management systems problems and the importance of these systems to 

carrying out HUDís mission and activities, we are recommending that 

HUDís Secretary make the modernization and integration of its financial 

management systems a continuing top priority and to take the necessary 

actions to help ensure successful implementation.



In commenting on a draft of this report, HUD agreed with our 

recommendation that the Secretary make the integration of the 

departmentís financial management systems a continuing top priority and 

stated that it has already done so. HUD also discussed at length its 

current actions to address its financial management systems challenges 

and requested additional recognition of these actions in our report. 

While we recognize that HUD is presently taking action, much of this 

action has occurred only recently. Our report focuses on HUDís 

historical efforts to improve its long-standing financial management 

systems deficiencies, which have been the subject of our reports for 

several decades. As stated in our report,[Footnote 2] in 1984 we 

reported financial management problems that included systems that were 

inadequate, lacked internal controls, and failed to meet program 

managersí needs. While HUD has recently begun to renew its efforts to 

address these deficiencies, sustained commitment from HUDís management 

will be needed to completely address and eliminate these weaknesses.



Background:



HUD is the primary federal agency responsible for programs dealing with 

housing, community development, and fair housing opportunities. Its 

mission is to promote adequate and affordable housing, economic 

opportunity, and a suitable living environment free from 

discrimination. HUD pursues its mission through the programs offered by 

FHA, Ginnie Mae, the Office of Community Planning and Development, the 

Office of Public and Indian Housing, and the Office of Fair Housing and 

Equal Opportunity. FHA makes housing affordable through its mortgage 

insurance programs for multifamily and single-family housing. Ginnie 

Mae supports expanded affordable housing by providing an efficient 

government-guaranteed secondary market for mortgaged-backed 

securities. HUD is one of the nationís largest financial institutions 

with responsibility for managing more than $550 billion in insured 

mortgages and $600 billion in guarantees of mortgage-backed securities. 

For fiscal year 2003, HUDís budget authority was about $32 billion.



The challenges HUD faces in improving its financial management systems 

are not new and have been the subject of GAO reports for several 

decades. For example, in 1984 we reported financial management problems 

that included systems that were inadequate, lacked internal controls, 

and failed to meet program managersí needs. In an effort to correct 

financial management systems deficiencies, in 1991 HUD initiated the 

FSI effort which, as discussed later in this report, was a 

departmentwide project to design and implement an integrated financial 

management system consisting of both financial and mixed 

systems.[Footnote 3] HUDCAPS was a product of this effort.



HUD currently uses numerous financial management and mixed systems to 

achieve its mission. HUD uses HUDCAPS as its core financial management 

and general ledger system. FHA used a Management Sciences Associates 

(MSA) system as its financial management system through fiscal year 

2002. FHA now uses Peoplesoft, which was implemented on October 1, 

2002, as its general ledger system. Ginnie Mae uses Macola, which 

provides for all of its financial accounting needs. In addition, there 

are:



* 19 legacy insurance systems that are interfaced with FHAís new 

general ledger system;



* PAS, which performs funds control and tracks transaction details for 

the department; and:



* Hyperion,[Footnote 4] which supports the preparation of the 

departmentís financial statements.



HUDís financial statement auditors have reported the departmentís lack 

of an integrated financial management system that is in compliance with 

federal financial system requirements as a material internal control 

weakness since fiscal year 1991. In addition, HUDís financial statement 

auditors have reported HUD as not being in substantial compliance with 

the requirements of the Federal Financial Management Improvement Act of 

1996 (FFMIA)[Footnote 5] since fiscal year 1997, when reports under the 

act were first required. HUD has been reported as not being in 

substantial compliance with FFMIA primarily because of deficiencies in 

FHAís legacy general ledger system. This system did not support credit 

reform accounting nor did it comply with the U.S. Standard General 

Ledger (SGL) at the transaction level.[Footnote 6] In light of these 

issues, in 1999 FHA began the acquisition of a new financial management 

system.



In 1994 we designated HUD a high-risk agency, in part because of 

inadequate financial management and information systems and slow 

progress in correcting fundamental management weaknesses. In our 2003 

biannual performance and accountability series report,[Footnote 7] we 

identified two of HUDís major program areas--single-family mortgage 

insurance and rental housing assistance--as high-risk. HUDís challenges 

with programmatic:



and financial management information systems cut across both programs 

and contribute to its high-risk designation. Also, in fiscal years 2001 

and 2003 we identified HUDís financial management information systems 

as a major management challenge in our biannual performance and 

accountability series report.



Scope and Methodology:



To summarize the outcome of HUDís past efforts to implement an 

integrated financial management system and to identify the challenges 

HUD faces with current financial management systems, we reviewed prior 

GAO and HUD OIG audit reports. We also interviewed officials at the HUD 

Office of the Chief Financial Officer (OCFO), Office of the Chief 

Information Officer (OCIO), Office of the Inspector General (OIG), FHA, 

and Ginnie Mae. To determine the status of HUDís current efforts to 

identify and address its financial management systems needs, we 

interviewed HUD OCFO and OCIO officials. We obtained and reviewed HUDís 

Statement of Work and Needs Statement for its currently planned 

feasibility study to upgrade or replace HUDCAPS and to determine if 

HUDís identified needs were included in the Statement of Work. We 

conducted interviews with FHA officials to discuss their plans for the 

implementation of a new core accounting system and to determine whether 

this system would be integrated with HUDCAPS. We also conducted 

interviews with Ginnie Mae officials to discuss their financial 

management system and to determine whether the entity had plans for 

acquiring a new system that would be integrated with HUDCAPS.



Our work focused on HUDís core financial management systems, including 

HUDCAPS and the FHA and Ginnie Mae general ledger systems. We conducted 

our work in Washington, D.C. from July 2002 through November 2002 in 

accordance with generally accepted government auditing standards.



HUD also suggested several technical comments, which we incorporated 

where appropriate.



HUDís Past Financial Management:



Systems Integration Efforts Have:



Not Been Successful:



HUDís FSI effort, which was initiated in 1991, was intended, among 

other things, to implement an integrated financial management system 

that would provide timely and accurate information to managers and 

enable the department to properly manage its financial resources. While 

the project did result in the development and deployment of various 

modules and systems to support several key programs and processes, it 

did not achieve the primary goal of implementing an integrated 

financial management system. Rather, the projectís main focus was 

narrowed to improving HUDís core financial management system. HUDCAPS 

evolved from this effort and continues to be HUDís core financial 

management system today.



The CFO Act calls for agencies to develop and maintain an integrated 

accounting and financial management system that complies with federal 

requirements and provides for (1) complete, reliable, consistent, and 

timely information that is responsive to the financial information 

needs of the agency and facilitates the systematic measurement of 

performance, (2) the development and reporting of cost information, and 

(3) the integration of accounting, budgeting, and program information. 

In addition, the Office of Management and Budget (OMB) Circular A-127, 

Financial Management Systems, requires agencies to establish and 

maintain a single integrated financial management system that conforms 

with functional requirements published by the Joint Financial 

Management Improvement Program (JFMIP).[Footnote 8]



In its 1991 FSI plan, HUD acknowledged that inadequate and 

nonintegrated financial management systems rendered it unable to 

properly manage its programs and financial resources. The FSI plan 

included specific objectives to establish sound financial management 

controls, correct material weaknesses, improve financial management, 

provide timely and accurate information to managers to enable them to 

meet their organizational objectives, meet the goals of 31 U.S.C. ß 

3512 (d) commonly referred to as the Federal Managersí Financial 

Integrity Act (FMFIA) of 1982,[Footnote 9] and comply with OMB Circular 

A-127, Financial Management Systems.



HUDís strategy for achieving the FSI objectives was to replace about 

100 of its financial and mixed systems with 9 new standard integrated 

systems including a core financial management system.[Footnote 10] This 

strategy was based on an analysis which concluded that HUD did not have 

the basic financial management systems to serve as the foundation for 

an integrated systems environment. The design of the 1991 FSI plan 

required that 8 financial systems be integrated with the new core 

accounting system. Once the 9 systems were deployed, program offices 

were to use them to support their business operations.



In 1993, HUD revised its initial FSI plan in response to (1) slow 

progress in implementing systems integration, (2) the need to comply 

with revisions to OMB Circular A-127, and (3) senior managementís 

serious doubts about the viability of creating nine new fully 

integrated systems and having program offices adapt their business 

operations to meet the requirements of these systems by September 1998, 

which was the FSI planís original target date. The 1993 plan included 

the same primary objectives as the 1991 plan but also included new 

objectives such as eliminating the departmentís financial management 

systems from OMBís list of high-risk areas for management improvement, 

being consistent with HUDís then current reform plan,[Footnote 11] and 

meeting the requirements of the Government Performance and Results Act 

of 1993.[Footnote 12] Under the 1993 plan, the CFOís office was 

required to complete the core financial system project initiated under 

the 1991 plan and program offices were required to develop (1) new 

systems that would support program management priorities, financial and 

management information needs, and business needs, and (2) integrate 

these systems with the core financial system. Plans for the remaining 

eight standard systems called for in the 1991 plan were cancelled. In 

1997, HUD revised its FSI plan again, extending the date for fully 

deploying the core financial management system from September 1998 to 

October 1999 and incorporating the development and deployment of 

additional new systems required to meet the departmentís latest 

management reforms and organizational changes.[Footnote 13]



In our 1998 report, we identified several challenges regarding HUDís 

1997 FSI plan. These challenges included inadequate project management 

oversight, lack of finalized project plans, and outdated cost-benefit 

analyses. Specifically, we reported on how the department had spent 

hundreds of millions of dollars on its effort to develop an integrated 

financial management system without having the appropriate project 

management processes in place and without knowing how much it would 

cost or how long it would take to complete the objectives of the FSI 

effort. Title 40 U.S.C. ß 11312, commonly referred to as the Clinger-

Cohen Act of 1996, requires agencies to establish a process to assess 

the value and risks of information technology (IT) investments, 

including specific quantitative and qualitative criteria for comparing 

and prioritizing alternative IT projects. In response to the 

recommendation in our 1998 report, HUD has established an IT investment 

management program to select, control, and evaluate investments 

throughout their lifecycle. In this regard, HUD has routinely assessed 

and scored proposed projects against departmentwide project selection 

criteria and used the program to select IT projects.



As a result of the FSI effort, several modules and systems initiated 

under the 1993 and 1997 plans were implemented including HUDCAPS and 

systems to support the departmentís Section 8 financial and program 

management functions, community planning and development grants, and 

procurement process. HUDCAPS, as HUDís core financial management 

system, was initially intended to replace the general ledger systems at 

FHA and Ginnie Mae as well as HUDís PAS. However, HUDCAPS has not 

replaced these systems. Both FHA and Ginnie Mae have continued to 

maintain their own general ledger systems, and HUD continues to 

maintain PAS. HUDCAPS functions as the departmentís financial 

management system, receiving data from FHAís and Ginnie Maeís general 

ledger systems on a periodic basis.



Current Financial Management Systems Are Outdated and Continue to 

Have Deficiencies:



In January 2003, for the twelfth year in a row, the HUD OIG cited the 

lack of an integrated financial management system in compliance with 

federal financial system requirements as a material weakness in its 

audit of the departmentís financial statements. In addition, as 

acknowledged by HUD officials, HUDCAPS uses outdated technology and is 

a version of a COTS software package that is no longer available. HUD 

is totally dependent upon the vendor for software modifications, 

maintenance, and enhancements because the vendor owns the source code 

for the system. As a result, HUD will have to continue to pay the 

vendor for support of any new modifications or upgrades to HUDCAPS. 

Further, as recognized by HUD officials, HUDCAPS is neither a robust 

nor efficient system. For example, it cannot be modified to account for 

multiyear monies at year-end, resulting in extensive manual effort to 

reclassify dollars from 1-year accounts to multiyear accounts. This is 

one reason that HUD has to rely on extraordinary manual efforts to 

prepare its financial statements.



To promote more timely financial reporting and to discourage the costly 

manual efforts that many agencies have used to obtain unqualified 

opinions of financial statements without addressing their underlying 

systems problems, OMB accelerated audited financial statement reporting 

dates by 1 month for fiscal years 2002 and 2003 and by 3Ĺ months for 

fiscal year 2004. OMB also requires the preparation of unaudited 

quarterly financial statements. HUD has been able to issue its audited 

financial statements by the required due dates (most recently February 

1, 2003) for the last 3 fiscal years. HUD has also received unqualified 

opinions on these statements since fiscal year 2000. However, because 

the departmentís current financial management systems are outdated, 

inefficient, and require extensive manual intervention, HUD will be 

increasingly challenged to meet these reporting dates as they are 

further accelerated.



HUDís financial statement auditors have also reported weaknesses in 

FHAís financial management system for several years. As discussed 

earlier in this report, until October 1, 2002, FHA used MSA as its 

financial management system. MSA is an old version of a COTS software 

package that did not (1) comply with governmental accounting standards, 

(2) have funds control or budgetary modules, and (3) comply with 

federal credit reform accounting. In the fiscal year 2002 financial 

statement audit report, the HUD OIG reported HUD as not being in 

substantial compliance with FFMIA primarily because FHAís systems did 

not comply with the SGL at the transaction level. FHAís 19 legacy 

insurance systems that fed transactions to its commercial general 

ledger system lacked the capabilities to process transactions in the 

SGL format. Therefore, FHA provided only consolidated summary-level 

data to HUDCAPS. To do this, FHA used several manual processing steps, 

including the use of personal-computer-based software to convert the 

summary-level commercial accounts to government SGL and transfer the 

account balances to HUDCAPS. This process did not comply with JFMIP 

requirements that the core financial system provide for automated month 

and year-end closing of SGL accounts and roll-over of the SGL account 

balances.



To help address deficiencies with its legacy general ledger system, as 

a first step in upgrading its overall financial management system FHA 

implemented the general ledger module of a COTS software package on 

October 1, 2002. This module automates the monthly interface of 

summary-level balances with HUDCAPS. The project plan for FHAís new 

system includes full implementation of other FHA financial modules, 

such as cash management and funds control, and the modification or 

replacement of various insurance systems by fiscal year 2007. Although 

the COTS software that FHA purchased has been tested and certified as 

being compliant with JFMIP requirements, it is too early to determine 

whether the new general ledger module will meet all of FHAís identified 

needs and fully address the deficiencies that have hampered FHAís 

compliance with FFMIA.



Ginnie Mae has used its current general ledger and financial management 

system for the last 10 years and has no plans to replace it. In 

addition, Ginnie Mae has received unqualified opinions for many years, 

and its financial statement auditors have not reported any material 

weaknesses or reportable conditions since 1995. However, as previously 

mentioned, because Ginnie Maeís system is not integrated with HUDCAPS, 

it may ultimately need to be modified or replaced to achieve full 

financial management systems integration at HUD.



HUD Is in the Early Stages of Assessing its Current Financial 

Management System Needs:



HUD is currently in the early stages of deciding whether to upgrade 

HUDCAPS or acquire and deploy a new integrated system that would better 

meet its needs. While in August 2000 HUD developed a financial vision 

to implement a new integrated financial management system,[Footnote 14] 

actions on the financial management systems vision of 2000 were largely 

deferred. For the past 2 years, HUDís management has focused its 

attention on stabilizing and enhancing the existing financial 

management systems operating environment in order to enable the 

preparation of auditable financial statements and address internal 

control weaknesses reported in the HUD OIG annual financial statement 

audit reports. These efforts were instrumental in helping HUD achieve 

unqualified audit opinions for the last 3 years. However, serious 

internal control weaknesses related to HUDís financial management 

systems remain.



In May 2002, HUD submitted a procurement request for the initial study 

of the HUD Integrated Financial Management Improvement Project 

(HIFMIP). This study is expected to document and analyze the 

departmentís business functions and the feasibility, risks, and costs 

of core system options, to include modifying existing systems, COTS 

implementation, and outsourcing opportunities. HUDís plans for awarding 

a contract for the initial study and completing the contract have 

changed several times since the initial procurement request. For 

example, HUD initially expected to award a contract by the end of 

September 2002 for work to be completed by April 2003. However, with 

the recent hiring of an ACFO for Systems, HUDís plans were delayed from 

September 2002 to December 2002 so that the scope of the Needs 

Statement could be broadened to include the financial management needs 

of FHA and Ginnie Mae, which we view as a sound decision. HUD currently 

plans to award a contract for the study by May 2003 and to update the 

financial management systems vision by January 2004. HUD also plans to 

complete a contracted study of core systems options for management 

decision making under the HIFMIP by July 2004.



Conclusions:



In the past, HUD has not sufficiently planned for the implementation of 

a departmentwide integrated financial management system or provided the 

necessary direction, oversight, and sustained attention needed for a 

successful project. While HUDCAPS was an improvement over HUDís earlier 

core financial management system, it fell far short of HUDís goal to 

develop a departmentwide integrated financial management system. As a 

result, long-standing financial management deficiencies, including the 

availability of timely, reliable data to support decision making, 

remain a challenge and HUDís ability to meet accelerated financial 

reporting requirements is made much more difficult. HUD management has 

recently renewed its efforts to address the departmentís systems 

deficiencies. Sustained commitment will be needed to successfully 

complete these efforts.



Recommendation:



To help ensure the success of future systems implementation efforts, we 

recommend that the Secretary of the Department of Housing and Urban 

Development make the modernization and integration of the departmentís 

financial management systems a continuing top priority and direct the 

Chief Financial Officer to take the following steps:



* work collaboratively with the directors of the departmentís 

components,



* acquire a qualified and experienced project manager,



* obtain stakeholder involvement,



* develop and maintain milestones, and:



* establish measurable performance indicators.



Agency Comments and Our Evaluation:



In written comments (reprinted in app. I) on a draft of this report, 

HUD generally agreed with our recommendation but suggested that we 

recognize the actions the department has already taken to implement the 

recommendation. While we recognize that HUD has already taken some 

actions to implement the recommendation in our report, the thrust of 

our recommendation is for sustained management commitment in order to 

ensure the success of its modernization and integration efforts. 

Because this systems implementation will be a long-term effort for the 

department, it will need to achieve a disciplined effort consistent 

with recognized best practices referred to in our recommendation. Our 

prior experiences in reviewing major systems acquisitions have shown 

that failure to establish and enforce key processes outlined in 

legislation and expanded on in best practices developed by GAO and 

others is a salient factor for efforts that end up costing more and 

taking longer than estimated and that fall short of performance 

expectations. Many of these best practices were not present in HUDís 

past systems implementation effort and will be a challenge for the 

department in future efforts.



Regarding financial management systems integration requirements, HUD 

stated that our report incorrectly implies that it is required to have 

one departmental financial management system encompassing FHA, Ginnie 

Mae, and all other HUD program activity. Our report does not say this 

or even imply this. Rather, we state that HUDís past FSI effort did not 

result in an integrated financial management system, which was a stated 

goal of the project that began in 1991. We also state that HUDís 

existing financial management system is not efficient, has become 

outdated, and has high annual maintenance costs. HUDís letter 

acknowledges all of these issues. Federal financial management system 

requirements state that systems should be planned, managed, and linked 

together electronically in an efficient and effective manner to provide 

departmentwide financial system support necessary to meet the agencyís 

financial management needs. As was reported by the HUD OIG in its 

report on HUDís fiscal year 2002 financial statements, the agencyís 

systems do not comply with these requirements.



We are sending copies of this report to the Honorable Mel Martinez, 

Secretary of the Department of Housing and Urban Development, Angela 

Antonelli, the Chief Financial Officer, and other interested parties. 

We will make copies available to others upon request.



If you have any questions about this letter, please contact me at (202) 

512-9508 or by email at calboml@gao.gov. Key contributors to this 

assignment were Rosa R. Harris, Debra S. David, David Gill, and Estelle 

Tsay.



Sincerely yours,



Linda M. Calbom:



Director, Financial Management and Assurance:



Signed by Linda M. Calbom:



Appendix I:



Comments from the Department of Housing and Urban Development:



U.S. Department of Housing and Urban Development Washington, D.C. 

20410-0100:



CHIEF FINANCIAL OFFICER:



MAR 11, 2003:



Ms. Linda Calbom:



Director, Financial Management and Assurance Team:



General Accounting Office 441 G Street NW, Suite 5Q24 Washington, DC 

20548:



Dear Ms. Calbom:



Thank you for the opportunity to provide comments on the revised draft 

report of March 3, 2003, entitled Department of Housing and Urban 

Development: Status of Efforts to Implement an Integrated Financial 

Management System (GAO-03-447R). We 

appreciate the revisions made to address many of our February 21st 

comments on the original February 7th version of the draft report. We 

are reiterating a few comments that were not fully addressed and 

request that the final report: 1) reflect HUDís position on the 

adequacy of the Departmentís current financial management systems 

integration design, and 2) provide greater recognition of the many 

substantive financial management systems improvements made by HUD 

during the 12 year period covered by this review. We generally agree 

with the recommendation contained in the draft report and request 

recognition of the actions the Department has already taken to 

implement the recommendation.

Our specific comments are summarized below with further details in the 

enclosed table:



Financial Management Systems Integration Requirements:



The revised draft report incorrectly implies that HUD is required to 

have one departmental financial management system encompassing Federal 

Housing Administration (FHA), Government National Mortgage Association 

(Ginnie Mae) and all other HUD program activity. Office of Management 

and Budget (OMB) Circular A-127, Financial Management Systems, states 

that: ďThe term Ďsingle integrated financial management systemí means a 

unified set of financial systems and the financial portions of mixed 

systems encompassing the software, hardware, personnel, processes 

(manual and automated), procedures, controls and data necessary to 

carry out financial management functions, manage financial operations 

of the agency and report on the agencyís financial status to central 

agencies, Congress and the public.Ē This definition allows that large, 

diverse and complex agencies such as HUD may have a set of multiple 

financial management systems that are integrated through manual or 

automated processes for consolidated reporting purposes.



In HUDís current business environment, the HUD Central Accounting and 

Program System (HUDCAPS), and its various supporting subsidiary systems 

such as the Program Accounting System (PAS), serve as the Departmentís 

core financial management system. FHA and Ginnie Mae have separate 

program funding and operations and are required by statute to produce 

their own annual audited financial statements. HUD currently integrates 

the stand-alone FHA and Ginnie Mae financial statement information with 

HUDCAPS information on HUDís general program activity through the 

Hyperion software used to facilitate HUDís consolidated financial 

reporting process. This makes perfect business sense for HUD, and is an 

acceptable model for private sector conglomerates and at other federal 

agencies that include government corporations or large separate funds 

such as Ginnie Mae and FHA. While the loading of FHA and Ginnie Mae 

reporting data is currently done manually, the manual process is low-

risk with compensating controls, including the Office of the Inspector 

Generalís (OIG) independent financial statement audit. Nevertheless, as 

recommended by the OIG, HUD is pursuing a more efficient automated 

transfer of the FHA and Ginnie Mae reporting information for 

consolidation in Hyperion.



Past HUD Efforts to Implement an Integrated Financial Management 

System:



HUD agrees that the 1991 Financial Systems Integration (FSI) project 

was not successfully implemented as originally envisioned or designed. 

However, the draft GAO report incorrectly implies that achieving the 

now twelve-year old FSI project design is a prerequisite for HUDís 

compliance with current federal financial management systems 

requirements. We believe alternative financial management systems 

designs can work to meet HUDís needs, in full compliance with federal 

requirements. It is apparent from GAOís overview of the FSI project 

history that the project never gained widespread support and the 

feasibility and reasonableness of the proposed large scale overhaul of 

the Departmentís financial and mixed information systems and 

corresponding business processes was questioned from early on in the 

FSI project. As the draft report describes, this led to a series of 

project changes that limited the projectís focus to needed improvements 

to HUDís core financial management system.



The GAO report should acknowledge that significant financial management 

systems improvements were made from 1991 to date, as evidenced by the 

fact that the Department moved from being an agency that could not 

produce auditable consolidated financial statements prior to fiscal 

year 1991, to an agency that received its first unqualified audit 

opinion in fiscal year 1998, with unqualified audit opinions for the 

last three consecutive fiscal years-2000 through 2002. HUDís core 

financial management systems improvements since 1991 have included: 1) 

the ability to post to the Standard General Ledger (SGL) at the 

transaction level for HUDís general program activity, 2) full 

automation of the reporting of cash management activity with the 

Treasury, 3) monthly reconciliation of the funds balance with Treasury, 

4) elimination of duplicate data entry in areas such as travel expense, 

through integration of source systems with the general ledger, 5) 

improved reporting through data warehousing, and 6) expanded electronic 

commerce through Internet-based payment and reporting processes for 

recipients of HUD funds. While the revised draft report focuses 

primarily on the HUDCAPS general ledger:



component of the FSI project, other GAO reports have recognized HUDís 

successful development and deployment of many other FSI project efforts 

that have provided needed support for the Departmentís Section 8 

financial and program management functions, community planning and 

development grants, the procurement process, and other HUD program 

areas. Since 2000, HUDís efforts have been focused on stabilizing and 

enhancing the existing financial management systems operating 

environment to overcome the audit disclaimer issues from fiscal year 

1999 and to eliminate several reportable conditions from the OIGís 

annual financial statement audits.



Current Financial Management Systems Challenges at HUD:



While HUD agrees that the Departmentís core financial management system 

has inefficiencies and is costly to maintain, our internal assessments 

conclude that the core financial management system is substantially 

compliant with the requirements of the Joint Financial Management 

Improvement Project (JFMIP). As GAO acknowledges, the FHA Subsidiary 

Ledger Project is well under way to replace FHAís commercial accounting 

system with a system that is fully compliant with federal requirements. 

It should be further acknowledged that HUD has timely produced 

auditable consolidated financial statements, and has received 

unqualified audit opinions on those statements, for the past three 

fiscal years. Furthermore, the completion of the audit of HUDís fiscal 

year 2002 consolidated financial statements was successfully 

accelerated by one month to January 31, 2003. The accelerated audit was 

augmented by HUDís preparation of mid-year consolidated financial 

statements in fiscal year 2002, and HUD has begun the preparation and 

submission of quarterly statements in fiscal year 2003. HUD is planning 

to further accelerate the preparation and audit of its fiscal year 2003 

statements as a step towards the mandated accelerated annual reporting 

date of November 15, 2004, for fiscal year 2004.



Although HUD has made great progress towards the objective of producing 

more timely, accurate and relevant financial information for effective 

management of the Department, we fully acknowledge that the challenge 

remains to eliminate the remaining material weakness and reportable 

condition issues reported in the OIGís audit of the Departmentís 

consolidated fiscal year 2002 financial statements. In some cases, 

HUDís ability to correct these internal control weakness issues, such 

as the need to improve FHAís controls over budget execution and funds 

control, is clearly dependent on needed financial management systems 

improvements. Other weakness issues, such as controls over obligation 

balances, require program process improvements to better use existing 

financial management systems capabilities and to provide more timely 

information to existing systems to strengthen management controls and 

improve decision making on some funded activities. The draft GAO report 

lacks specificity on the nature of HUDís remaining financial management 

systems weaknesses and does not identify any other financial management 

systems needs not already reflected in the OIGís fiscal year 2002 

consolidated financial statement audit report.



HUDís Commitment to Meeting Financial Management Systems _Needs:



Financial management systems improvements are a top priority for HUD 

and this administration. We have focused our attention and the 

necessary resources on addressing HUDís most significant financial 

management systems needs, those in FHA, and on planning for other 

needed improvements. The FHA Subsidiary Ledger Project is the key to 

bringing HUD into substantial compliance with federal financial 

management requirements by addressing FHAís need to implement the SGL 

at the transaction level and provide adequate systems support for 

budget execution and funds control and credit reform accounting. We 

successfully completed a major milestone of this project on-schedule in 

October 2002, to provide FHA with a new operating general ledger system 

that had been in various planning stages for nearly a decade.



The current administration has taken a deliberate and methodical 

approach to properly planning for the next generation core financial 

management system for the Department. While the draft report correctly 

indicates that HUD deferred action on an August 2000 vision for the 

next generation core financial management system, it does not fully 

explain the basis for that decision and the long-term benefits 

anticipated from allowing for proper systems planning. Since the August 

2000 systems vision was developed at the end of the prior 

administration, the incoming administration wanted to study the 

proposal before making the significant resource commitment necessary to 

carry out the proposal or desirable alternatives. Furthermore, the HUD 

OIG specifically recommended that action on the vision be deferred 

pending further study of the feasibility, risk and cost-benefit of 

various options for the next generation core financial management 

system.



As HUDís new Chief Financial Officer, my decision to defer action on 

the vision and further study the Departmentís systems options was 

supported by the GAOís own conclusion that the previous HUD FSI Project 

failed to achieve its original objectives due, in part, to a lack of 

finalized plans and outdated benefit-cost analysis. In revisiting the 

August 2000 vision, I wanted to consider FHAís related experience on 

the FHA Subsidiary Project and perform benchmarking of other agency 

experiences with consideration of best practices and lessons learned. 

Additional reasons for not rushing to implement the vision included the 

need to assess the possible impacts of new OMB directed financial 

management systems initiatives, and to coordinate with the HUD Chief 

Information Officerís efforts to develop the ďas isĒ and ďto beĒ 

Enterprise Architecture for the financial management segment of the 

Department. We believe that the time we are devoting to properly 

planning the HUD Integrated Financial Management Improvement Project 

(HIFMIP) will enable HUD to better achieve its objective for a more 

efficient and effective financial management systems operating 

environment that better meets the Departmentís business needs and 

complies with federal requirements.



With respect to the proposed GAO recommendation in the draft report, 

the Department has already taken the actions needed to address it. 

Improved integration of the Departmentís financial management systems 

is a top priority for the Department, as evidenced by the inclusion of 

both the FHA Subsidiary Ledger and HIFMIP efforts in the:



Presidentís Management Agenda for HUD. I established a HIFMIP Executive 

Advisory Committee consisting of principals that would be directly 

impacted by this effort, including FHA and Ginnie Mae, with an advisory 

role for the HUD OIG. A kick-off meeting of the committee was held on 

January 8, 2003 and a working level group is being formed to include 

all stakeholders. An Assistant Chief Financial Officer for Systems with 

a wealth of project management and systems implementation experience 

was hired in October 2002. Reporting to him is a Project Manager hired 

for the HIFMIP effort in February 2003. HUD plans to award the HIFMIP 

support contract by May 2003, with work completed on the HIFMIP Vision 

by January 2004 and feasibility studies with a systems recommendation 

by July 2004. Initial project milestones and measurable performance 

indicators have been established and will be refined and tracked for 

all aspects of HIFMIP. HUD has been working diligently over the past 

two years to fund, improve and plan further needed improvements to the 

Departmentís financial management systems.



As you complete your review and final report, we request full 

consideration of our comments in providing an accurate and balanced 

assessment of HUDís continuing financial management systems needs and 

efforts to meet those needs. If you or your staff has questions, please 

contact James M. Martin, Assistant Chief Financial Officer for 

Financial Management, on (202) 708-0614, extension 3706.



Sincerely,



Angela M. Antonelli:



Enclosure:





The following are our comments on HUDís letter received on March 11, 

2003.



GAO Comments:



See ďAgency Comments and Our EvaluationĒ section of this report.



HUD provided additional technical suggestions which were incorporated 

as appropriate.



Our report does not advocate or imply that achieving a 12-year-old 

project design is a prerequisite for HUDís compliance with current 

federal financial management systems requirements. Our report discusses 

why HUDís past systems implementation effort had not been successful so 

that past mistakes would not be repeated in future systems 

implementation projects. The recommendations made in our 1998 report 

were conceptual in nature and would be applicable to any systems 

development initiative that HUD chooses to pursue.



Our report acknowledges HUDís unqualified opinions on its financial 

statements as well as its ability to issue these statements by the 

required due dates for the last 3 fiscal years. Our point is that HUDís 

current process for producing financial statements is not efficient 

because its current financial management systems are outdated and 

require manual intervention. Further, these systems do not provide 

timely, reliable, and useful information to manage the agency on a day-

to-day basis, which is the end goal of the CFO Act and a prerequisite 

to good financial management.



The objective of our report was to convey the nature of HUDís financial 

management systems needs rather than to identify specific weaknesses. 

These specific weaknesses are clearly outlined in the OIGís recent 

audit report on the fiscal year 2002 financial statements.



We agree that planning is essential to the success of any systems 

implementation project, which is clearly stated in our report.



(190065):



FOOTNOTES



[1] U.S. General Accounting Office, HUD Information Systems: Improved 

Management Practices Needed to Control Integration Cost and Schedule, 

GAO/AIMD-99-25 (Washington, D.C.: Dec.18, 1998). 







[2] U.S. General Accounting Office, Increasing the Department of 

Housing and Urban Developmentís Effectiveness Through Improved 

Management, Vol.1, GAO/RCED-84-9 (Washington, D.C.: Jan. 10, 1984).



[3] Mixed systems are those that support both programmatic and 

financial information needs.



[4] Hyperion is the software within HUDCAPS used to compile the general 

ledger information for reporting purposes and financial management 

consolidation.



[5] FFMIA requires the 24 major departments and agencies covered by the 

Chief Financial Officers Act of 1990 (CFO Act) to implement and 

maintain financial management systems that comply substantially with 

(1) federal financial management systems requirements, (2) applicable 

federal accounting standards, and (3) the U.S. Government Standard 

General Ledger at the transaction level.



[6] The SGL provides a standard chart of accounts and standardized 

transactions that agencies are to use in all of their financial 

systems.



[7] U.S. General Accounting Office, Major Management Challenges and 

Program Risk: Department of Housing and Urban Development, GAO-03-103 

(Washington, D.C.: January 2003).



[8] JFMIP is a joint and cooperative undertaking of OMB, the Department 

of the Treasury, the Office of Personnel Management (OPM), and GAO 

working with executive agencies to improve financial management 

practices throughout the government.



[9] Section 4 of FMFIA requires agencies to report whether their 

accounting systems conform to the accounting principles and standards 

mandated by the Comptroller General of the United States.



[10] The initial nine systems in the 1991 FSI plan were the (1) core 

accounting system, (2) mortgage insurance system, (3) administrative 

accounting system, (4) mortgage-backed securities system, (5) grants 

management system, (6) debt collection/management system, (7) notes/

loan servicing system, (8) project/recipient monitoring system, and (9) 

management information system. 



[11] In 1994, the HUD Secretary announced the HUD Reinvention Blueprint 

Plan, intended to reinvent and transition the department from a 

ďlumbering bureaucracy to a streamlined partner with state and local 

governments.Ē



[12] The Government Performance and Results Act of 1993 requires 

agencies to set goals, measure performance, and report on their 

accomplishments.



[13] The ďHUD 2020 Management Reform PlanĒ issued in 1997 included, as 

one of its reforms, the development and implementation of an integrated 

financial management system that is accurate, reliable, and timely. In 

his confirmation hearing, Secretary Cuomo stated that his top priority 

was to put HUDís management systems in order and to restore effective 

management and financial accountability at HUD. This plan established 

an October 1999 deadline for fully deploying an integrated core 

financial system. 



[14] This document described HUDís plans, at that time, for developing 

and implementing an integrated financial management system.