Thank you for the opportunity to appear before you today.

Financial and compliance audits - including audits of State and local governments and non-profit entities under the Single Audit Act - are an essential element of the US Department of Housing and Urban Development's (HUD) management control and oversight of its housing and community development programs.

The Office of Public and Indian Housing's Real Estate Assessment Center is responsible for collecting and assessing audit reports from housing providers receiving financial assistance from either the Office of Public and Indian Housing or the Office of Multifamily Housing. Thus, each of the approximately 3,200 Public Housing Authorities (PHAs) and each owner of about 21,000 insured/assisted multifamily properties is required to electronically submit an annual financial statement audit to the Real Estate Assessment Center for a financial and regulatory compliance assessment.

For the approximately 3,200 PHAs and the 8,700 nonprofit owners of multifamily projects this means an audit in accordance with the Single Audit Act and OMB Circular No. A-133. The Real Estate Assessment Center uses the financial submissions to assess the financial condition and regulatory compliance of the property or the PHA, and assigns the property or PHA to one of three risk categories, depending on whether the property is a good, marginal or troubled performer. The financial submissions and assessment results are referred to program staff in HUD's Office of Public and Indian Housing and Office of Multifamily Housing for use in risk-based targeting of technical assistance, on-site monitoring and enforcement activity to improve program compliance and performance.

To determine if the financial audit information being assessed is reliable, the Real Estate Assessment Center has set up a division to assure the quality of the audits.

The Quality Assurance Subsystem (QASS) consists of a staff of auditors, whose primary purpose is to conduct Quality Assurance Reviews (QAR) of Certified Public Accounting firms that perform financial statement audits of HUD housing program participants. The staff is supported by the QASS system, software used to monitor the performance of CPA firms that conduct audits of HUD program participants.

Based on several factors, the QASS team selects "high risk" firms for quality assurance reviews annually. The QAR selection criteria includes outstanding referrals from both financial analysts at the Real Estate Assessment Center and HUD program offices, total assets audited by the firm among all HUD related engagements, and total revenues audited by the firm for HUD related engagements. Also, if a firm audited ten or more entities during the previous fiscal year, but identified no audit findings, that is considered a factor for selection.

A team of QASS auditors visits selected firms' offices and reviews a sample of audits and the associated working papers for compliance with professional auditing standards and HUD requirements.

When substandard work is identified, the QASS team recommends administrative sanctions which could include one or more of the following: Referral to one or more of the state boards of accountancy in the states where the CPA firm practices; referral to HUD's Departmental Enforcement Center for potential debarment proceedings; and referral to the American Institute of Certified Accountants.

QASS has determined that for PHAs, there are approximately 340 CPA firms auditing about 2,150 PHAs and that the top ten percent of the firms audit about 68 percent of the population. Many of these firms are either sole practitioners or firms with three or fewer CPAs on staff. The average number of audits performed by the top ten percent of firms is 44 audits per year, with a range between 35 and 114 audits. Seven sole practitioners do more than 50 audits annually, with one CPA doing 98 audits by himself. A firm with only three CPAs audited 8 of the 33 largest PHAs in the country.

Analyses of referrals that QASS has received, as well as QARs already completed, indicate that several high volume practitioners do not have the resources to perform PHA audit engagements in accordance with professional auditing standards or within timeframes required by the Department. The combination of high volume and limited staff resources means that audit quality suffers. With fees being directly related to the time spent on an audit engagement, fewer staff hours not only results in a lower fee but also a lower quality of work.

Of the 25 PHA auditors reviewed during the 12 months ended February 2002, QAR results indicate that 20 firms were not in compliance with professional auditing standards. Among those 20 firms, it was not uncommon for firms to violate seven, eight, or nine of the ten professional auditing standards. QASS has made 18 referrals for administrative sanctions and has an additional ten referrals pending. The majority of these are to the state boards of accountancy where the CPAs practice, however there are four debarment actions pending at the Departmental Enforcement Center.

For Multifamily housing projects, regardless of whether it is a nonprofit or profit motivated owner, QASS has determined that there are approximately 2,260 CPA firms providing audit services to the population of owners required to submit audits to HUD. For this program, the top ten percent of firms audit about 55 percent of the population. In FY 2001, QASS reviewed 87 firms that performed multifamily audits; both A-133 and program type audits, though primarily profit motivated owners. QASS identified only one firm with severe performance problems. In general, the firms that perform the most multifamily audits are regional, large local or national firms with adequate staffing for their workload.

Based on the work of the Real Estate Assessment Center Quality Assurance staff, the quality of A-133 audits of Housing Authorities is of concern, while the audits of Multifamily housing projects are generally of a higher quality.

HUD is concerned about the quality of Single Audits and has dedicated staff resources to the quality review process for the past three years. The Department supports the concept of a task force to review the quality of Single Audits and is ready to lend what we have learned from our experience to the task force.

Other HUD grant programs, such as those administered by the Office of Community Planning and Development, are also reliant on audits under the Single Audit Act as an essential component of their program management control and oversight. In these areas, HUD's program field staff are responsible for obtaining and acting on Single Audits to ascertain the financial condition and compliance of their program participants. However, a recent review by the US General Accounting Office cited that these HUD program areas do not have a central system to better assure that Single Audits are properly received and acted upon. HUD has plans in place to better assure that all required Single Audits are properly received and acted upon in all HUD program areas.

Thank you for the opportunity to appear today.