The U.S. Department of Housing and Urban Development (HUD) issued notice of a Federal Housing Administration (FHA) program change as a result of Mortgagee Letter 2009-31, “Strengthening Counterparty Risk Management,” issued Sept. 18, 2009. This policy change affects all supervised mortgagees. Effective for fiscal years ending on or after Jan. 1, 2010, all supervised mortgagees, including financial institutions, must submit annual audited financial statements to HUD within 90 days of their fiscal year-end. Additionally, there is a new requirement for a separate compliance audit. Previously, these requirements only applied to nonsupervised mortgagees (for example, a separate mortgage company).
Certain questions have arisen regarding the application of existing HUD guidance to supervised mortgagees, an issue the AICPA is still pursuing with HUD. Upon gaining clarification from HUD, the AICPA will provide additional guidance to auditors in this area. In the meantime, some of what is included below is based on assumptions and could change with clarification from HUD.
What Are the New Audit Requirements?
The mortgagee letter states that audited financial statements must be submitted in accordance with HUD Handbook 4060.1 REV-2 and prepared and audited in accordance with HUD’s Office of the Inspector General’s most recent Handbook 2000.04, Consolidated Audit Guide for Audits of HUD Programs (Audit Guide). At this time, HUD has not formally amended the Audit Guide to refer to supervised mortgagees. Until HUD issues guidance clarifying this point or modifies the Audit Guide to directly address supervised mortgagees, some auditors are assuming that chapter 7 of the HUD Audit Guide, “HUD-Approved Title II Nonsupervised Mortgagees and Loan Correspondents Audit Guidance,” is the relevant guidance that would apply to supervised mortgagees. HUD has informally confirmed to the AICPA that this is an appropriate course of action. The AICPA has asked HUD to formalize its position in this area through the issuance of clarifying implementation guidance or an update to the Audit Guide. Additionally, both chapter 1, “General Audit Guidance,” and chapter 2, “Reporting Requirements and Sample Reports,” of the HUD Audit Guide apply to these audits.
The HUD Audit Guide requires the auditor to issue the following reports:
A report on the financial statements with the auditor’s report on accompanying supplemental information required by HUD.
A combined report on internal control over financial reporting and internal control over compliance for HUD-assisted programs, which is required to identify any significant deficiencies and material weaknesses noted.
A report on compliance with applicable laws and regulations that may have a direct and material effect on each HUD-assisted program, which includes an opinion on compliance.
Chapter 2 of the HUD Audit Guide provides illustrations of the above-described reports and describes additional reports that may be required to be issued in an audit, depending on the facts and circumstances.
The above-described audits must be performed in accordance with generally accepted auditing standards (GAAS) (or PCAOB standards if the entity is an issuer) and the standards for financial audits of the U.S. Government Accountability Office’s Government Auditing Standards (GAGAS), issued by the comptroller general of the United States. For financial audits, GAGAS incorporates the fieldwork and reporting standards of GAAS and the related Statements on Auditing Standards (SAS) issued by the AICPA unless specifically excluded or modified by GAGAS. Additionally, in conducting audits in accordance with GAGAS, auditors assume certain responsibilities beyond those of audits performed in accordance with GAAS.
GAGAS describes ethical principles, establishes general standards, and establishes additional fieldwork and reporting standards beyond those required by GAAS. For example, an auditor must meet the GAGAS auditor qualifications, including the qualifications relating to independence and continuing professional education, which in some cases are more restrictive than GAAS. Additionally, the audit organization must meet the quality-control standards of GAGAS. There are a number of additional requirements. Chapters 1–4 of the AICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits, provide additional information on the GAGAS requirements that might be useful to auditors who are new to this area.
As noted earlier, with regard to the compliance audit component of the new HUD requirements, chapter 7 of the HUD Audit Guide is the “assumed” primary source of audit guidance until HUD issues clarifying guidance or updates the Audit Guide to specifically address supervised mortgagees. Auditors are also reminded that recently issued SAS no. 117, Compliance Audits, (effective for fiscal periods ending on or after June 15, 2010) is applicable to the compliance audit component of these engagements.
New Electronic Submission Requirements and Related Agreed-Upon Procedures Engagement
Financial statements and other financial and compliance data must be submitted electronically through the FHA’s Lender Assessment Subsystem (LASS) for FHA review. The responsibility for this electronic submission rests with supervised mortgagees. Auditors are then required to perform a separate agreed-upon procedures engagement related to the electronic filing, which should be performed under AT section 201, Agreed-Upon Procedures Engagements (AICPA, Professional Standards, vol. 1). The LASS User Manual contains information that auditors will need to navigate the process. Of particular interest are the sections that provide instructions for auditors to obtain their user ID/registration information and the auditor’s procedures.
Section 7-4 of the HUD Audit Guide notes the following:
The LASS templates only require the financial information of the approved mortgagee and not the consolidated entity. However, HUD will accept the audits of the consolidated financial statements of the parent if it includes consolidating schedules, audited by the auditor, which distinguish the balance sheet, operating statement and computation of adjusted net worth of the mortgagee/loan correspondent subject to the HUD audit requirement. These amounts are the amounts entered into LASS. The consolidating schedules must be subjected to the auditing procedures applied to the consolidated statement of the parent, and the auditor’s opinion must cover the financial statement accounts of the subsidiary.
It is unclear from this guidance whether the consolidating schedules are subject to audit at the entity level, or subject only to SAS no. 29, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents. Additionally, the LASS templates used to make the electronic submissions have not been formatted to reflect the typical financial statement presentation of supervised mortgagees, including an unclassified balance sheet. Again, the AICPA is working with HUD to gain clarity on both of these issues.
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