Federal Trade Commission

Financial Statement Audit for Fiscal Year 2001
Management Letter

Findings for Fiscal Years 2000 and 2001

1. FY 2000 Finding: Rent Expense for Fiscal Year 2000 Included Overpayments Totaling $189,202.

As part of the OIG's review of rent paid to the General Services Administration (GSA) for Washington, D.C. and field locations, the OIG reviewed monthly rent charges and investigated unusual fluctuations. In all cases, the agency pays rent to GSA, regardless of whether the property is government or privately-owned. The monthly rent billing from GSA is charged directly against FTC's Treasury account through the On-line Payment and Collection System (OPAC). GSA provides a bill detailing the charges to the Administrative Services Office (ASO). Based on our discussions with ASO managers and the examination of leases and GSA billing documentation, the OIG found that the agency overpaid rent at three locations during FY 2000. These overpayments totaled $189,202. Details of the overpayments, which occurred between October 1999 and April 2000, are presented below:

• The April 2000 rent bill for the 601 Pennsylvania Avenue NW location (e.g., the "601 Building") entitled GSA Public Buildings Service Bill for Space and Services included three charges of $38,665 each, totaling $115,995, described as "Rebill-Other" As part of the overall April rent bill from GSA, these amounts were charged directly against FTC through the OPAC system. Based on staff discussions and review of the documentation, the OIG has determined that these charges were incorrect and should not have been paid.
   
• The October 1999 rent bill entitled, GSA Public Buildings Service Bill for Space and Services, included charges for 205 Portland Street and 55 Summer Street in Boston, MA. While ASO officials notified GSA in writing on April 15, 1999 that the FTC would be vacating these locations by August 15, 1999, the GSA continued to bill the FTC via OPAC through January 2000 and February 2000, respectively. These charges resulted in overpayments of $62,272 for the Portland Street space, and $10,935 for the Summer Street space.

Regarding the overpayment of rent for the "601 Building," ASO officials told the OIG that they contacted GSA's representative for FTC leases in Washington, D.C., via an official e-mail, on March 16, 2001, and were subsequently informed three days later that GSA was researching the charges. ASO sent a follow up e-mail on April 4, 2001. ASO informed the OIG that it expects to get a credit OPAC in the amount of $115,995.

Regarding rent overpayment in Boston, ASO officials told the OIG that they have been in contact with GSA's representative for FTC leases over the past year, and most recently via e-mail on March 19, 2001, without response. ASO said it would contact supervisory personnel at GSA in an effort to retract the overpayments.

FY 2000 Recommendations

a.) ASO more thoroughly review all monthly rent bills to verify that the proper rent is being charged. Preparing a schedule of anticipated monthly billings at the beginning of the fiscal year based upon the lease or occupancy agreement terms could assist in monitoring payment billings. Any discrepancies found should be resolved in a timely manner.
 

b.) ASO pursues the recovery of its rent overpayments.

FY 2001 Finding Follow Up:

The $115,995 due the FTC for the 601 Pennsylvania Avenue, NW location was returned to the FTC in December 2001. The amounts due back in connection with the Boston, MA properties are still outstanding. ASO staff has been in contact with GSA representatives throughout the year on this matter, and is continuing to pursue collection of its overpaid rent in FY 2002.

Toward the latter part of FY 2001, ASO assigned a staff person to monitor the monthly rent bills. Monthly rent charges were reviewed for variances between months. While comparing rent charges monthly for variances can be a useful tool in highlighting errors, the process employed by ASO did not tie the changes to the lease agreement and thus the analysis was not sufficient to detect a sizable under-billing error that started at the beginning of the fiscal year and continued throughout the year.

The FTC earns an offsetting credit against its monthly rent bill for managing the headquarters facilities at 600 Pennsylvania Avenue. The error resulted because the FTC was being double-credited each month during the year which, when discovered by GSA in September 2001 (at the very end of the fiscal year), required a year-end payment from the FTC in excess of $900,000. According to ASO management, the credit offset for the facilities management fee is being monitored for FY 2002 and the credit offset will no longer be in effect after FY 2003. Additionally, ASO told the OIG that it recently implemented procedures to compare actual rent billings to a schedule of anticipated billings based upon the lease and occupancy agreements.

The OIG notes that there will be a major lease change occurring in FY 2002 when a portion of the agency moves to a new location at 601 New Jersey Avenue, which will have a significant change in anticipated rent charges.

ASO officials told the OIG that they have developed a matrix detailing expected monthly rent payments, by location, based on occupancy agreements (OA) or, in situations where OA's do not exist, on GSA-provided rent projections. To improve reconciliation of the rent account ASO will provide this report to the Financial Management Office (FMO) for comparison with budgetary and accounting records as an added check against over or under payments.

The OIG will follow up on the collection of the Boston rent refunds and on the implementation of ASO's revised rent monitoring procedures in the FY 2002 audit.

2. FY 2000 Finding: Credit Card Transaction Recording Process Would Be More Efficient Using Citibank Direct.

During the testing of the payment process related to Citibank credit card charges, the OIG noted that personnel at the NBC are spending approximately 32 hours per month or an annual cost of $9,500 to record coding changes to credit card transactions. Currently, the Citibank monthly bill electronically records its transactions into FTC's payment system. These transactions are automatically coded to organization, program and budget object class. When changes to any of these data fields are desired, e.g., to more specifically classify an item purchased or to make corrections to default codes, the individual cardholder must make manual changes on the individual statements and forward them to NBC. NBC staff then calls up on-line the transaction that was already posted and re-inputs the transaction to reflect these changes.

The OIG believes that the time spent on the routine change process can be avoided if FTC used the Citibank Direct program. The Citibank Direct program contains budget object codes that are generated automatically based upon the type of purchase (rather than just one default budget object class code). More importantly, it allows the cardholder to make changes to the codes on-line prior to final payment, thus eliminating the necessity for NBC staff to make such changes.

FMO staff informed the OIG that it is aware of the program benefits and, as such, will continue to work closely with Citibank to implement a more efficient system that meets FTC's unique matter reporting objectives.

FY 2000 Recommendation

The OIG recommends that the Financial Management Office continue to evaluate the cost-benefit of implementing Citibank Direct to assist in the processing of Citibank credit card transactions.

FY 2001 Finding Follow Up:

The Assistant CFO for Acquisitions informed the OIG that the development of the online reconciliation process was not implemented in FY 2001 because Citibank was not able to resolve all program issues until early in FY 2002. FMO told the OIG that, since then, it has begun discussions with Citibank to implement the electronic process. According to these officials, Citibank is scheduled to begin work with the FTC in late June 2002 to set up the accounting "strings and templates" necessary for the reallocation program. The FMO's goal is for full FTC implementation by October 2002.

OIG will follow up on the implementation process in the FY 2002 audit.

3. FY 2000 Finding: Accounts Payable Accrual at Fiscal Year End is Understated.

The OIG examined disbursements made from October 1, 2000 through December 20, 2000 to determine if disbursements related to goods or services received in FY 2000 were properly included in accounts payable at September 30, 2000.

During the year, accounts payable are recorded and processed for payment when NBC receives both an invoice from the vendor and a receiving report from the contracting officer's technical representative (COTR), who certifies the acceptance of the goods/services.

In an attempt to capture these expenses for financial reporting purposes at year-end, FMO records an accrued liability based on receiving reports submitted to NBC. However, the OIG determined that this practice understates payables as many receiving reports are submitted months after the close of the fiscal year for goods or services received during the fiscal year. When valid invoices are not used to develop the accrual because receiving reports are not submitted in a timely manner, agency liabilities and expenses will be understated on the financial statements.

Accounting adjustments identified by the OIG related to this finding total $937,427. Specifically:

• $ $613,842 of expenses related to noncapital assets were not included in accounts payable at 09/30/00, but instead would have been improperly recorded in FY 2001.
   
• $ A $323,585 capital asset was invoiced by 09/30/00, but the corresponding receiving report was submitted after the fiscal year end, meaning the asset would not have appeared on the balance sheet. The OIG obtained the missing receiving report and noted that the COTR certified that the goods were received prior to 09/30/00.

Accounts payable accruals (at year end) are frequently only best estimates of the agency's liabilities. Hence, the OIG believes that basing payable accruals on invoices, when receiving reports have not been submitted timely, would provide a better estimate of actual payables than relying on receiving reports alone.

FY 2000 Recommendation

The OIG recommends that the FMO record the accrual for accounts payable at year-end based on either the receipt of an invoice from a vendor or the submission of a receiving report acknowledging the acceptance of goods/services from the COTR.

FY 2001 Finding Follow Up:

While the recording of year-end accruals improved in FY 2001 as the FMO implemented the OIG's recommendation, the OIG again found that the costs for still other services/goods delivered on or before 09/30/01 were not accrued at year end. In each of these instances, the OIG noted that there were no invoices or receiving reports submitted, yet an agency liability still existed. Consequently, basing the recording of year-end accruals solely on having either an invoice or a receiving report on file is not sufficient for all transactions. Specifically, services provided by the Government Printing Office totaling $254,021 and relocation consulting services worth $180,000 (estimate of completion) were not accrued. In its review of rent, the OIG noted rent due but not invoiced of $599,082 was also not accrued (but was recorded as an undelivered order). The majority of these items were included in adjustments to the financial statements after the OIG brought them to the attention of FMO.

To avoid a recurrence of under accruing, the OIG believes that FMO should develop a list of these items each year to review when booking the year-end accruals. As an added check, FMO can make inquiries to COTRs to review the status of large contracts which may not routinely appear at year end.

FY 2001 Recommendation

1a.) Maintain a list of goods/services that are likely to be accrued at year end. This list should then be reviewed to ensure that all applicable accruals are made.

 

1b.) For large undelivered orders not accrued via receipt of an invoice or receiving report, the OIG recommends that the FMO make inquiries of selected COTRs to determine if services/goods have been received and accrue accordingly.

4. FY 2000 Finding: FTC's Capitalization Policy Is Not Routinely Followed.

FTC's capitalization policy states that all property, plant and equipment acquired with a unit value of $100,000 or greater and a useful life longer than two years are to be capitalized. Items purchased that do not meet this criteria are expensed. Depreciation of capitalized assets is calculated on a straight-line basis over the estimated useful lives of the assets.

The OIG reviewed expenditures related to budget object classes 251x and 31xx and found $800,886 of expenditures that should have been capitalized, but were expensed in the current year. Expenditures not capitalized included leasehold improvements and software.

FY 2000 Recommendation

The FMO should periodically remind requisitioning officials and administrative officers of FTC's capitalization policy so that requisitions for capital assets are properly coded.

FY 2001 Finding Follow Up:

The OIG found that FTC had not developed effective policy and/or procedures for capitalizing leasehold improvements and internal use software in keeping with Federal Accounting Standards Advisory Board requirements. During the OIG's review of expenses, it was determined that $359,527 in leasehold improvements should have been capitalized for amortization over 15 years as of September 30, 2001. In addition, costs incurred for the development of internal use software in the amount of $659,420 should have been capitalized for amortization over three years. Adjustments to the fiscal year 2001 financial statements were made by FMO for these two capitalized costs when the OIG brought these findings to its attention.

FY 2001 Recommendation

2a.) FMO issue policy and procedures for capitalizing leasehold improvements and internal use software.

2b.) FMO should utilize separate object classifications for the recording of capitalized expenditures. If the accounting system capability exists, these separate object classifications should be made to automatically record the transactions into the proper standard general ledger accounts for capitalized assets.

5. FY 2000 Finding: Verification Procedures Needed to Ensure the Accuracy of Manually Compiled Performance Data.

In its review of performance measures, the OIG noted that some measures necessarily rely on manual compilation processes, as opposed to automated extraction from a system database. With manual processes, it is imperative that some data verification controls are in place.

In the FY 2000 performance plan, both missions (maintaining competition and consumer protection) used manual compilation methods to report on their respective "consumer savings" performance measure.⁽¹⁾ Initial estimates prepared by each mission included compilation errors. Third parties (the OIG and the Bureau of Economics) brought the errors to the attention of mission staff. Errors can occur that would drive these estimates up or down, and be of a magnitude that would easily distort mission performance. In the maintaining competition mission, the error had a nonmaterial effect on overall consumer savings. However, in the consumer protection mission, the error inflated consumer savings by approximately 25 percent.

These errors point out the importance of implementing a review procedure to insure the accuracy of consumer savings computations. Both missions told the OIG that review procedures would be added.

Both missions (bureaus) rely on attorney staff to provide consumer savings estimates. In BCP, attorneys semiannually complete a questionnaire which updates case-related data for the bureau's case database. There are approximately 190 data fields, including case name, judgment amount, collections, redress and disgorgements. As part of this process, attorneys provide estimates of consumer savings based on past fraudulent sales of the business in question. These sales estimates are based on available business records.

The OIG did not compare sales records with consumer savings to assess the accuracy of the consumer savings estimate. BCP's GPRA sales figures are by necessity estimates, and are accurate only as of the date that they are compiled because they change as additional information becomes available. As the OIG noted, the estimate of consumer savings in the CP mission changed significantly over a rather short period of time—between September 30, 2000 and early March 2001—resulting in two different numbers being reported outside the agency for the same performance measure. An estimate of $401 million in savings was compiled near the end of the fiscal year by asking attorneys for estimates of fraudulent sales in scams that were shut down by the bureau. This number was provided to management for inclusion in the Management Discussion and Analysis section of the FY 2000 audited financial statements. However, for the Performance Report for FY 2000, the bureau had revised the $401 million down to $265 million as a result of computations based on new information.⁽²⁾

While the OIG understands that revisions are inevitable as estimates change when updated information becomes available, it is best to establish a single collection date for both financial statement and performance plan presentation. The reporting period for both reports (Performance Report and Financial Statements) is (as of) September 30. Further, estimates will always be subject to revision as new data is obtained. Therefore, the OIG believes that a cutoff date for providing estimates would promote consistency without sacrificing the integrity of the performance measure.

FY 2000 Recommendation

The OIG recommends that:

a.) Verification controls, such as checking the mathematical accuracy and correct reporting of the submitted data, be implemented.
 

b.) BCP and BC establish January 15 (following the fiscal year in which performance is being measured) as the final collection date (e.g., closing date) for data submitted for both financial statement and performance plan presentations.

FY 2001 Finding Follow Up:

For fiscal year 2001, FTC established compilation review and verification procedures for the performance measures that are being reported. An individual in the Bureau of Economics now reviews data on consumer savings for reasonableness and accuracy. Additionally, individuals other than the original preparers verify other portions of the data compilation.

Both bureaus have established January 15 as the closing date for financial statement and performance plan data submissions. However, the OIG notes that OMB has moved up the deadline for submission of the FY 2002 financial statements and performance report from February 28 to February 1.

FY 2001 Recommendation

The OIG recommends that:

3.) FMO coordinate with the Bureaus of Competition and Consumer Protection to establish an earlier closing date for financial statement and performance plan data submissions to FMO that will enable FMO to meet OMB's revised reporting requirements.

6. FY 2000 Finding: Contract Services Are Being Performed Prior to Contract Award Date.

In the examination of a sample of payment vouchers, the OIG noted one example where contractual services were performed before a signed contract or task order was in place. In this instance, the contractual services began two weeks prior to the contract award date. The services were provided during the period of January 15–February 1, 2000, while the contract was awarded on February 1, 2000. In discussions with an NBC supervisor in Denver, the OIG learned that her staff had noted similar occurrences.

Current NBC payment procedures include "verify(ing) that the goods and services were completed within the award date and expiration date." NBC (correctly) will not process an invoice for payment that is not supported by a proper contractual document.

FY 2000 Recommendation

When services are provided prior to a fully executed purchase order or contract, the OIG recommends that NBC direct the COTR to provide a change order for purchase orders or a modification for contracts to enable NBC to process payments timely.

FY 2001 Finding Follow Up:

The OIG followed up on this finding and again identified services were being performed without proper contractual documentation in place. In this year's review, the OIG identified eight instances from 29 vouchers reviewed where services began prior to a fully executed contract modification being in place.⁽³⁾ In these eight examples, a contract was signed, but changes to the contract were made after the start of the service in question. The effects of this outcome are twofold:

• The agency and the contractor are at risk when work is performed without an authorizing document; and
   
• Due to this breakdown in proper procedure, thousands of dollars of interest penalties are paid to vendors . (See Finding 8 for discussion of interest penalties.)

The Federal Acquisitions Regulations (FAR), states the following:

(a) Only contracting officers acting within the scope of their authority are empowered to execute contract modifications on behalf of the Government (Section 43.102)

(b) The contracting officer shall not execute a contract modification that causes or will cause an increase in funds without having first obtained a certification of fund availability. (Section 43.105).

The OIG found modifications prepared after services had begun. The reasons for these modifications include to: (i) extend the period of performance (and) add funds to the contract, (ii) add staff not previously submitted by the contractor, and (iii) amend the delivery order (Statement of Work). By allowing work to proceed in this manner, the agency violated the two FAR provisions identified above. That is, COTRs (and program managers) permitted work to proceed without the contracting officer's authorization, in effect, operating as contracting officers. Furthermore, the OIG found that delays in paying invoices due to improper authorizing documents have resulted in the agency paying thousands of dollars in interest penalties to vendors. Information on the modifications presented by type of service is provided below:

* Denotes interest penalty applied

The OIG plans to perform a more in-depth audit of selected IT contracts due to the high risk nature of these contracts (large dollars) and because of the amount of interest penalties incurred in current and prior years. The OIG believes that it is the responsibility of program managers and COTRs to monitor the contract to ensure that all work is authorized and that interest penalties do not accrue.

The OIG considers this finding still open.

7. FY 2000 Finding: Redress Collections Held in Contractor and FTC Accounts are not Being Disbursed Timely.

As part of the audit procedures performed by the OIG in the 1999 annual audit, we analyzed cash on hand at the contractors and in the FTC/Treasury suspense account to determine whether funds flowed through these accounts to consumers or to the U.S. Treasury (disgorged) timely.

Based on our review, we found that cash on hand with the agency=s three redress contractors increased from $18.3 million on 09/30/98 to $29.9 million on 09/30/99. The OIG analysis identified 30 FTC cases with funds on deposit with two FTC redress contractors totaling $9.979 million that were at least two years old on September 30, 1999. Discussions with select case managers on six of the largest cases totaling $7.5 million of the $9.979 million revealed that funds have been on deposit awaiting final disposition for between 24 and 106 months, with a median of 43 months.

Our reconciliation and aging analysis of the FTC Suspense Account at Treasury (Account No. 6875) found that of the $5.3 million in this account on September 30, 1999, $1.958 million from 33 cases was between 24 and 127 months old and awaiting final disposition. The OIG selected five of the largest cases with a median age of 55 months, totaling $1.1 million for detailed review.

To address the disposition of existing funds on account and prevent funds from accumulating for long periods in the future, the OIG recommended that the Bureau of Consumer Protection:

a.) review all cases that have funds in the FTC suspense account to determine if a redress distribution is appropriate. In those cases where redress is considered appropriate, the funds for these cases should be immediately transferred to contractor accounts so interest can be earned on balances pending the distribution. If a distribution is not deemed practical, the funds should be disgorged to the U.S. Treasury.

b.) centralize in the RAO the authority to monitor and set deadlines for staff to dispose of redress funds. Reasons given for redress distribution delay, whether by staff, contractors or receivers, need to be documented and routinely reported to senior management.

For the six cases with contractors identified above totaling $7.5 million, the OIG found that four of the six totaling $4.7 million had balances on 12/31/00 that exceeded their 9/30/99 balance. Funds on account for the remaining two cases decreased: on one of these, the entire balance was transferred to the court-appointed receiver, while the other was in the redress distribution phase. A summary of these six cases follows.

Of the remaining 24 cases reviewed by the OIG (30 - 6), 11 cases were closed, nine cases with $2.8 million on account remained open on 12/31/00, and four cases were open but contained small cash balances. For the nine cases still open totaling $2.8 million, the agency is preparing to disgorge the remaining funds (redress has occurred) on five cases; is developing a distribution plan and/or is distributing funds on three cases, and is currently investigating a defendant associated with the final case. The outcome of this investigation will dictate the disposition of the funds on deposit.

The OIG found that BCP has made substantial progress in closing cash accounts with Treasury. Of the five cases identified for detailed review, as of 1/31/01, all five have been either disgorged (3 cases), sent to consumers as redress (1 case), or transferred to a contractor for eventual distribution (1 case). In total, of the 33 cases with $1.958 million on account, seven cases totaling $131,745 remain open. Of this amount, $71,150 on one case must be disgorged by the district court. The remaining balance ($60,595) includes periodic payments by defendants which are disgorged soon after receipt.

BCP has closed its aged accounts held in the U.S. Treasury, and continues to make some progress distributing funds held at its redress contractors. However, disbursing contractor-held funds has been slow. In its December 12, 2000 response to the OIG regarding procedures to ensure the timely disposition of redress funds, BCP management stated that it would expand the responsibilities of the RAO to monitor and set deadlines in redress cases. The response also stated that:

RAO is currently documenting on a routine basis the reasons given for redress delay and has developed an exception report for distribution to senior management. Fields were added to the Redress Database to facilitate the generation of this report.⁽⁴⁾

Further, in correspondence from the BCP Director to FTC Commissioner Swindle dated February 9, 2001, Jodie Bernstein wrote the following regarding the timeliness of redress distributions:

I am implementing new procedures to ensure that redress distributions are made more quickly.... In this new process, the RAO will take on a more active role in managing the timeframe of redress distributions, in particular, those open for long periods of time.... The RAO will also monitor cases throughout the distribution process to ensure consumers are redressed in a timely manner.⁽⁵⁾

The OIG will continue to monitor the disposition of FTC redress cases, especially those managed by redress contractors, to assess the success of the bureau's new procedures.

FY 2001 Finding Follow Up:

The OIG identified 87 redress cases totaling $45 million on account at the FTC or with one of the two agency redress contractors on 9/30/01. Of this amount, 32 accounts ($14.1 million) were between 18 months and 139 months old.

 

In her January 25, 2001 response to Commissioner Swindle's request for information on the age of redress cases, the then BCP Director stated that BCP's "... goals are to close as many redress cases as possible within 18 months (emphasis added) after a final judgment has been entered and to close all redress cases within 30 months (emphasis added) unless exceptional circumstances exist." Further, managers are required to explain, in writing to the BCP Director, the circumstances that justify keeping the case open beyond thirty months. The OIG was told by BCP management that the current director has accepted these guidelines established by his predecessor.

 

Of the 32 accounts totaling $14.1 million, 17 of them ($11.4 million), had an account balance that remained the same, or fluctuated less than 6 percent, over a one year period (09/30/00 - 09/30/01). (Slight fluctuations in account balances can be caused by interest earnings or fee charges.) The distribution of these accounts follow:

The OIG asked BCP management for the details on these 17 cases ($11.4 million) that required they remain open past the BCP-set target to close cases. According to BCP managers, eight (8) of the 17 cases involved "exceptional circumstances," requiring the cases to remain open. These circumstances provided by BCP follow:

• Case 1 & 2. Only the district court can order disgorgement; original orders do not permit it automatically;
• Case 3. Per court order, monies were used to establish an escrow account as security against repeat offenses by the defendant;
• Case 4. Consumer education plan is currently being written;
• Case 5. Staff has been requested to prepare an additional distribution and is working on this now;
• Case 6. Monies are still being collected as assets are liquidated and fraudulent conveyance actions are being litigated;
• Case 7. Second distribution was stayed pending appeal. Appeal was decided in FTC's favor in summer of 2001. Now trying to collect an additional $1.3 million held offshore. If collected, consumers will receive 450 percent more on their claims; and
• Case 8. District court delaying disgorgement pending further collection actions.

The remaining nine accounts were classified by BCP as active, generally meaning that a distribution had recently been completed, or was imminent. Prior to the issuance of this management letter, BCP updated the status of these nine cases as of 06/01/02. According to BCP, five of the nine cases had been closed; three were in the final accounting phase (that is, awaiting a final accounting report from the relevant contractor), and one was in the final distribution phase, which distribution is scheduled for July 2002.

Regarding the eight cases that remain open due to "exceptional circumstances," the OIG did not expand its financial statement audit scope to determine whether the justifications provided by BCP merit holding these accounts open.

The OIG will perform another aging analysis as part of the FY 2002 financial statement audit.

8. FY2000 Finding:  Receiving Reports Are Not Prepared Timely.

Interest penalties paid to vendors for late payments by the agency pursuant to the Prompt Payment Act are usually the result of receiving reports not filed timely. Total interest expense incurred for late payment of invoices increased 333 percent, from $4,587 in FY 1999 to $19,859 in FY 2000. The OIG identified 13 vendors that received between $536 and $1,844 in interest penalties in FY 2000, totaling $12,418, or 63 percent of the total dollar amount. The OIG provided the names of the COTRs associated with these 13 vendors to management.

Of the 13 vendors receiving the largest interest payments, the OIG determined that six of the 13 were associated with the Office of Information Management, four performed services for the Bureau of Competition, and the remaining three performed services in the ASO, the Consumer Response Center, and the International Technical Assistance office. Interest payments by FTC division of at least $400 follow (amounts are rounded):

FY 2000 Recommendation

The OIG recommends that the CFO provide COTR names and interest penalty history regarding the 13 FY 2000 cases mentioned above to senior management in the five bureaus/divisions identified. Management should then inform the OIG of actions taken to address the late payments.

FY 2001 Finding Follow Up:

The OIG found that the agency continues to pay interest penalties resulting from the late payment of invoices. In FY 2001, the agency made 534 interest payments, amounting to $20,252. The OIG identified 13 interest payments for detailed review to better understand why late penalties not only continue to occur, but increase each year.

The prompt pay act requires that agencies pay their bills timely (e.g., within thirty days) and take discounts when applicable. When invoices are not paid timely, interest penalties accrue. The interest rate applied is established by Treasury. In FY 2001, the interest rate was approximately six percent. Based on a review of the documentation and information collected from COTRs, the OIG identified the following four causes for interest penalties:

1. Late submission of receiving reports. The FTC's vendor payment processor, the NBC, requires proof that an invoice is valid before it will pay the vendor. Agency COTRs provide such proof by completing a receiving report certifying that goods/services were delivered as specified on the invoice.

 

When goods are delivered and/or services provided, COTRs are responsible for certifying and forwarding a receiving report to NBC, noting the date the goods/services were accepted. This requirement is independent of whether the vendor has submitted an invoice. NBC proceeds with payment to the vendor only when it has received both the invoice and the certified receiving report. The COTRs the OIG spoke with generally do not forward a certified receiving report prior to the vendor submitting an invoice.

 

When a receiving report is not on file at NBC, then NBC must obtain it from the COTR before payment can be made. Upon the receipt of an invoice, NBC logs it into its payments system (e.g., the log date) and forwards a copy to the FMO, who in turn relays the document with a blank receiving report attached, to the COTR. This provides the COTR with an invoice to review and serves as a reminder that a receiving report certification is due. Up through fiscal year 2001, NBC forwarded invoices to the FTC twice a week. NBC officials told the OIG that, in FY 2002, invoices are sent to FTC daily.

 

The COTR reviews the invoice, then signs and dates the receiving report signifying agreement with the invoice. This date becomes the official acceptance date for the goods/services, e.g., the date the goods/services were delivered and accepted by the COTR. The 30-day window the agency has to pay its bills begins on the latter of the acceptance date and the NBC log date.

 

The OIG identified receiving reports that were submitted late (beyond the 30-day window) and resulted in interest penalties paid to vendors. Some examples of these are provided below.

• An invoice for $15,538 for copying services was received by NBC on 2/20/01. The COTR accepted the services on 1/30/01. The COTR did not forward the receiving report to NBC until 4/27/01, resulting in an interest penalty of $177. (org. code 0616)
  
• An invoice for economic consulting services totaling $34,099 was received at NBC on 10/23/00. The receiving report was forwarded to NBC on 03/02/01 with an acceptance date of 10/23/00, resulting in an interest penalty of $721. (org. code 1035)
  
• An invoice for Westlaw database services totaling $13,205 was received at NBC 1/17/01. The COTR accepted these services on 09/30/00. The receiving report was forwarded to NBC on 3/12/01, resulting in an interest penalty of $77.⁽⁷⁾ (org. code 0623)
   
• An invoice for computer hardware for $133,223 was received at NBC on 4/23/01. The receiving report noted that the goods were accepted by the COTR on 4/25/01. The receiving report was forwarded to NBC on 5/31/01, resulting in an interest penalty of $266. (org. code 0623)
   
• An invoice in the amount of $57,114 was received by NBC on 12/14/00, for software application development. The services were accepted on 12/15/00. The receiving report was sent to NBC on 1/25/01, resulting in an interest penalty of $253. (org. code 0623)
   
• The agency hired faculty from G.W. University to conduct legal writing training at a cost of $7,725. NBC was invoiced for these services on 10/26/00. The services were accepted by the COTR on 9/29/00, but a receiving report was not sent to NBC until 3/30/01, resulting in an interest penalty of $204. (org. code 0618)

While the examples illustrate that receiving reports were submitted late resulting in interest penalties, determining why such reports are late was more difficult. Based on discussions with COTRs the OIG believes that most receiving reports were simply not processed timely by COTRs. However, records do not exist that would enable us to conclusively explain other occurrences. For example, while receiving reports are date stamped when received in the FMO and at NBC, the dates that the receiving reports were provided to the COTR by FMO were not maintained in FY 2001. In other instances, third parties, i.e., administrative officers, are involved in the process, providing and collecting receiving reports to and from COTRs. It was unclear the extent to which this additional layer facilitated or delayed the processing of receiving reports.

 

2. Contract modifications after completion of the work. The OIG identified examples of invoices submitted that either exceeded the dollar amount of the contract and/or included staff who were not identified in the original contract. In both instances, NBC could not process the invoice and had to wait for a contract modification, resulting in interest penalties. In all instances, interest penalties are calculated from the latter of the log and acceptance dates, notwithstanding when the modification was received.

• An invoice for "help desk" services for the month of January 2001, totaling $133,807, was received at NBC on 2/26/01. The receiving report noted the date of acceptance of these services as 03/23/01, and was received at the NBC on 3/30/01. Unfortunately, a balance of just $25,390 remained on this order, far short of the $133,807 billed. Thus, before payment could be made a contract modification was required. The contract was modified on 4/30/01. The delay caused by a late contract modification resulted in a penalty payment of $344. (org. code 0623)
   
• An invoice for economic consulting services was received by NBC on 08/25/00 for the sum of $107,498. The vendor invoiced for two individuals who were not identified in the original contract, necessitating a modification to add these individuals to the contract. The services were accepted by the COTR on 10/02/00. The receiving report was received at NBC on 10/12/00. The modification was received on 12/05/00, resulting in an interest payment to the agency of $780. (org. code 1032)
  
• An invoice for economic consulting services ($16,787) was received at NBC on 6/22/00. The receiving report was sent to the NBC on 11/06/00 with an acceptance date for the services 05/19/00. Similar to the above example, the invoice could not be paid as a contract modification was needed to add two individuals to the contract. The modification was sent to NBC on 12/05/00. An interest penalty was of $475 was paid to the vendor. (org. code 1035)

While these examples demonstrate a lack of COTR performance, the OIG also questions whether interest penalties should have been paid in these examples as all involved invalid invoices; e.g., a portion of the work was performed without a valid order, or the vendor billed for staff not approved by FTC.

 

3. Processing requirements at NBC. The OIG identified receiving reports that were received between 28 and 31 days from the latter of the acceptance / invoice date at the NBC, yet still resulted in interest penalties.⁽⁸⁾ The vendor payments supervisor at NBC told the OIG that NBC is provided five work days to process an invoice (e.g., schedule the invoice for payment) once the receiving report is received. The Federal Financial System (FFS) then computes the interest penalty based on when FFS wires the payment, which usually adds another two - three days. As a result, a receiving report received by NBC up to seven days shy of the 30-day deadline would most likely incur a late fee.

• Four of the 13 receiving reports were submitted to NBC between 28 days and 31 days after the date the NBC received an invoice. All resulted in interest penalties:

It is clear that the agency, to avoid interest penalties similar to those identified above, should require that all receiving reports be submitted to NBC at least one week prior to the 30 day deadline.

 

4. Continuing Resolutions Impact on Purchase Orders. The agency processes purchase order requests only on an exception basis at the beginning of the fiscal year when a continuing resolution is in effect. The agency is not permitted to obligate funds in excess of the authority contained in the continuing resolution. Short term purchase orders are filled when the COTR requests them. During discussions with COTRs from the 13 vendor payments, and the vendor payment supervisor at NBC, the OIG learned that some vendors operate without an order at the fiscal year beginning. These services are usually routine and continuous, such as copier rental.

 

When the services are provided without an order on a "good-faith" basis, the agency will generally incur interest penalties as NBC will not pay an invoice without an order. As a result, invoices accumulate at NBC, only to be paid when a budget is passed. In past three years, the agency received its appropriation for the year between 59 and 82 days after the start of the fiscal year. Acquisitions staff told the OIG that it will process orders when needed by the agency, but it is up to agency staff to inform Acquisitions of important orders, i.e., orders that cannot wait until a budget is passed.

 

Allowing contractors to operate without a valid order places both the contractor and the agency at risk. Operating without a budget (e.g., on a continuing resolution) appears to be the rule rather than the exception at the beginning of the fiscal year. As this is a recurring issue with potential liability implications for the agency, the OIG believes management needs to take steps to address the implications of continuing resolutions on the completion of purchase orders, and ensure that vendors are providing goods/services under a valid order.

 

In conclusion, while $20,000 may not be a material amount in a budget of $145 million, it is nonetheless, wasted when used to pay interest penalties. Given the apparent ineffectiveness of past efforts to curb penalties, more aggressive measures must be taken. Foremost is establishing accountability for such payments. While all staff the OIG spoke with understood that late submissions of receiving reports/contract modifications could result in penalties, none were aware that penalties had actually been paid to vendors due to their specific actions/inactions. As a result, there appears to be no controls in place to alert managers and COTRs of the cost to the bureau/office. Only one agency financial report (FTCF610) contains information on these penalties by division, but the user must have knowledge of payment codes to identify them. Top management (bureau directors, office heads) needs to know (i) that penalties are accruing, (ii) the names of individuals responsible for them, and (iii) the amounts of interest being charged against bureau/division budgets.

 

Although none of the 13 interest penalties we reviewed in detail resulted from the agency being under a continuing resolution, based on discussions with COTRs and NBC staff, this also occurs. The agency has added language to some purchase orders limiting the agency's liability to the funds available per the continuing resolution or the enacted appropriations. The OIG believes that this solution is effective, while the alternative—working without a contract or purchase order—raises a host of procurement concerns.

 

Finally, the OIG questions whether some penalties should have been paid at all. According to documented FTC policy, certifying officers in the Finance Branch approve invoices for payment based on evidence of a valid procurement document, a valid receiving document, and a valid invoice submission from the vendor (emphasis added). Improper invoices, e.g., those without a contract or purchase order number, or those adding individuals without a proper modification are not valid invoices according to FTC policy. NBC officials have begun to pay invoices with proper receiving reports, less the amount for charges by individuals in question, to avoid interest penalties. The Acquisitions office also recommends the use of labor categories (versus naming specific individuals) to avoid such issues. Both techniques are sound and should become official agency policy.

FY 2001 Recommendations

The OIG recommends that:

4a.) The Finance Office provide a schedule of monthly interest penalties paid to pertinent Bureau/Office heads and to regional directors. The schedule should identify, at a minimum, the vendor, the penalty amount and a statement that bureau/office funds are being used to pay the penalty.

 

4b.) The Assistant CFO for Acquisitions should inform vendors/contractors when a contract is awarded that invoices that exceed order limitations will not be eligible for late interest payments.

4c.) The Assistant CFO for Finance instruct NBC to approve invoices for payment based on labor category, rather than the identification of individuals. Amounts charged for labor categories not approved by FTC should be excluded from payment until a modification is received. Interest penalties should then accrue on the unpaid amount 30 days from the modification date.

4d.) When sending receiving reports and copies of invoices to COTRs, the Assistant CFO for Finance identify a due date for their return to the finance office. This due date should take into account the processing requirements at NBC.

4e.) The Assistant CFO for Acquisitions require COTRs to submit purchase requisitions prior to the start of any service, to include situations where the agency must operate under a continuing resolution. Order requests submitted after the commencement of the service should require the approval of the COTRs supervisor.

Auditor's Note. When alerted to interest penalty findings, FMO took immediate steps to address their causes. For example, prior to the issuance of this letter, FMO sent letters to bureau/office heads alerting them to office/bureau interest penalty expenditures by vendor. Further, NBC, at the direction of FMO, now approves invoices for payment based on labor category, and identifies due dates for all receiving reports. The OIG believes that this quick response has already reduced some penalties and should prevent others.

9. FY 2001 Finding: Parking Benefits Are Not Accurately Reported

Parking provided to an employee at or near the employer's place of business is considered a qualified transportation fringe benefit. Internal Revenue Service (IRS) regulations permit employees provided with this benefit to exclude it from their income, up to a certain monthly limit ($175 in 2000, $180 in 2001). If the parking benefit has a value that is more than this limit, the excess must be included in the employee's income and reported on his/her IRS form W-2.

The FTC's ASO manages both the reserved and non-reserved spaces at its headquarters garage. For reserved spaces, ASO determines the value of the parking benefit by averaging monthly fees at similar, nearby parking facilities. In FY 2000 and FY 2001, the average in the area around the FTC headquarters building for reserved spots was $369 and $376 per month, respectively. The names of employees receiving parking benefits in excess of the exclusion are forwarded to the Human Resource Management Office (HRMO), along with the per-pay period amount to be included as income. HRMO, in turn, submits the names of the identified employees along with their social security numbers, organization codes and the per-pay period amounts to be reported as income to the National Business Center.

For calendar year 2000, the OIG examined the list of individuals designated as receiving parking benefits valued in excess of the $175 exclusion.⁽⁹⁾

Calendar year 2000 was selected because it was the most recent year for which W-2's had been issued at the time the review was performed. For the 10 employees designated as receiving parking benefit income, three employees' W-2's were incorrect. Of the three incorrect, two had their parking benefit income over-reported and one had no benefit income reported.

In researching the discrepancies, the OIG determined the following:

a) For the two employees with over reported benefit income, the per-pay period amounts submitted by HRMO to NBC were correct, but the amount in the payroll system was incorrect.

 

b) For the one employee in a regional office with no reported benefit income, the per-pay period amount determined by ASO was $46.16, but the amount reported by HRMO to NBC was $36.92. No amount was reported in the payroll system.

Subsequent to the examination of the FY 2000 W-2's, the OIG reviewed the FY 2001 parking benefit income being reported and determined that errors regarding reserved parking spaces are still occurring.

Unlike the process used for reserved spaces, the OIG found that, contrary to IRS regulations, a dollar value was not established for the non-reserved spaces, as these spaces are assumed to be valued at or below the IRS limit. Consequently, the OIG was unable to determine whether individuals assigned non-reserved spaces are being taxed correctly.

Recommendation

The OIG recommends that:

5a.) Near the end of the calendar year, HRMO validate parking-benefit data supplied to NBC to ensure that its instructions to NBC have been properly processed.

 

Discussion: NBC has the capability to provide to HRMO the per-pay period amounts reported in the payroll system and the year-to-date benefit income amounts for each employee affected. The data could be checked against HRMO's instructions and the year-to-date benefit income checked for reasonableness. Benefit amounts for employees added to, or falling off, the list during the year could easily be verified.

 

5b.) ASO calculate the value of non-reserved parking spaces using a process similar to reserved-parking evaluation to determine if they exceed the IRS exclusion. Any value in excess should be reported as benefit income.

Endnotes:

1. Consumer savings is the amount of money consumers save as a result of FTC actions in the marketplace, either to prevent anti-competitive mergers (MC) or to close fraudulent businesses (CP).

2. $100 million of this difference between the original and revised estimates was the result of a compilation error. Approximately $36 million of the difference is the result of updates.

4. Memorandum dated 12/12/00 from BCP to the FTC Audit Follow Up official regarding BCP's response to OIG Audit Report: Aging Analysis of Redress Funds Held on Account (AR 00-047, July 31, 2000).

5. Memorandum dated February 9, 2001, from the Director, Bureau of Consumer Protection to Commissioner Swindle regarding OIG Audit Report: Aging Analysis of Redress Funds Held on Account (AR 00-047, July 31, 2000), p. 3.