Fiscal Year 2000 (Second Half)

November 30, 2000

The Honorable Robert Pitofsky
Chairman
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580

Dear Chairman Pitofsky:

The attached report covers the Office of Inspector General's (OIG) activities for the second half of fiscal year 2000, and is submitted according to Section 5 of the Inspector General Act of 1978, as amended.

During this reporting period, the OIG completed an analysis of redress funds held on account by contractors and receivers along with a review of the processes used to develop and control redress claimant lists. In the cash management area the OIG found that of the $35.2 million on account at fiscal year end 1999 to pay for consumer redress, $6.5 million could be put to better use if closer attention was paid by management to old cash balances retained in contractor, receiver, and Treasury accounts.

Two new audits were started this period, while field work was concluded on a third review. The new reviews include an audit of the agency's fiscal year 2000 financial statements, and a security check into the disposition of excess PCs, in particular the cleansing of computer hard drives.

Also, one investigation into document destruction was closed this period, while three new matters were opened.

As in the past, management has been responsive in attempting to address all OIG recommendations. I appreciate management's support, and I look forward to working with you in our ongoing efforts to promote economy and efficiency in agency programs.

Sincerely,

Frederick J. Zirkel
Inspector General

TABLE OF CONTENTS

TRANSMITTAL

INTRODUCTION

AUDIT ACTIVITIES

Completed Audits 
Summary of Findings for Audit Reports Issued During the Current Period 
Audits in Which Field Work is Complete 
Audits in Which Field Work is in Progress

INVESTIGATIVE ACTIVITIES

Investigative Summary 
Investigations Closed During the Current Period 
Matters Referred for Prosecution

OTHER ACTIVITIES

Significant Management Decisions 
Access to Information 
Internet Access 
Audit Resolution 
Review of Legislation 
Contacting the Office of Inspector General

TABLES

Table I: Summary of Inspector General Reporting Requirements 
Table II: Inspector General Issued Reports With Questioned Costs 
Table III: Inspector General Issued Reports With Recommendations That Funds Be Put To Better Use

INTRODUCTION

The Federal Trade Commission (FTC) seeks to assure that the nation's markets are competitive, efficient, and free from undue restrictions. The FTC also seeks to improve the operation of the marketplace by ending unfair and deceptive practices, with emphasis on those practices that might unreasonably restrict or inhibit the free exercise of informed choice by consumers. The FTC relies on economic analysis to support its law enforcement efforts and to contribute to the economic policy deliberations of Congress, the Executive Branch and the public.

To aid the FTC in accomplishing its consumer protection and antitrust missions, the Office of Inspector General (OIG) was provided five workyears and a budget of $607,500 for fiscal year 2000.

AUDIT ACTIVITIES

For this semiannual period, the OIG audited the processes used by the agency's Redress Administration Office and FTC staff attorneys to develop and control redress claimant lists and performed an aging analysis of over $35 million dollars in redress funds. The OIG also issued a draft report to management on select aspects of the oversight of and payment for the agency's telecommunication services. Further, the OIG completed field work for an investigative alert identifying vulnerabilities associated with the oversight of receivers on FTC cases. Finally, we began audits of the agency's financial statements for FY 2000 and a security review regarding the control of data existing on the hard drives of excessed (e.g., surplus) computers. Detailed information regarding the status of these audits and reviews is provided below.

Completed Audits

Audit Report Number
Subject of Audit
AR 00-046
Audit of Processes Used to Develop and Control Redress Claimant Lists
AR 00-047
Aging Analysis of Redress Funds Held on Account

Summary of Findings for Audit Reports Issued During the Current Period

In AR 00-046, Audit of Processes Used to Develop and Control Redress Claimant Lists, the objectives were to (i) document the data collection and/or construction methods used to develop claimant data from fraudulent companies by agency staff and its contractors/ subcontractors; (ii) identify what, if any, vulnerabilities exist pertaining to these methods that could lead to the payment of either erroneous or fraudulent claims; and (iii) audit a sample of distributions determined to be high risk to assess whether redress checks were issued to any individuals other than rightful claimants.

This review grew directly out of the OIG's annual financial statement audit which includes field work to review redress account balances. In fiscal years 1998 and 1999, redress distributions totaled approximately $25.8 million. During the review, the audit team observed that original claimant lists were not always maintained by the agency. As a result of this finding, the OIG suspected that internal control weaknesses might exist in the disbursement phase of the redress process; specifically, that management would not always be able to independently verify the accuracy of redress distributions performed by third parties (contractors, responsible defendants and/or receivers). As the OIG audit opinion is rendered on the financial statements taken as a whole, and not on any individual line item, the OIG expanded its audit work by attempting to examine in greater detail the support behind the redress distribution amounts shown on the Statements of Custodial Activity.

The OIG found that the agency has taken some steps to reduce the vulnerability to fraud in the payment of redress by enhancing the monthly reports submitted by the redress contractors. Such enhancements include standardizing the reporting format to enable Bureau of Consumer Protection (BCP) staff to quickly and easily follow movement of funds (including deposits, interest earnings, redress payments, and fees) from month to month. RAO also spot checks canceled checks against original claimant lists to verify that only authorized claimants received a check. This control helps to guard against an unscrupulous third party (e.g., contractor employee or responsible party defendant) from "salting" or adding names of associates to the claimant list.

While this check of claimants against an original list is the agency's first line of defense against theft, the OIG found that the original list on ten cases in our sample (36 percent) was not maintained by the agency. Another eight cases (28 percent) in our sample had lists that could have been compromised without the knowledge of the FTC. These were contractor and defendant-prepared lists where the FTC did not have a presence during list development. In these 18 cases, if claimant checks were mailed to individuals working in concert with an unscrupulous contractor or defendant employee who desired to divert funds, the likelihood of being discovered would be small.

Of the remaining 10 cases (36 percent) in our sample where original claimant lists were available, half was selected for audit. However, an audit of one of these five selected cases could not be completed as documentation concerning redress was with a receiver who did not respond to agency staff or OIG requests for this information. This receiver later admitted to financial irregularities in the case and is currently under investigation. (See Investigative Alert: Vulnerabilities Pertaining to Oversight of Receivers by FTC Staff, IA 01-08, below)

To address these vulnerabilities, the OIG recommended that claims administration contractors be instructed to accept claimant lists only from the RAO (and not from individual attorneys), thus ensuring that the RAO will have an original copy of all lists so as to more effectively perform its oversight function. The OIG also recommended that in cases where defendants will be providing claimant information to the FTC for its use in determining redress, attorneys seek, through negotiation with the defendant (i) a copy of the claimant list prior to final judgment, and (ii) agreement to oversee the construction of the final claimant list. This recommendation identifies a practice used on occasion by some FTC attorneys to establish a presence early on in the claimant list development process with defendant-prepared claimant lists. Such a presence, in the opinion of the OIG, helps to ensure that criteria for determining claimant eligibility is applied without bias by the corporate defendant who inevitably will have a sizable financial stake in the size and composition of the claimant pool it is responsible for developing.

In AR 00-047, Aging Analysis of Redress Funds Held on Account, the OIG performed an audit of the cash balances held by the agency's three redress contractors and by the FTC in its U.S. Treasury suspense account.

As of September 30, 1999, the agency's three redress contractors were holding $29.9 million in funds on FTC cases. This represents a 63 percent increase in funds held by contractors as of September 30, 1998 ($18.3 million). The OIG identified 30 cases totaling $10 million (33 percent of the total) where funds were held on account for two years or longer as of September 30, 1999. Discussions with case managers on six (6) of the largest cases (totaling $7.5 million) revealed that funds have been on deposit awaiting final disposition for up to106 months, with a median time on account of 42 months.

The OIG also identified a 23 percent increase in funds held in the Treasury's suspense account, from $4.3 million on September 30, 1998 to $5.3 million on September 30, 1999. Of the $5.3 million in this account on September 30, 1999, $2 million from 33 cases was between 24 and 127 months old and awaiting final disposition.

Based on our aging analysis of these cash accounts and discussions with case managers, it appears that funds are unnecessarily sitting in accounts instead of flowing through to either consumers or the U.S. Treasury. The longer the delay in providing redress, the fewer the number of consumers who will ultimately receive any repayment. This is the result of predictable consumer mobility. While redress may be delayed pending the completion of collection efforts, it is not in the best interest of consumers for the agency to hold funds for extraordinary lengths of time and expect to perform a credible redress distribution.

Based on our analysis of 11 of the largest cases from the universe presented above, the OIG has identified nine (9) cases totaling $6.5 million with funds that could have been put to better use (see Table III), e.g., turned over to consumers, or in some cases deposited in the Treasury General Fund more quickly if better management oversight of these cases was in place.

In one of the nine cases reviewed by the OIG a $1.45 million redress distribution was held up by a receiver based on the premise that a substantial tax liability was possible and this issue would need to be resolved before a distribution to consumers could be completed. After checking with regional office staff and the receiver, the OIG learned that the maximum possible liability was not expected to exceed $50,000. Consumers in this case waited over four years for a decision to be made that could have been accomplished within months.

The OIG recommended that the RAO review all accounts to determine whether redress is practical, especially on older cases, and to immediately authorize disgorgement of funds to the Treasury when redress is not practical. The OIG also recommended that management establish due dates for decisions regarding the investigation into alternatives to redress. Finally, reasons given for redress distribution delays, whether by staff, contractors or receivers, need to be documented and routinely reported to senior bureau management.

Audits in Which Field Work is Complete

Audit Report Number
Subject of Audit
AR 01-048
Audit of FTC Telecommunications Billing Procedures, Practices, Controls and Expenditures The overall objective of this review was to identify vulnerabilities pertaining to the oversight and payment of the agency's telecommunication services. To address this overall objective, the OIG (i) assessed whether the agency is paying only for the services it uses and/or the hardware/equipment it employs; (ii) reviewed system controls that are in place to monitor employee use of telephones, cell phones, and pagers, and determined whether these controls work effectively; (iii) analyzed whether the agency, given its service history, is using optimal service plans (for local, long distance, pagers and cell phones) to efficiently and effectively meet its needs; and (iv) documented the role GSA and other third parties perform in assisting the FTC in implementing its telecommunications program and reviewed the cost and the effectiveness of this assistance. An exit conference with management was held and the draft report's findings and recommendations were presented to management.
IA 01-08
Investigative Alert: Vulnerabilities Pertaining to Oversight of Receivers by FTC Staff The objective of this review was to identify vulnerabilities associated with current practices to monitor receiver processes and outcomes, and to recommend actions to correct them. The review grew out of an investigation of one receiver's wrongdoing, which resulted in a multi-million dollar embezzlement. The alert will be issued after conclusion of the criminal investigation.

Audits in Which Field Work is in Progress

Audit Report Number
Subject of Audit
AR 01-049
Security Review: Control of Data Stored in Excessed Computers The objectives of this review are to (i) determine whether hard drives in excessed (or surplus) computers that have been relocated to FTC's warehouse contain non-public and/or sensitive information; (ii) document the procedures (if any) in place at the warehouse to track incoming computers and to "scrub" computer hard drives prior to public release to schools and other non-profit organizations; (iii) identify the level of sophistication required to obtain this information from the hard drives (prior to scrubbing); and (iv) determine whether procedures in place to scrub hard drives are complete and universally performed on all computer hard drives.
AR 01-050
Audit of FTC Financial Statements for Fiscal Year 2000 The objective of this financial audit is to determine whether the agency's financial statements present fairly the financial position of the agency. The statements to be audited are the Balance Sheet, as of September 30, 2000, and the related Statement of Net Cost, Statement of Changes in Net Position, Statement of Budgetary Resources, Statement of Financing, and Statement of Custodial Activity for the year then ended. The OIG will also work with management to better tie the Statement of Net Cost to the agency's performance measures. These reported measures of program and financial performance are to be consistent with information on major goals and objectives from the agency's strategic plan, and should be linked to the programs featured in the Statement of Net Cost. This will be the forth annual financial statement audit performed by the OIG; the first three audits resulted in unqualified opinions.

INVESTIGATIVE ACTIVITIES

The Inspector General is authorized by the IG Act to receive and investigate allegations of fraud, waste and abuse occurring within FTC programs and operations. Matters of possible wrongdoing come to the OIG in the form of allegations or complaints from a variety of sources, including FTC employees, other government agencies and the general public.

Reported incidents of possible fraud, waste and abuse can give rise to administrative, civil or criminal investigations. OIG investigations might also be initiated based on the possibility of wrongdoing by firms or individuals outside the agency when there is an indication that they are or were involved in activities intended to improperly affect the outcome of a particular agency enforcement action. Because this kind of wrongdoing strikes at the integrity of the FTC's consumer protection and antitrust law enforcement missions, the OIG places a high priority on investigating it.

In conducting criminal investigations during the past several years, the OIG has sought assistance from, and worked jointly with, other law enforcement agencies, including other OIG's, the Federal Bureau of Investigation (FBI), the U.S. Postal Inspection Service, the U.S. Secret Service, the U.S. Marshal's Service, the Internal Revenue Service, Capitol Hill Police, as well as and state agencies and local police departments.

Investigative Summary

During this reporting period, the OIG received 28 complaints of possible wrongdoing. Of these 28 complaints, a total of 18 related to matters that the OIG determined were the responsibility of FTC program components. Consequently, the OIG referred these matters to appropriate FTC components for disposition.

Of the ten (10) remaining complaints, the OIG decided to close six (6) of them after conducting preliminary investigative reviews. Accordingly, the OIG opened four (4) new investigations from the remaining complaints. Three (3) of these complaints involved possible leaks of nonpublic information to newspapers, while the remaining one involved the possible obstruction of an FTC merger review by alleged document destruction.

Following is a summary of the OIG's investigative activities for the six-month period ending September 30, 2000. While the OIG opened four (4) new investigations during this reporting period, it also closed one (1) case:

Cases pending as of March 31, 2000
1
Plus: New cases
+4
Less: Cases closed
-1
Cases pending as of September 30, 2000
4

Investigations Closed During the Current Period

Obstructions & Unauthorized Disclosures (1)

The OIG closed a case during this reporting period which was also opened during the same period. It involved the possible obstruction of an FTC premerger filing case under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act). A knowledgeable confidential informant suspected that relevant company documents sought by FTC enforcement staff under an HSR Act "second request" were deliberately not being provided by the principal merging company as they would have a negative impact on the FTC's approval of the proposed merger. Company documents were being sought by staff under the HSR Act so the FTC could evaluate the proposed merger's anti-competitive impact on consumers.

As the informant did not allege that any documents had actually been destroyed, and there was no evidence to suggest that there had been any criminal destruction of documents, the OIG decided to inform outside counsel for the principal merging company of the allegation, and then to work with these lawyers in an effort to ensure FTC enforcement staff that the law firm's client was playing by the rules.

Although the OIG was careful not to take any position on the merits of the proposed merger - as this is not a matter under our IG Actjurisdiction - we met on several occasions with outside counsel for the principal merging company to discuss a resolution that would satisfy the OIG that a good faith effort was being undertaken by the company to ensure staff that they would be provided full access to all relevant, requested records.

The OIG's discussions with the lawyers proved constructive as the company, at the highest levels, undertook several steps to ensure that its employees and surrogates were following all legal requirements, and that they were well aware of the implications of not producing every relevant document sought by FTC enforcement staff. Following these discussions, the OIG informed FTC enforcement staff of the company's corrective efforts. Thereafter, the OIG closed the case.

Matters Referred for Prosecution

During this reporting period, the OIG continued to work with a federal prosecutor in California on a case involving the embezzlement of several million dollars by a court-appointed receiver from several receivership estates derived from at least eight (8) FTC enforcement cases and two (2) non-FTC cases.

OTHER ACTIVITIES

The OIG seeks to continuously assist management and, whenever appropriate, to work in partnership with management to improve agency program operations. Along these lines, OIG staff continued to participate in an advisory capacity in a number of agency task forces. Specifically, in this reporting period, OIG staff provided input to two agency-wide task forces: (i) the Government Performance and Results Act (GPRA) Committee, and (ii) the Check In, Check Out, and Moves (CICOM) Committee. The GPRA committee seeks to provide a central forum through which GPRA information, obtained from various sources in and outside the agency, can be disseminated, shared and discussed. During this semiannual period, the OIG assisted management in evaluating its revised performance measures.

OIG staff also served as an advisory member to the CICOM committee. This assignment seeks to tap OIG expertise developed as a result of numerous audits of agency systems, and the OIG's identification of security vulnerabilities relating to employee hirings and separations. Management also sought the assistance of the OIG when it considered enhancements to its key card security system.

Significant Management Decisions

Section 5(a)(12) of the Inspector General Act requires that if the IG disagrees with any significant management decision, such disagreement must be reported in the semiannual report. Further, Section 5(a)(11) of the Act requires that any decision by management to change a significant resolved audit finding must also be disclosed in the semiannual report. For this reporting period there were no significant final management decisions made on which the IG disagreed, and management did not revise any earlier decision on an OIG audit recommendation.

Access to Information

The IG is to be provided with ready access to all agency records, information or assistance when conducting an investigation or audit. Section 6(b)(2) of the IG Act requires the IG to report to the agency head, without delay, if the IG believes that access to required information, records or assistance has been unreasonably refused, or otherwise has not been provided. A summary of each report submitted to the agency head in compliance with Section 6(b)(2) must be provided in the semiannual report in accordance with Section 5(a)(5) of the Act.

During this reporting period, the OIG did not encounter any problems in obtaining assistance or access to agency records. Consequently, no report was issued by the IG to the agency head in accordance with Section 6(b)(2) of the IG Act.

Internet Access

The OIG can be accessed via the world wide web at www.ftc.gov/oig/oighome.htm. A visitor to the OIG home page can download recent (1996 - 2000) OIG semiannual reports to Congress, the FY 1998 and FY 1999 CFO Act audits, and can browse through a list of audit reports and order them via an e-mail link to the OIG. In addition to this information resource about the OIG, visitors are also provided a link to other federal organizations and offices of inspector general. During this semiannual period, the OIG received approximately 16,000 visits to its home page.

Audit Resolution

As of the end of this reporting period, all OIG audit recommendations for reports issued in prior periods have been resolved. That is, management and the OIG have reached agreement on what actions need to be taken.

Review of Legislation

Section 4 (a) (2) of the IG Act authorizes the IG to review and comment on proposed legislation or regulations relating to the agency or affecting the operations of the OIG. During this reporting period, the OIG reviewed and provided supporting comments on a number of bills intended to amend the IG Act (e.g., S. 870 and S. 1707), as well as on a legislative proposal by DOJ that would amend the IG Act to authorize criminal investigators in the offices of 23 presidentially-appointed IG to exercise law enforcement powers.

During this period the Vice Chair of the ECIE asked the IG to chair a committee of ECIE IGs to review the government's auditing standard on independence. The committee was tasked with preparing a response to an exposure draft issued by GAO relating to revision of the auditing standard on independence. As a result of the committee's efforts, the Auditing Standards Advisory Council and GAO are now reevaluating their earlier proposals.

Contacting the Office of Inspector General

Employees and the public are encouraged to contact the OIG regarding any incidents of possible fraud, waste or abuse occurring within FTC programs and operations. The OIG telephone number is (202) 326-2800. To report suspected wrongdoing, employees and the public should call the OIG's chief investigator directly on (202) 326-2581. A confidential or anonymous message can be left 24 hours a day.

The OIG is located in room 494 of the FTC Headquarters Building at 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. Office hours are from 8:30 a.m. to 6:00 p.m., Monday through Friday, except federal holidays.

TABLE I

SUMMARY OF INSPECTOR GENERAL
REPORTING REQUIREMENTS

IG Act Reference
Reporting Requirement
Page(s)
Section 4(a)(2)
Review of legislation and regulations
9
Section 5(a)(l)
Significant problems, abuses and deficiencies
2
Section 5(a)(2)
Recommendations with respect to significant problems, abuses and deficiencies
2, 3
Section 5(a)(3)
Prior significant recommendations on which corrective actions have not been made
9
Section 5(a)(4)
Matters referred to prosecutive authorities
8
Section 5(a)(5)
Summary of instances where information was refused
9
Section 5(a)(6)
List of audit reports by subject matter, showing dollar value of questioned costs and funds put to better use
1
Section 5(a)(7)
Summary of each particularly significant report
2
Section 5(a)(8)
Statistical tables showing number of reports and dollar value of questioned costs
12
Section 5(a)(9)
Statistical tables showing number of reports and dollar value of recommendations that funds be put to better use
13
Section 5(a)(10)
Summary of each audit issued before this reporting period for which no management decision was made by the end of the reporting period
9
Section 5(a)(11)
Significant revised management decisions
8
Section 5(a)(12)
Significant management decisions with which the Inspector General disagrees
8

TABLE II

INSPECTOR GENERAL ISSUED REPORTS
WITH QUESTIONED COSTS

 

Number

Number Dollar Value
(in thousands)

Questioned Costs Unsupported Costs
A. For which no management decision has been made by the commencement of the reporting period
0
0
0
B. Which were issued during the reporting period
0
0
0
Subtotals (A + B)
0
0
0
C. For which a management decision was made during the reporting period
0
0
0
(i) dollar value of disallowed costs
0
0
0
(ii) dollar value of cost not disallowed
0
0
0
D. For which no management decision was made by the end of the reporting period
0
0
0
Reports for which no management decision was made within six months of issuance
0
0
0

TABLE III

INSPECTOR GENERAL ISSUED REPORTS
WITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

 
Number
Dollar Value
(in thousands)
A. For which no management decision has been made by the commencement of the reporting period
1
531*
B. Which were issued during this reporting period
1
6,500
C. For which a management decision was made during the reporting period
2
7.031
(i) dollar value of recommendations that were agreed to by management
2
7,031
- based on proposed management action
2
7,031
- based on proposed legislative action
0
0
(ii) dollar value of recommendations that were not agreed to by management
0
0
D. For which no management decision has been made by the end of the reporting period
0
0
Reports for which no management decision was made within six months of issuance
0
0
*Relates to audit report AR 00-045A (pages 4-5).