Fiscal Year 2003 (First Half)

The Honorable Timothy J. Muris
Chairman
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580

Dear Chairman Muris:

The attached report covers the Office of Inspector General's (OIG) activities for the first half of fiscal year 2003, and is submitted according to Section 5 of the Inspector General Act of 1978, as amended.

During this six-month reporting period ending March 31, 2003, the OIG completed its audit of the FTC's fiscal year 2002 financial statements and issued a companion management letter containing financial related findings. The OIG also initiated planning activities for a follow-up review of the agency's information security program under the Federal Information Security Management Act (FISMA).

In addition, the OIG opened five investigations into wrongdoing during the period, one of which was subsequently referred to management for ultimate disposition.

As in the past, management has been responsive to 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
Planned Audits

INVESTIGATIVE ACTIVITIES

Investigative Summary
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
TableIII: 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 $747,200 for fiscal year 2003.

AUDIT ACTIVITIES

During this semiannual period, the OIG issued an audit of the FTC's FY 2002 financial statements and a companion report to management containing financial-related findings and recommendations resulting from the audit. The OIG also initiated planning activities for a follow-up review of the agency's information security program under the Federal Information Security Management Act (FISMA). Details of these reviews are provided below.

Completed Audits

Audit Report Number Subject of Audit
AR 02-055 Audit of the Federal Trade Commission's Financial Statements for the Fiscal Year Ending September 30, 2002
AR 02-055A Management Letter to the FY 2002 Financial Statements

In AR 02-055, Audit of the Federal Trade Commission's Financial Statements for the Fiscal Year Ending September 30, 2002, the objective was to determine whether the agency's financial statements present fairly the financial position of the agency. The statements audited were the Balance Sheets as of September 30, 2001 and 2002, and the related Statements of Net Cost, Statements of Changes in Net Position, Statements of Budgetary Resources, Statements of Financing, and Statements of Custodial Activity for the years then ended. This was the sixth consecutive year that the FTC has undertaken a financial statement audit. The agency received an unqualified opinion, the highest opinion given by independent auditors.

The FY 2002 audited statements provide insight into the mission and operations of the Federal Trade Commission. The FTC had total assets of $237.4 million as of September 30, 2002. Approximately $156 million of this total represented funds on account, or to be collected and distributed as part of the consumer redress program, under the agency's Consumer Protection mission. In addition, $41 million is held in a divestiture fund and will be subsequently disbursed per the terms of the divestiture agreement under the agency's Maintaining Competition mission. Another $1.7 million represents undisbursed Hart-Scott-Rodino (HSR) premerger fees to be transferred to the Department of Justice (DOJ). Remaining assets include fund balances in appropriated accounts, account receivables, and fixed assets.

Financing sources for FY 2002 included exchange revenue of $67.9 million from the collection of premerger notification fees, reimbursements received from other government agencies, appropriated amounts from the general fund of the Treasury, and imputed revenue to cover unfunded benefits. At the close of the fiscal year, any financing source not needed to fund the gross cost of operations is added to the Cumulative Results of Operations.

The $67.9 million in HSR filing fees was $18.4 million less than the fees collected the previous year. FTC collects a filing fee from qualifying mergers with a transaction amount over $50 million in total assets. The fee is based on a three-tiered structure: $45,000, $125,000, and $280,000, depending upon the combined asset total of the merger transaction. The fee is divided equally between the FTC and the DOJ. In fiscal year 2002, a decline in merger activity resulted in 1,142 qualifying filings processed, a decrease of nearly 50 percent from the previous year's total of 2,257 qualifying filings.

The budgetary authority appropriated from the general fund was reduced by the amount of offsetting collections (HSR fees) received. In fiscal year 2002, the amount of direct appropriation that was recorded as a net financing source was $86.2 million, or 53.6 percent of total funding sources received.

The gross cost of operations during the 2002 fiscal year was approximately $161 million, a 13.9 percent increase over fiscal year 2001. Of the $161 million, $154.7 million was funded through budget authority. The remaining $6.0 million represents costs which will be funded in a future period, such as the government's share of employee retirement benefits. During FY2002, expenses for salaries and related benefits totaled $110.6 million, or 68.8 percent of the gross cost of operations, with lease space rental amounting to $13.9 million for another 8.7 percent. The remaining $36.2 million, or 22.5 percent, included travel, facility maintenance and equipment rental, utilities, imputed benefit costs, depreciation, future funded expenses and other items. This funding level supported 1,057 staff-years which were employed in fulfilling FTC's missions.

The OIG also issued a Management Letter to the FY 2002 Financial Statements (AR 02-055A). The objective of the management letter is to bring to management's attention financial and/or internal control weaknesses that were discovered during the audit of the agency's financial statements, and to make recommendations for corrective action. The audit also follows up on past recommendations made in the prior year's management letter. For example, this year's management letter contains one new finding and the status (follow up) of eight prior-year findings.

The new finding concerns the reconciliation of premerger notification fees within the agency. The FTC's Premerger Notification Office (PNO) processes applications for potential mergers. This process does not begin until both the application and the fee have been received. The premerger application filing is recorded in the PNO database. The agency's financial Management Office (FMO) monitors and records premerger fees that have been credited to the FTC's premerger account at the FTC. Hence, program activity is recorded and monitored at two locations within the agency.

FMO had implemented a monthly reconciliation process to compare its records of premerger fees received and confirmed by Treasury to PNO's premerger filings recorded in its database. However, the reconciliation was incomplete as it only compared the records between FMO and PNO without addressing differences between the two systems.

Without reconciling these two databases, FMO and PNO cannot ensure the accuracy and completeness of the two systems, and that proper controls are being maintained to capture all premerger transaction activity. As the agency depends on these fees for its operating funds, and maintains half of these funds in a custodial capacity for DOJ, it is imperative that the accuracy of these systems be ensured.

The OIG recommended that FMO and PNO establish a monthly reconciliation process to insure the accuracy and integrity of the respective databases.

Of the eight prior year audit recommendations, the OIG found that, in all instances, the agency has taken steps to address the issues raised by the OIG. Five of the recommendations are closed, three are substantially complete. Though closed, the OIG will continue to monitor the agency's progress in the areas of interest penalties on late payments to vendors and the aging of redress cash.

Planned Audits

Audit Report Number Subject of Audit
Review of Premerger Filing Controls over the Proper Payment of Filing Fees The FTC collects a filing fee from qualifying mergers with a transaction amount of over $50 million in total assets. The fee is based on a three- tiered structure: $45,000, $125,000, and $280,000, depending upon the combined total of assets of the merger transaction. The merging or acquiring entities identify the filing fee they are to pay on the application form when they identify the total (merged) assets. The objective of the audit will be to review agency controls over the under-reporting of assets, resulting in the underpayment of filing fees.
Review of Federal Information Security Management Act Implementation The Federal Information Security Management Act of 2002 (FISMA) requires an independent assessment of Federal agency information security programs and practices to determine their effectiveness. The OIG will evaluate the adequacy of the FTC's computer security program and practices for FTC major systems. This year, the OIG will focus its review on the FTC's Plan of Action and Milestones to determine to what extent the agency has implemented previously agreed to OIG recommendations. In addition, the OIG will consider other well known vulnerabilities, including, but not limited to, patch application, wireless network intrusion, external penetration, background investigation of IT employees, and employee check out procedures.
Program Inspection: An Evaluation of Controls over the Transit Subsidy Program

The Federal Government encourages the use of public mass transportation by its employees. Executive Order 13150, "Federal Workforce Transportation," effective October 2000, requires Federal agencies in the National Capital Region to provide employees with public transit subsidies approximating their commuting costs up to $100 per month (as of January 1, 2002). The FTC provides about $600,000 in benefits to between 650 and 700 employees annually.

The Executive Director has overall responsibility for program planning, implementation and evaluation of the effectiveness of the subsidy program in achieving policy objectives. The Department of Transportation manages the program government wide.

To participate in the program, employees must complete an application form certifying the amount of their expected monthly transportation costs. Subsidies are provided in the form of Metrochek vouchers, which can be used as fare cards on Metrorail or to purchase bus or train tickets.

The objective of this program inspection is to evaluate controls in place to prevent program abuse by employees and administrators.

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 are referred 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 when there is an indication that they are or were involved in activities intended to improperly affect the outcome of particular agency enforcement actions. 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 state agencies and local police departments.

Investigative Summary

During this reporting period, the OIG received 38 complaints/allegations of possible wrongdoing. Of the 38 complaints, 16 involved issues that fall under the jurisdiction of FTC program components (identity theft, credit repair, etc.). Consequently, the OIG referred these matters to the appropriate FTC component for disposition. Another four complaints were referred to other government and/or law enforcement agencies for ultimate disposition.

Of the remaining 18 complaints, 13 were closed without any action. The OIG investigated the remaining 5 matters.

Following is a summary of the OIG's investigative activities for the six-month period ending March 31, 2003.

Cases pending as of 9/30/02
3

Plus: New cases

5

Less: Cases closed

3
Cases pending as of 3/31/03
5

The first closed investigation resulted from an allegation made by a credit bureau that an individual had used FTC letterhead to write a letter to the credit bureau. The letter, which purportedly was sent by an FTC staff attorney, was written to mislead the credit bureau into believing that the FTC not only supported the individual in the dispute with the credit bureau, but also that the FTC was challenging the credit bureau's debt collection and credit reporting practices. The staff attorney whose name appeared on the letter informed the OIG that he did not write the letter.

The OIG informed the suspected author of the criminal sanctions associated with posing as a federal official, in particular using indicia of an official nature such as FTC letterhead. The OIG also admonished him, informing him that if we learned of such conduct in the future, a referral to a prosecutor would be considered. Thereafter, we closed the case.

The OIG closed a second investigation that related to the unauthorized disclosure of information. The OIG received an allegation from a home equity lender that staff within the FTC leaked nonpublic information about a pending lawsuit against this lender. As the OIG found no evidence to substantiate the allegation or any facts to support wrongdoing by a specific individual within the FTC, the investigation was closed.

A third investigation was closed that involved a possible gratuity paid to an FTC employee by a vendor who had a prior relationship with the employee. After satisfying ourselves that the basis for the allegation was unfounded, we closed the investigation.

However, the OIG did learn of a procurement transaction that violated a contract provision along with selected Federal Acquisitions Regulations. As a result, an Investigative Alert was prepared and issued to management detailing OIG findings pertaining to controls over (i) competitive bidding, (ii) advance payments, (iii) inspection of delivered goods, (iv) product returns, and (v) policies/procedures governing notification to both senior management and the OIG of potential serious wrongdoing by agency employees. 

Matters Referred for Prosecution

During the current reporting period the OIG did not refer any cases to a federal prosecutor.


OTHER ACTIVITIES

PCIE/ECIE Activities

During this reporting period, the OIG hosted a financial statement audit symposium attended by representatives of various federal OIGs and Chief Financial Officer (CFO) organizations. The objective of the program was to provide federal agencies subject to the Tax Dollars Accountability Act of 2002 with information regarding the preparation and audit of agency financial statements.

Although not required to under existing legislation at the time, the FTC chose to prepare financial statements for audit in 1997 in keeping with sound financial management practices. As such, the FTC/OIG and program staff have a wealth of knowledge and experience that was useful to agencies beginning this monumental task. The OIG, with assistance from agency CFO staff, discussed pertinent OMB and GAO guidance, presented statement compilation methodology, and shared OIG experiences during the initial years of issuing audited financial statements.

As a followup to this symposium, the OIG assisted individual OIGs and program staff from several federal agencies in tasks ranging from the setting up of the accounting "strings and templates" to accurately capture and report financial information to the development of work statements to solicit contractual audit services.

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: http://www.ftc.gov/oig. A visitor to the OIG home page can download recent 1996-2002 OIG semiannual reports to Congress, the FY 1998 - 2002 financial statement audits, and other program and performance audits issued beginning in FY 1999. A list of audit reports issued prior to FY 1999 can also be ordered 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 inspectors general.

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 provided comments to the PCIE legislative committee on a number of personnel proposals developed by the committee.

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 investigator directly on (202) 326-2618. A confidential or anonymous message can be left 24 hours a day. Complaints of allegations of fraud, waste or abuse can also be email directly to chogue@ftc.gov.

The OIG is located in Suite 1110, 601 New Jersey Avenue, Washington, D.C. Office hours are from 8:30 a.m. to 6:00 p.m., Monday through Friday, except federal holidays. Mail should be addressed to:

Federal Trade Commission
Office of Inspector General
Room NJ-1110
600 Pennsylvania Avenue, NW
Washington, DC 20580

TABLE I

SUMMARY OF INSPECTOR GENERAL REPORTING REQUIREMENTS

IG Act Reference
Reporting Requirement
Page(s)
Section 4(a)(2) Review of legislation and regulations
8
Section 5(a)(l) Significant problems, abuses and deficiencies
1-3
Section 5(a)(2) Recommendations with respect to significant problems, abuses and deficiencies
3
Section 5(a)(3) Prior significant recommendations on which corrective actions have not been made
8
Section 5(a)(4) Matters referred to prosecutive authorities
6
Section 5(a)(5) Summary of instances where information was refused
7
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
1
Section 5(a)(8) Statistical tables showing number of reports and dollar value of questioned costs
10
Section 5(a)(9) Statistical tables showing number of reports and dollar value of recommendations that funds be put to better use
11
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
8
Section 5(a)(11) Significant revised management decisions
7
Section 5(a)(12) Significant management decisions with which the Inspector General disagrees
7

 

TABLE II

INSPECTOR GENERAL ISSUED REPORTS WITH QUESTIONED COSTS

 

Number

Number Dollar Value

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
1
2,959
0

Subtotals (A + B)

1
2,959
0
C. For which a management decision was made during the reporting period
1
2,959
0

(i) dollar value of disallowed costs

1
2,959
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
A. For which no management decision has been made by the commencement of the reporting period
0
0
B. Which were issued during this reporting period
0
0
C. For which a management decision was made during the reporting period
1
18,884

(i) dollar value of recommendations that were agreed to by management

1
18,884

- based on proposed management action

1
18,884

- 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