The Honorable Robert Pitofsky
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 first 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 audit of the FTC's fiscal year 1999 financial statements. The agency received an unqualified opinion. My office also reviewed the methodology used by the agency to define and gather selected performance measures that the agency is required to report to Congress under the Government Performance and Results Act (GPRA). In this area the OIG found that, for selected measures, some additional work must be performed before policy makers can place reliance on agency numbers.
Fieldwork on three other reviews has been completed. In addition, the OIG has closed three investigations.
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.
Frederick J. Zirkel
TABLE OF CONTENTS
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
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 $578,500 for fiscal year 2000.
For this semiannual period, the OIG reported on agency systems used to collect data for annual performance measures pursuant to the Government Performance and Results Act (GPRA); issued an audit of FTC's FY 1999 financial statements; prepared a letter to management containing financial-related findings and recommendations resulting from the audit; completed a draft report identifying redress distribution vulnerabilities; completed audit field work related to an aging analysis of redress funds held in contractor and Treasury bank accounts; and completed fieldwork on a survey of the agency's telecommunications costs. Detailed information regarding these audits and reviews is provided below.
|Audit Report Number||Subject of Audit|
|AR 00-044||Review of Systems Used to Capture Annual Performance Measures Under the Government Performance and Results Act.|
|AR 00-045||Federal Trade Commission Audited Financial Statements for Fiscal Year 1999|
|AR 00-045A||Management Letter (Audited Financial Statements for FY 1999)|
Summary of Findings for Audit Reports Issued During the Current Period
In AR 00-044, Review of Systems Used to Capture Annual Performance Measures Under the Government Performance and Results Act, the OIG reviewed nine of the agency's 13 performance measures for FY 2000 that were contained in its FY 2001 proposed OMB budget request. The objective of our review was to determine whether systems are in place to capture performance information both accurately and timely.
Our review of these performance measures found that generally systems are in place to collect and process performance measurement data. However, the methodology used for accumulation of the performance data was not sufficiently defined to allow for accurate and consistent reporting. The OIG believes that the best way to address this weakness is for the agency's GPRA task force to define the specific data elements that comprise each measure along with the rationale behind each of the 13 performance measures; i.e., clearly express how consumers and/or businesses are better off when the FTC meets or exceeds its performance targets. Management has agreed to better define the precise data elements that comprise each performance measure.
In reviewing the measurement systems, we did not comment on whether the measures best reflect the mission and outcomes of the agency's performance, nor did we endorse any of the measures. Our observations and analysis were provided to management without recommendations as no performance measure had been reported to the public and no transaction testing was performed by the OIG.
In AR 00-045, Federal Trade Commission Audited Financial Statements for Fiscal Year 1999, 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, 1999 and 1998, 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 is the third consecutive year that the OIG has undertaken a financial statement audit. The agency again received an unqualified opinion, the highest opinion given by independent auditors.
The FY 1999 audited statements provide a great deal of insight into the mission and operations of the FTC. The FTC had total assets, primarily cash, of $115.5 million, which represented a 17 percent increase over the prior year asset total of $99.2 million. This increase is accounted for by increases in non-entity assets. Cash in redress accounts grew by approximately $11.6 million, accounting for over 70 percent of the asset growth. On the liabilities side, liabilities not covered by budgetary resources increased $19 million, from $61.1 million to $80.1 million. Of this amount, $12.6 million (66 percent) was increases in undistributed redress balances held in contractor and FTC redress suspense accounts (from $22.6 million to $35.2 million).(1)
On the revenue side, the FTC collected $97.5 million in fees under the premerger notification program. This was a $3.3 million decrease over the previous year fee collection of $100.8 million. The FTC collects a filing fee from each acquiring business entity that files a Notification and Report transaction form. The $45,000 fee, which is set by law, is divided equally between the FTC and the Antitrust Division of the Department of Justice (DOJ). Fee collections, to include carryover fees from prior years, funded approximately 86 percent and 80 percent of agency operations in 1999 and 1998, respectively. The amounts collected for DOJ are shown as nonexchange revenue on the Statement of Custodial Activity (SCA).(2) The SCA also shows that the FTC obtained judgments totaling $145 million against defendants in cases brought by the agency on behalf of consumers and collected $25.7 million in redress and civil penalties during the year.
In the Management Letter accompanying the FY 1999 audited financial statements, the OIG followed up on agency actions to address findings made in the prior year audit, and identified additional areas where improvement can be made. The agency continues to make progress in reducing the number of prompt payment penalties for the third year in a row. These "late payment" penalties were down 37 percent over the prior year. One cause of penalties is the late submission of receiving reports to the finance office by some staff. These reports are required before vendors can be paid. Management has agreed to meet individually with staff who habitually submit late reports to correct this problem.
The OIG also noted improvements over the prior year in (i) error detection procedures for travel voucher review, (ii) timely travel voucher submission by staff and payment by the finance office, and (iii) the accuracy and completeness of civil penalty assessments and collections reported to the finance office by the operating bureaus. The OIG remains concerned about the tendency of an estimated 10 percent of staff to submit travel orders to the finance office after the completion of travel. In addition to the obvious administrative and budgetary implications, staff also put themselves at risk of liability should an accident occur while on travel status without such orders.
The OIG also found potential vulnerabilities in the debt referral process used by the agency to refer non-tax debt or claims owed that have been delinquent for a period of 180 days. By law, such debt is to be referred to the U.S. Treasury's Debt Management Service (DMS) for collection. With the assistance of staff responsible for such referrals, the OIG identified improvements in the controls established to ensure timely referrals. The OIG recommended a "Treasury referral tracking system" to address the vulnerabilities, to include a "tickler file" of judgments eligible for referral, and a database consisting of data on judgments (i) currently with the DMS, (ii) returned from DMS to be written off, and (iii) collected by DMS.
The audit also identified $531,000 in funds that could be put to better use. This amount results from the suggested improvements in the management of undelivered orders.
Audits in Which Field Work is Complete
Two of the audits in which fieldwork is complete grew directly out of the OIG's audit of the FTC's financial statements. While performing financial statement audit work on redress distributions, the audit team determined that original claimant lists are 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, the OIG was concerned that management would not always be able to independently check on 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 line item appearing in the agency's statements, the OIG decided to expand its audit work by looking at the support behind the redress distribution amounts shown in the Statement of Custodial Activities. This financial statement shows that for fiscal years 1999 and 1998 redress distributions totaled approximately $25,000,000. In summary, the OIG decided to review the processes used by staff to develop and control redress claimant lists to ensure that redress disbursements are paid only to defrauded consumers.
Next, while auditing fiscal years 1999 and 1998 financial statement cash balances, the audit team noted that redress fund balances were growing. Funds also appeared to remain in Treasury, contractor and receiver accounts for some time before distributions were completed. To learn how long funds remained in these bank accounts and to gain additional insight into why redress distributions have not proceeded more quickly after the collection of defendant payments, the OIG decided to examine redress cash balances, which for fiscal year 1999 totaled approximately $35,200,000. In summary, this second financial statement generated review focused on preparing an aging analysis of all redress funds held in contractor and Treasury suspense accounts. The specific objectives of these two reviews are presented below.
|Audit Report Number||Subject of Audit|
|AR 00-046||Audit of Processes Used to Develop and Control Redress Claimant Lists The objectives of this financial-related audit are threefold: (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 might exist pertaining to these methods that could lead to the payment of either erroneous or fraudulent claims (critical elements of this process are the identification of the individual(s) responsible for list preparation and control of the list once developed); and (iii) audit a sample of distributions determined to be high risk to ascertain whether all redress funds were properly accounted for and that redress checks were issued to only rightful claimants.
Based on staff interviews and case file review, the OIG developed six claimant list construction scenarios and established criteria to assess the vulnerability to fraud of each distribution. The OIG has scheduled an exit conference with management to obtain the draft report's findings and recommendations.
|AR 00-047||Aging Analysis of Redress Funds Held in Contractor and Treasury Suspense AccountsThe objective of this analysis is to determine whether the agency ensures that funds held for redress are disbursed timely or, when appropriate, disgorged to the U.S. Treasury in a timely manner. 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 on September 30, 1998 ($18.3 million). Similarly, there was 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. An aging analysis, including a discussion with case attorneys and a review of deposit and disbursement records was performed on 11 cases with funds held in bank accounts for between 24 and 127 months, totaling $8.6 million. The OIG held an exit conference with management to discuss the draft report's findings and recommendations.|
|Audit of FTC Telecommunications Billing Procedures, Practices, Controls and Expenditures The overall objective of this review is to identify vulnerabilities pertaining to the oversight and payment of the agency's telecommunication services. To address this overall objective, the OIG will (i) assess whether the agency is paying only for the services it uses and/or the hardware/equipment it employs; (ii) review system controls that are in place to monitor employee use of telephones, cell phones, and pagers, and determine whether these controls work effectively; (iii) analyze whether the agency is using (given its service history) optimal service plans for local, long distance, pagers and cell phones to efficiently and effectively meet its needs; and (iv) document the role GSA and other third parties perform in assisting the FTC in implementing its telecommunications program, and review the cost and the effectiveness of this assistance. A draft report with recommendations has been prepared and is being readied for distribution to management.|
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 usually 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 might 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 some information that indicates they are or were involved in activities intended to 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 Postal Inspection Service, the U.S. Secret Service, the Internal Revenue Service, and state agencies and local police departments. The OIG has also provided assistance to, and worked with foreign government law enforcement agencies, such as the Royal Canadian Mounted Police and the Canada Customs and Revenue Agency.
During this reporting period the OIG received 29 complaints of possible wrongdoing. Of the 29 complaints a total of nine (9) related to matters that the OIG determined to be the responsibility of FTC program components. Consequently, the OIG referred these matters to the appropriate FTC component for disposition. Of the 20 remaining complaints, the OIG referred four (4) of them to other federal law enforcement agencies as they contained allegations within their authorities.
Of the 16 complaints left, five (5) resulted in preliminary investigative reviews before the OIG decided to close them. One involved the alleged misuse of the FTC's e-mail address and another concerned an alleged inordinate delay by an FTC redress contractor in sending a redress check to a defrauded consumer. A third complaint related to a possible Hatch Act violation by an unknown FTC employee, while the remaining two complaints involved a suspected leak of sensitive information by an employee (reported to the OIG by a Canadian police department) and the unauthorized use of a government car by an FTC official.
The OIG opened two (2) new investigations from the remaining 11 complaints, one involving a violation of a criminal financial conflict of interest law by an FTC employee and the other a misappropriation of non-exchange revenue by a receiver. The latter investigation is currently in progress. The OIG took no action on the nine (9) remaining complaints.
Following is a summary of the OIG's investigative activities for the six-month period ending March 31, 2000. While the OIG opened two new investigations during this reporting period, it also closed three (3) cases:
|Cases pending as of September 30, 1999||2|
|Plus: New cases||+2|
|Less: Cases closed||-3|
|Cases pending as of March 31, 2000||1|
Obstructions & Unauthorized Disclosures
The OIG closed a case this reporting period which was opened in a prior period involving a possible improper disclosure of nonpublic information in an FTC enforcement case. An agency enforcement official brought the matter to the OIG's attention when FTC enforcement investigators found a letter in a search of a defendant's corporate records. The letter indicated that an unnamed agency employee might have leaked the existence of an enforcement investigation to an employee of the firm under investigation.
The OIG interviewed the author of the letter and learned that he had been trying to solicit a friend as a customer in the alleged pyramid scheme. The friend, it turned out, was the sibling of an FTC employee who advised him to stay away from the company. Based on this advice, the businessman concluded that the reason his prospective customer was told to stay away from the company was because it might be in trouble with the FTC. In turn, the businessman, conveyed this conjecture in a letter to company officials.
The OIG found no evidence that harm occurred in the employee's warning to her sibling, and we found no evidence that she ever conveyed specific nonpublic information to her sibling. As such, we closed the case.
Employee Misconduct & Ethical Violations
The OIG closed an investigation opened this reporting period after obtaining a declination to criminally prosecute the matter from a federal prosecutor.
The investigation was opened when the OIG received a referral from management which indicated that an FTC antitrust attorney had violated a federal criminal financial conflict of interest statute (18 U.S.C. §208) when she personally and substantially participated in a merger review involving a company in which she had a personal financial interest (which was imputed to her by marriage) that exceeded $5,000.
The attorney, as required by law, filed a Confidential Financial Disclosure Report (CFDR) with her supervisor. She reported a financial interest in a number of stocks. In a matter of days after the filing, she was assigned to work on a merger review involving a company in which she held a financial interest.
The OIG learned that instead of immediately reporting the conflict to her supervisor, she proceeded to speak to company lawyers and interview customers and competitors of the merging companies. The OIG found no evidence to indicate that the person attempted to enrich herself financially or to alter the outcome of the investigation in any way as the OIG determined that no stock was traded during the period in question and that the particular merger was not an event that affected the stock price of the company owned by the FTC employee.
The subject claimed that she had simply failed to pay sufficiently close attention to details appearing on her CFDR. As the facts support this assertion, the OIG referred the matter to the agency's Designated Agency Ethics Official (DAEO) for coordination with agency management to consider administrative action and reinforcement of ethics training. Crimes Against the Government
The OIG closed another investigation which it had initiated this semiannual period involving an employee's misuse of the FTC's e-mail system. Based on a complaint received from a person outside the agency, the OIG learned that an FTC employee had been sending a large number of personal e-mail messages to a number of individuals outside the agency.
The OIG determined that the volume of the employee's personal e-mail traffic far exceeded the agency's de minimus use standard, as over 6000 individual e-mail messages (both sent and received) were recorded during a period of 50 workdays. The OIG also found that the employee had established a hotlink on a Web site to ensure that all messages sent from the site would come directly into his FTC e-mail "box."
The OIG determined that for a number of years the employee had been engaging in a substantial amount of e-mail communication in furtherance of a non-profit organization.
After consulting with a prosecutor, the matter was referred to both the DAEO and management to consider administrative action as the evidence indicated that the employee had violated a number of ethics rules. Management immediately acted to stop the behavior, discipline the employee, and to place additional controls in the system to guard against future problems. The OIG also recommended that the Chief Information Officer and DAEO reemphasize and clarify for all FTC employees the agency's policy on the personal use of agency computers.
During the current reporting period, the OIG referred two cases to a federal prosecutor. One case was declined while the second has been accepted and is ongoing. The OIG also consulted with a third prosecutor to seek guidance on whether or not a referral should be made.
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. The committee also continually updates and improves the FTC strategic and performance plans consistent with statutory mandates and program needs of the FTC.
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 security vulnerabilities relating to employee hirings and separations.
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.
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.
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 (1995 -- 1999) OIG semiannual reports to Congress, the FY 1997 and FY 1998 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 7,000 visits to its home page.
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.
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. 1707 and H.R. 20l3), as well as on a legislative referral related to OIG Authorities (e.g., law enforcement powers). The OIG also commented on legislation designed to strengthen information security practices throughout the Federal Government (S. 1993).
Also during this reporting period, the IG served on an ECIE committee which has been reviewing OIG independence issues and considering possible legislative initiatives, as well as on another committee of IGs developing Best Practices for OIGs.
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.
SUMMARY OF INSPECTOR GENERAL
|IG Act Reference||Reporting Requirement||Page(s)|
|Section 4(a)(2)||Review of legislation and regulations||11|
|Section 5(a)(l)||Significant problems, abuses and deficiencies||2|
|Section 5(a)(2)||Recommendations with respect to significant problems, abuses and deficiencies||2|
|Section 5(a)(3)||Prior significant recommendations on which corrective actions have not been made||11|
|Section 5(a)(4)||Matters referred to prosecutive authorities||9|
|Section 5(a)(5)||Summary of instances where information was refused||10|
|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||13|
|Section 5(a)(9)||Statistical tables showing number of reports and dollar value of recommendations that funds be put to better use||14|
|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||11|
|Section 5(a)(11)||Significant revised management decisions||10|
|Section 5(a)(12)||Significant management decisions with which the Inspector General disagrees||10|
INSPECTOR GENERAL ISSUED REPORTS
WITH QUESTIONED COSTS
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||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|
INSPECTOR GENERAL ISSUED REPORTS
WITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE
|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||0||0|
|(i) dollar value of recommendations that were agreed to by management||0||0|
|- based on proposed management action||0||0|
|- 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||1||531|
|Reports for which no management decision was made within six months of issuance||0||0|
1. These amounts represent amounts due consumers, and are thus classified as liabilities.
2. The SCA is a required financial statement under Statement of Federal Financial Accounting Concepts (SFFAC) No. 2 for those Federal agencies that collect nonexchange revenues (e.g., taxes, duties, fines, and penalties) for the General Fund of the Treasury, a trust fund, or other recipient entities.