oversight

Department of Education's Compliance with the Prompt Payment Act Action Official Office: Office of the Chief Financial Officer .

Published by the Department of Education, Office of Inspector General on 2005-09-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                       Department of Education’s 

                 Compliance with the Prompt Payment Act




                                FINAL AUDIT REPORT 





                                            ED-OIG/A17-E0008
                                            September 2005


Our mission is to promote the efficiency,                 U.S. Department of Education
effectiveness, and integrity of the                       Office of Inspector General
Department’s programs and operations.                     Financial Statements Internal Audit Team
                                                          Washington, DC
 Statements that managerial practices need improvements, as well as other 

              conclusions and recommendations in this report, 

represent the opinions of the Office of Inspector General. Determinations of 

                corrective action to be taken will be made by 

             the appropriate Department of Education officials. 



   In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports 

        issued by the Office of Inspector General are available to members 

             of the press and general public to the extent information 

             contained therein is not subject to exemptions in the Act. 

                         UNITED STATES DEPARTMENT OF EDUCATION
                                         OFFICE OF THE INSPECTOR GENERAL




                                                                                                 SEP 2 8 !lOS
MEMORANDUM


To:           Jack Martin
              Chief Financial Officer
              Office of the Chief Financial Officer

From:         Helen Lew           /{e/tl- LenJ
              Assistant Inspector General for Audit Services
              Office of Inspector General

Subject:       Final Audit Report
               Department of Education's Compliance with the Prompt Payment Act
               Control Number ED-OIG/AI7-E0008

Attached is the subject final report that covers the results of our review of the Department of
Education's (Department) compliance with the provisions ofthe Prompt Payment Act during the
period January 1,2004 through September 30,2004. An electronic copy has been provided to
your Audit Liaison Officer. We received your comments generally concurring with the findings
and recommendations in our draft report.

Corrective actions proposed (resolution phase) and implemented (closure phase) by your office
will be monitored and tracked through the Department's Audit Accountability and Resolution
Tracking System (AARTS). Department policy requires that you develop a final corrective
action plan (CAP) for our review in the automated system within 30 days of the issuance of this
report. The CAP should set forth the specific action items, and targeted completion dates,
necessary to implement final corrective actions on the findings and recommendations contained
in this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector
General is required to report to Congress twice a year on the audits that remain unresolved after
six months from the date of issuance.

In accordance with the Freedom ofInformation Act (5 U.S.c. §552), reports issued by the Office
of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

We appreciate the cooperation given us during this review. If you have any questions, please
call Greg Spencer at 202-245-6015.

Enclosure

                                     400 MARYLAND AVE., S.W., WASHINGTON, DC 20202-1510
                                                              www .ed.gov

             Our mission is to ensure equal access to education and to promote educational excellence throughout the nation.
Electronic Distribution List:

       Danny Harris 

       Deputy Chief Financial Officer 

       Office of the Chief Financial Officer 


       Glenn Perry
       Director
       Contracts and Acquisition Management
       Office of the Chief Financial Officer

       Theresa S. Shaw 

       Chief Operating Officer 

       Federal Student Aid 


       Patrick Bradfield
       Acquisition Planning & Contract Management Group
       Federal Student Aid
                                              TABLE OF CONTENTS 



                                                                                                                                     Page


EXECUTIVE SUMMARY .......................................................................................................... 1 


BACKGROUND ........................................................................................................................... 3 


AUDIT RESULTS......................................................................................................................... 3 


          Finding No. 1 – Incorrect Receipt Dates Used to Calculate Invoice Payment Due                                                        

                         Dates ......................................................................................................... 4 


                     Recommendations.................................................................................................. 5 


          Finding No. 2 – Adjustments to Payment Process Needed to Comply with Prompt 

                          Payment Act and Department Policy...................................................... 6 


                     Recommendations.................................................................................................. 7           


          Finding No. 3 – Annual Quality Control Procedures Need to be Developed and                                                                   

                          Reviews Conducted ................................................................................. 7


                     Recommendation ................................................................................................... 8          


OBJECTIVES, SCOPE, AND METHODOLOGY....................................................................... 8 


ENCLOSURE 


          Department Response to Draft Audit Report 

                                    EXECUTIVE SUMMARY 


In 1982, Congress enacted the Prompt Payment Act, Public Law 97-177 to require federal
agencies to pay their bills on a timely basis, pay interest penalties when payments are made late,
and take discounts only when payments are made by the discount date. The Office of
Management and Budget’s (OMB) implementing regulations for prompt payment requirements
are set forth in 5 C.F.R. Part 1315.

The objectives of our audit were to determine (1) the Department of Education’s (Department’s)
compliance with the provisions of the Prompt Payment Act (Act) and (2) the adequacy of its
internal controls to ensure compliance with the Act.

During the period January 1, 2004 through September 30, 2004, the Department did not comply
with the provisions of the Act and did not have adequate internal controls to ensure compliance
with the Act. Our audit disclosed that (1) incorrect receipt dates were used to calculate invoice
payment due dates, (2) adjustments to the payment process are needed to comply with the Act
and Department policy, and (3) annual quality control procedures need to be developed and
reviews need to be conducted. As a result, we project that about 3,1001 invoice payments during
the review period had underpaid interest. In addition, we estimate that the total amount of the
interest underpayments during the review period was no less than $175,135 and no more than
$353,055.2

To correct the weaknesses identified, we recommend that the Chief Financial Officer:

      • 	 Develop a special use report that identifies all receipt dates recorded as of the 1st, 2nd or
          3rd day of a month. The report should be prepared and reviewed early enough in the
          month by procurement staff to ensure invoices needing prior period adjustments have
          time to be properly processed and paid in accordance with the Act.

      • 	 Prepare a written reminder to procurement staff regarding the requirements for properly
          annotating the date of receipt of invoices, and what dates should be used as receipt dates
          in the Department’s systems.

      • 	 Cease combining current and overdue invoices.

      • 	 Develop a process, prior to implementation of Oracle 11i, that would monitor and correct
          the recording and paying of invoices associated with (a) multiple receipt purchase orders
          or (b) multiple lines with different receipt dates. In addition, ensure the Oracle 11i

1
  We are 90% confident that 3,134 invoices (no less than 2,355 invoices and no more than 4,008 invoices) had
interest underpayments.
2
    We are 90% confident that the amount of interest underpayments was $264,095 +/- 34%.
______________________________________________________________________________
ED-OIG/A17-E0008 	                                                Page 1
       implementation incorporates the necessary functionality for properly recording and
       paying amounts associated with these types of invoices.

   • 	 Strengthen controls over the invoice approval process to ensure timely request of 

       payment. 


   • 	 Implement controls to ensure compliance with the Department’s policy to process
       payment of invoices at least three business days, but no more than seven business days,
       prior to the due date to ensure timely payment by Treasury.

   • 	 Calculate and pay interest based on the Treasury settlement date when invoices are not
       paid on time.

   • 	 Develop policy and procedures to ensure that an annual quality control validation review
       is performed to confirm that controls are effective and processes are efficient.

The Department generally concurred with our findings and recommendations, with one
exception. The Department stated they agree with our reasoning to develop a process, prior to
implementation of Oracle 11i, that would monitor and correct the recording and paying of
invoices associated with (a) multiple receipt purchase orders or (b) multiple lines with different
receipt dates. However, after consideration of the upcoming conversion to Oracle version 11i,
the Office of the Chief Financial Officer (OCFO) determined that modification to the present
Oracle code would not be economically practical for the Department.

We agree that it may not be economically practical for the Department to make modifications to
the present Oracle code. However, the problem of using incorrect receipt dates to calculate
invoice payments still persists when paying invoices associated with multiple receipt purchase
orders or multiple lines with different receipt dates. Our recommendation is for the Department
to develop an appropriate process, which could include manual reviews, special use reports or
other procedures that would monitor the problem and allow for corrections until Oracle 11i is
implemented.

The entire text of the Department’s response is included as an enclosure to this report.




______________________________________________________________________________
ED-OIG/A17-E0008 	                                                Page 2
                                    BACKGROUND 


In 1982, Congress enacted the Prompt Payment Act, Public Law 97-177 (Act) to require federal
agencies to pay their bills on a timely basis, pay interest penalties when payments are made late,
and take discounts only when payments are made by the discount date. OMB’s implementing
regulations for prompt payment requirements are set forth in 5 C.F.R. Part 1315. The regulations
apply to procurement contracts, and vendor, utility and Commodity Credit Corporation
payments. They do not apply to interagency payments; late interest penalties regulated by state,
local, or foreign governments; payments to subcontractors; and travel reimbursements to federal
employees. In determining the payment due date, unless otherwise specified, the payment is due
either: (1) on the date specified in the contract, (2) in accordance with discount terms when
discounts are offered and taken, (3) in accordance with accelerated payment methods, or (4) 30
days from the date of receipt of a proper invoice.

Office of the Chief Financial Officer (OCFO) Procedure for Receiving Goods and Services in
the Contracts and Purchasing Support System (CO-008) outlines the Department’s business
process for receipt of goods and services, and it provides the Department’s policy on payments.
It is the policy of the Department to make payments on all goods and services by the 30th day
after the receipt of a proper invoice/voucher and satisfactory contractor performance whichever
is later. Payments made after the 30th day in such cases must be paid with interest.

OCFO Procedure for Administrative Payment Operations (CO-045) provides the procedures for
paying invoices and vouchers submitted by contractors. OCFO requires that invoices and
vouchers submitted by contractors must be processed and paid timely in accordance with Federal
Acquisition Regulations (FAR) Subpart 32.9, Prompt Payment.




                                   AUDIT RESULTS 


The Department did not comply with the provisions of the Act and did not have adequate internal
controls to ensure compliance with the Act. Our audit disclosed that (1) incorrect receipt dates
were used to calculate invoice payment due dates, (2) adjustments to the payment process are
needed to comply with the Act and Department Policy, and (3) annual quality control procedures
need to be developed and reviews need to be conducted. As a result, we project that about
3,1003 invoice payments during the review period had underpaid interest. In addition, we


3
    See footnote 1.

______________________________________________________________________________
ED-OIG/A17-E0008                                                  Page 3
estimate that the total amount of the interest underpayments during the review period was no less
than $175,135 and no more than $353,055.4


Finding No. 1 – Incorrect Receipt Dates Used to Calculate Invoice Payment
                Due Dates


The Department used incorrect invoice receipt dates to determine the payment due dates for 23
of the 112 invoice payments tested.5 Our testing identified four reasons why incorrect receipt
dates occurred:

• 	 Thirteen of the 23 invoice payments were not paid within 30 days because the contracting
    officers did not consistently follow the Department’s procedures for making prior period
    adjustments for invoices received in one month, but processed in the receipt system the next
    month. As a result, the Oracle Financial system calculated the payment due date using the 1st
    day of the month the invoice was processed as the receipt date, rather than the prior month
    date on which the invoice was received. The prior period adjustment procedures are used as
    the system does not allow a prior month’s date to be entered as a receipt date in a current
    month.

• 	 Procurement staff did not use the contractor’s invoice date as the receipt date for two of the
    23 invoices payments when the procurement staff did not annotate the invoice with the date
    of receipt. As a result, interest was not calculated or paid on the overdue invoices.

• 	 Two payments reviewed were comprised of several overdue invoice amounts along with
    current invoice amounts. These were then paid using the most current invoice receipt dates.
    As a result, interest was not calculated or paid on the overdue invoices.

• 	 An incorrect receipt date was used for seven of the 23 invoice payments because the current
    Oracle application’s functionality can not match directly to a receipt line item. Instead, the
    functionality only matches to a purchase order line item. This has resulted in incorrect due
    dates when a purchase order is associated with multiple receipts and when an invoice is
    matched to multiple line items with different receipt dates. Oracle can not determine the
    correct receipt date and schedule all matched invoices for payment based on their original
    receipt dates.

FAR § 32.904 provides that the due date for making an invoice payment is the later of the 30th
day after the designated billing office receives a proper invoice from the contractor or the 30th
day after the Government’s acceptance of supplies delivered or services performed.



4
 See footnote 2. 

5
 The detail on the invoice payments sum to 24 because one invoice payment had two occurrences that caused the

use of incorrect receipt dates. 

______________________________________________________________________________
ED-OIG/A17-E0008 	                                                Page 4
5 C.F.R. Part 1315.4 states,

       “an invoice shall be deemed to be received: (1) On the later of: (i) For invoices that are
       mailed, the date a proper invoice is actually received by the designated agency office if
       the agency annotates the invoice with date of receipt at the time of receipt. For invoices
       that are electronically transmitted, the date a readable transmission is received by the
       designated agency office, or the next business day if received after normal working hours;
       or (ii) The seventh day after the date on which the property is actually delivered or
       performance of the services is actually completed . . . (2) On the date placed on the
       invoice by the contractor, when the agency fails to annotate the invoice with date of
       receipt of the invoice at the time of receipt (such invoice must be a proper invoice).”

   In addition, 5 C.F.R. § 1315.10(a)(1) states that interest will be calculated from the day after
   the payment due date through the payment date.

Recommendations:

To comply with the Act we recommend that the Chief Financial Officer:

   1.1 	 Develop a special use report that identifies all receipt dates recorded as of the 1st, 2nd or
         3rd day of a month. The report should be prepared and reviewed early enough in the
         month by procurement staff to ensure invoices needing prior period adjustments have
         time to be properly processed and paid in accordance with the Act.

   1.2 	 Prepare a written reminder to procurement staff regarding the requirements for properly
         annotating the date of receipt of invoices, and what dates should be used as receipt dates
         in the Department’s system.

   1.3 	 Cease combining current and overdue invoices.

   1.4 	 Develop a process, prior to implementation of Oracle 11i, that would monitor and
         correct the recording and paying of invoices associated with (a) multiple receipt
         purchase orders or (b) multiple lines with different receipt dates. In addition, ensure the
         Oracle 11i implementation incorporates the necessary functionality for properly
         recording and paying invoices associated with these types of invoices.

Department of Education Response:

The Department concurred with recommendations 1.1 through 1.3. With respect to
recommendation 1.4, the Department stated:

       “We concur with the reasoning behind this recommendation. However, after careful
       analysis and weighted consideration of the upcoming conversion to Oracle version 11i,
       OCFO has determined that modification to the present Oracle code would not be
       economically practical for the Department. The cost and timeliness of this modification
______________________________________________________________________________
ED-OIG/A17-E0008 	                                                Page 5
       would greatly limit the value of such a task due to the fact that the new Oracle 11i
       functionality scheduled for implementation next fiscal year will fully address this
       recommendation. Oracle 11i will facilitate the management of the receipt of goods and
       services at a line item level thereby enabling the ability to monitor and correct the proper
       recording and paying of invoices associated with (a) multiple receipt purchase orders or
       (b) multiple lines with different receipt dates. Investment in the modification of existing
       Oracle code would result in costly and complex Configuration Management issues and
       greatly increase the risk of error in the Oracle conversion process.”

Office of Inspector General Comments:

We agree that it may not be economically practical for the Department to make modifications to
the present Oracle code. However, the problem of using incorrect receipt dates to calculate
invoice payments still persists when paying invoices associated with multiple receipt purchase
orders or multiple lines with different receipt dates. Our recommendation is for the Department
to develop an appropriate process, which could include manual reviews, special use reports or
other procedures that would monitor the problem and allow for corrections until Oracle 11i is
implemented.




Finding No. 2 – Adjustments to Payment Process Needed to Comply with
                Prompt Payment Act and Department Policy


The Department did not comply with its policy and procedures to process invoices for payment
at least three business days prior to the invoice’s due date. The procurement staff did not
approve the invoice in a timely manner for two of the 112 invoice payments reviewed. In
addition, the Department did not comply with the Act’s implementing regulations that require the
use of the Treasury settlement date as the date of payment for calculating interest. The
Department’s systems are programmed to calculate interest based on the Department’s payment
request date, rather than the Treasury settlement date. As a result, for six of the 112 payments
reviewed the Department either did not pay the appropriate amount of interest or did not pay any
interest to vendors when interest was due.

The FAR, §32.906 states, “(a) The Government will not make invoice payments earlier than
seven days prior to the due dates specified in the contract . . . (b) The designated payment office
(1) Will mail checks on the same day they are dated; (2) For payments made by EFT, will
specify a date on or before the established due date for settlement of the payment at the Federal
Reserve Bank . . ..”

OCFO Procedures that Work - Procedure for Processing Contract and Purchase Order
Payments (CM-01) Step 2- Determining which approved payments are sent to Treasury requires
the Administrative Payments System Administrator to pay all approved payments at least three
business days prior to the due date but no more than seven business days from the due date.

______________________________________________________________________________
ED-OIG/A17-E0008                                                  Page 6
5 C.F.R. § 1315.10(a)(1) states “Interest will be calculated from the day after the payment due
date through the payment date at the interest rate in effect on the day after the payment due
date.” Section 1315.2(z) defines payment date as “the date on which a check for payment is
dated or the date of an electronic fund transfer (EFT) payment (settlement date).” Section
1315.2 (ee) defines settlement date as “the date on which an EFT payment is credited to the
vendor’s financial institution.”

OCFO Procedures that Work - Administrative Payment Operations (CO-045) states “An interest
penalty is automatically paid when the invoice/voucher is paid after the due date, unless the
invoice/voucher was not proper and the contractor was notified within seven days of receipt of
that invoice/voucher.”

Recommendations:

To improve the Department’s invoice payment process and strengthen financial management, we
recommend that the Chief Financial Officer:

   2.1 	 Strengthen controls over the invoice approval process to ensure timely request of
         payment.

   2.2 	 Implement controls to ensure compliance with the Department’s policy to process
         payment of invoices at least three business days, but no more than seven business days,
         prior to the due date to ensure timely payment by Treasury.

   2.3 	 Calculate and pay interest based on the Treasury settlement date when invoices are not
         paid on time.
Department of Education Response:

The Department concurred with each of the above recommendations.



Finding No. 3 – Annual Quality Control Procedures Need to be Developed and
                Reviews Need to be Conducted


The Department has not performed annual quality control validation reviews to ensure controls
are effective and that processes are efficient. Although, the procurement staff monitors invoices
on a weekly basis through a Posting Hold Report and a Summary of CPO Invoices on Hold and
Unapproved Report, the Department is not fulfilling its responsibility to conduct annual quality
control validation reviews and does not know whether controls are in place and operating as
intended. Due to the lack of effective controls, we project that about 3,100 invoice payments
during the review period had underpaid interest. We estimate based on a 90% confidence level
that the total amount of the interest underpayments during the review period was no less than
$175,135 and no more than $353,055.
______________________________________________________________________________
ED-OIG/A17-E0008 	                                                Page 7
5 C.F.R. § 1315.3(a) states “Ensuring that internal procedures will include provisions for
monitoring the causes of late payments and any interest penalties incurred, taking necessary
corrective action, and handling inquiries.”

5 C.F.R. § 1315.3(b) states “Administrative activities required for payments to vendors under
this part are subject to periodic quality control validation to be conducted no less frequently than
once annually. Quality control processes will be used to confirm that controls are effective and
that processes are efficient. Each agency head is responsible for establishing a quality control
program in order to quantify payment performance and qualify corrective actions, aid cash
management decision making, and estimate payment performance if actual data is unavailable.”

Recommendation:

To fulfill its responsibilities for prompt payment we recommend that the Chief Financial Officer:

   3.1 	 Develop policy and procedures to ensure that an annual quality control validation review is
         performed to confirm that controls are effective and processes are efficient.

Department of Education Response:

The Department concurred with the above recommendation.



             OBJECTIVES, SCOPE, AND METHODOLOGY


The objectives of the audit were to determine the Department’s compliance with the provisions
of the Act and determine the adequacy of its internal controls to ensure compliance with the Act.
To accomplish our objective, we gained an understanding over the invoice receipt and payment
process. We reviewed the Act, FAR, and applicable Departmental policies and procedures. We
conducted interviews with various components within OCFO regarding the receipt and payment
of invoices and reviewed official contract and purchase order files located in six Principal
Offices and one Advisory Board. We conducted follow-up interviews with Federal Student Aid
(FSA), OCFO/Contracts and Acquisitions Management (CAM) and OCFO/Financial Systems
Operations (FSO), when necessary.

In selecting invoices to review, we requested that the Department provide us with a data extract
file of all invoice payments during the period January 1, 2004 through September 30, 2004. In
response to our request, the Department provided a data extract file containing over 11,000
invoice payments totaling approximately $951.5 million.

The data extract file provided by OCFO/FSO was tested to assess the reliability of the
information, including:

______________________________________________________________________________
ED-OIG/A17-E0008 	                                                Page 8
   • 	 reviewing the Department’s invoice payments summarized by month (January 2004
       through September 2004) to the Department’s external reporting to OMB’s Federal
       Interagency Databases Online (FIDO);
   • 	 tracing 20 invoice payments generated from OCFO/CAM’s active award list to the data
       extract file; and
   • 	 reviewing the reasonableness of field contents (alpha and numeric) in the data extract file.

Based on our assessment, we concluded that the data was sufficiently reliable for use in meeting
the audit objectives.

Using the data extract, the audit universe was stratified into four sampling strata. Each defined
strata included approximately 25% of the absolute dollar amount of invoice payments from the
$951.5 million invoice universe. We tested a stratified random sample of 112 invoices payments
totaling approximately $302.2 million. We traced the sample items back to source documentation
to determine whether interest was due for the invoice under the Act and the correct amount was
paid. For errors identified we determined the cause, impact on sample size, and projected the
errors to the population. We recalculated interest payments for sample items where interest was
paid by using Treasury’s on-line prompt payment calculator to determine if the correct interest
amount was paid and the correct interest rate was used.

As part of our review we gained an understanding of the internal control, policies and practices
applicable to the Department’s administration over the invoice receipt and payment process.

Our audit focused on payments made from January 1, 2004 through September 30, 2004. We
conducted fieldwork at the Department’s offices located in Washington, DC. We held an exit
conference with Department officials on July 18, 2005. We performed our audit in accordance
with generally accepted government auditing standards appropriate to the scope of the review
described above.




______________________________________________________________________________
ED-OIG/A17-E0008 	                                                Page 9
                                                                                                        Enclosure




                       UNITED STATES DEPARTM ENT OF EDUCATI ON

                                  OFFICE OF THE CHIEF FI NANCIAl. OFFICER




MEMORANDUM


TO:              Greg Spencer
                 Director
                 Financial Statements Internal Audit Team


FROM:            Danny H     .   \. 1\
                 Deputy  ~~al Officer
SUBJECT:         Audit of U.S. Department of Education Compliance with the Prompt Payment
                 Act (Audit Control Number: ED-OIG/A 17-EOO(8)

Thank you for providing your Draft Audit Report entitled Department o( Education 's
Comeliance with the Prompt Payment Acr (ED-O/G/A/7-EOOO8), dated July 2005 . We have
reviewed the draft and generally concur with your findings and recommendations. However,
in consideration of efforts currently underv.oay and of specific circumstances relating to some
recommendations, a few exceptions ha ve been noted. We look forward to working with your
team to ensure the most appropriate resolution to all the issues you have identified.

The following are your individual findings and recommendations, along with our respective
respo nse:

Finding No. I - Incorrect Receipt Dates Used to Calculate Invoice Payment
Due Dates

You stated, "The Departmem used incorrect in voice receipt dates to detennine the payment
due dates for 23 of the 112 invoice payments tested."

Recommendations:

To comply with the Act we recommend that the Chief Financial Officer:
                                                                                              . "'
      1. 1 Develop a special use report that identifies all receipt dates recorded as of the I , 2 or
          •
         3 day ofa month. 1be report shou ld be prepared and reviewed early enough in the
         month by procurement staff to ensure invoices needing prior period adjustments have
         lime 10 be properly processed and paid in accordance with the Act.




           o·,,_ . ·_""""_ . . ____.N. ___
                                       _
                                 000 MARVLM'O AVE .• S .W•. WASIIIl<GTOI< . 1.IC lOlO2

                                           .......                                       w_
Page 2

         We concur with this recommendation. The Financial System Operations Division will
         prepare a query for usc by Contracts and Acquisitions Management (CAM), Federal
         Student Aid, and program executive officers to ident ify potential prior month receipts
         requirin g adjustments to the receipt date. In addi tion, OCFO will revise current
         operating procedures to ensure the appropriate use of this report.

   1.2 Prepare a written reminder to proc urement staff regarding the requirements for
       properly annotating the date of receipt of invoices, and what dates should be used as
       receipt dntes in the Department's system.

         We concur with this recommendation. CAM wi ll update current operating procedures
         to address the proper annotation o f receipt o f invoices and distribute by ....'Tillen
         communication to all contracting personnel.

   1.3 Cease combining c urrent and ove rd ue invoices.

         We concur with this recommendation. CAM will update current operating procedures
         to ensure that contracting personnel are aware that it is improper to combine contract
         payment requests for any purpose.

   1.4 Develop a process, prior to implcmentation of Oracle 11 i, that would monitor and
       correct the proper recording and paying of inyoices associated with (a) multiple receipt
       purchase orders or (b) mU ltiple lines with different receipt dates. In addition, ensure the
       Oracle 11 i implementation incorporales the necessary funct ionality for prope rly
       recording and paying invo ices assoc iated with these types of invoices.

         We concur with the reasoning behind this recommendation. However, after careful
         anal ysis and weighted consideration of the upcoming conversion to Oracle version
         11i, OCFO has dete nnined that modification to the present Oracle code wo uld not be
         economicall y practical for the Depanment. The cost and time liness of this
         modification would greatly limit the value of such a task due to the fact that the ncw
         Oracle II i functionality scheduled for implementation next fiscal year will fully
         address this recommendation. Oracle II i will facil itate the management of the receipt
         of goods and services at a line item level thereby enabling the ability to moni tor and
         correct the proper recording and paying of invoices associated with (a) mUltiple
         receipt purchase orders o r (b) multiple lines with di fferent receipt dales. Investment in
         the modification of existing Oracle: code would result in costly and complex
         Configuration Management issues and greatly increase the risk of error in the Oracle
         conversion process.
Page 3

Finding No.2 - Adjustments to Payment Process Needed to Comply with
Prompt Payment Act and Department Policy

You stated, " The Depanment did not compl y with its policy and procedures 10 process
invoices for payment at least three business da ys prior to the invoice's due date. The
procurement staff did not approve the invoice in a timely manner for two of the 112 invoice
payments reviewed. In addition, the Depanment did not comply with the Act's implementing
regulations that requirc the use of the Treasury settlement dote as thc datc of payme nt for
calculating interest. The Depanment's systems arc programmed to calculate interest based on
the Department's payment request date, rather than the Treasury settlement date. As a result,
for six of the 112 payme nts reviewed the Depanment either did not pay the appropriate
amoum of interest or did not pay any interest to vendors when interest was due."

The FAR, §32.906 Slates, "(a) The Government will not make invoice payments earlier than
seven days prior to the due dates specified in the conlrnCt ... (b) The designated payment
office (I) Will mai l checks on the same day they are daled; (2) For payments made by EFT,
will speci fy a date on or before the established due dale fo r settlement of the payment at the
Federal Reserve Bank ... ."

OCFO Procedures that Work · Procedure for Processing Contn!ct and Purchase Order
Payments (CM-OJ ) Step 2- Determining which approved payments are sent to Treasury
requires the Administrative Payments System Administrator to pay all approved payme nts at
least three business days prior 10 the due date but no more than seven business days fro m the
due date.

5 C .F.R. § 1315.JO{aX I) states " Interest will be caleulated from the day after the payment due
date through the payment date at the interest rate in effect on the day after the payment due
date." Section 1315.2(z) defines payment date as "the date on which a check for payment is
dated or the date of an electronic fund transfer (EFT) payme nt (settle ment date)." Section
13 15.2 (ee) defines settlement date as "the date on whic h an EFT payment is credited to the
vendor's financia l insti tution."

OCFO Procedures that Work - Administn!tive Payment Operations (CO-045) states "An
interest penalty is automatically paid when the invoice/voucher is paid after the due date,
Wlless the invoice/voucher was nOI proper and the contracto r was notified within seven days
of receipt of that invoicclvoucher."

Recommendations:

To improve the Department's invoice payment process and strengthen financial management,
we recommend that the Chief Financial Officer:
Page 4

   2. 1 Strength en controls over the invoice approval process to ensure ti mely request of
        payment.

         We concur with this reco mmendat ion. CAM wi ll reinforce to contracting personnel
         through operating procedures and wrillen communication, the importance of timely
         processing of invoices. CAM will continue to monitor invoice processing through the
         repo rt ing tools currentl y at its disposal.

   2.2 Implement contro ls to ensure compliance with the Department's policy to process
       payment of invo ices at least three business days, but no morc than sevcn busincss days,
       prior to the due dale to ensure timely payment by Treasury.

         We concur with this recommendation and will ensure that compliance with the
         Department's existing policy is adhered to. Prese ntl y. all invoice payments are
         req uired 10 be swept fo r process ing at least three business days, but no more than
         seven business days prior to the due date to ensure timely payment by Treasury.
         Greater emphasis will be placed o n monitoring this funct ion.

   2.3 Calculate and pay interest based on the Treasury settlement date when invoices are not
       paid on time.

         We concur wi th this rceommendation and are already in the process of modifying the
         FMSS software to account for the one-day processing period required for transfe r of
         funds fo llowing the payment re lease by the Department until recei pt by the rcei pient's
         fi nancial institution.


Finding No.3 - Annual Quality Control Procedures Need to be Developed and
Reviews Need to be Conducted

You stated, " The Departmen t has not perfonn ed annual quality eontro] validation reviews 10
ens ure contro ls are efTective and that processes are efficient. Although, the procurement stafT
monitors invoices on a weekly basis through a Posting Ho ld Report and a Swnmary of CPO
Invoices on Hold and Unapproved Report, the Department is not fulfilling its responsibility to
conduct annual q uality control validation reviews and does not know whether controls are in
place and operating as intended. Due to the lac k of effective contro ls, we project that about
3, 100 invoice: payments during the: review period had underpaid interest, We eslimatc based
on a 90% confidence level that the tolal amoun t of the interest underpayments duri ng the
revie w period was no less than $175,135 and no more than $353,055 ...
Page 5

5 C.F.R. § 1315.3(a) states " Ensuring that internal procedures will include provisions for
monitoring the causes of late payme nts and any interest penalties incurred, taking necessary
corrective act ion, and handling inquiries."

5 C.F.R. § 1315 .3(b) states "Administrative activities required for payments to vendors under
this part arc subject 10 periodic quality control va lidation to be conducted no less frequently
than once annually. Quality control processes will be used to confirm that controls are
effective and that processes are efficient. Each agency head is responsible for establishing a
quality control program in order to quantify payment performance and qualify corrective
actions, aid cash management decision making, and estimate payment performance if actual
data is unavailable."

Recommendation:

To fulfill its responsibilities for prompt payment we recommend that the Chief Financial
Officer:

   3.1 Develop pol icy and procedures to ensure that an annual quality control validation review is
       performed to confirm that controls arc effective and processes arc efficient.

         We concur with this recommendation. Although numerous informal controls are now
         in place and used by OCFO to ensure that payments are accurate and timely, OCFO
         will establish formal policy and proccdure 10 assure thai prompt payment processes
         are va lidated no less frequently than annually.

If you have any questions or would like to discuss the response in more detail, please do not
hesitate to contact me at 202-401-0896.

Thank you.

cc: Glenn Perry
    Greg Robison
    Charles Miller
    Gail Cornish
    Cynthia Bond
    Jean Vinglas
    Randy Prindle
    Marge White
    Dawn Dawson
    Lwanda Rosemond
    Richard Dipasquale