Opportunities to Improve the Congressional Award Foundation's Internal Controls

Published by the Government Accountability Office on 1997-07-30.

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

      United States
GAO   General Accounting Offrce
      Washington, D.C. 20548

      Accounting and Information
      Management Division


       July 30, 1997
       Ms. Kendall S. Hartman
       National Director
       Congressional Award Foundation
       Subject:       Oonortunities     to Imnrove the Conuressional   Award
                      Foundation's    Internal  Controlg
       Dear Ms. Hartman:
       In May 1997, we issued our opinion on the Congressional        Award
       Foundation's   (1) fiscal year 1996 financial  statsts        and
        (2) management assertions regarding its system of internal
       controls as of September 30, 1996. We also reported on the
       Foundation's compliance with selected provisions       of relevant
       laws and regulations    during fiscal year 1996 (GAO/AIMD-97-87,
       Nay 15, 1997).
       In conducting our fiscal year 1996 audit, we found that the
       Foundation had made progress in addressing some of the
       accounting procedure and internal     control  matters identified
       in the management letter   from our audit of the Foundation's
       fiscal year 1995 financial    statements' (GAO/AIMD-96-161R,
       September 25, 1996). Specifically,       the Foundation had
       improved its controls over processing cash receipts       and
       maintenance of property records.
       The purpose of this letter       is to advise you of matters
       identified   during our fiscal year 1996-audit            concerning the
       Foundation's policies     and procedures relating          to (1) cost
       assignments and allocations,        (2) monitoring      the restrictive
       status of contributions,       (3) receivables      management,
        (4) documentation    for financial     reporting     adjustments,
        (5) bank reconciliation     procedures,      and (6) transaction
       documentation and approval, and to provide our suggestions
       for improvement. Although these matters are not considered
       material in relation     to the Foundation's        fiscal year 1996
       financial   statements, we believe that by acting to address
       them, the Foundation will -rove            internal    controls    over
       these areas. The Foundation may wish to consider obtaining
       the services of professionals        with financial       management and

                          GAO/AIHD-97-126R Congressional      Award Foundation
reporting   expertise   for   assistance   in addressing    these
We conducted our audit pursuant to the Congressional Award
Act, as amended (2 U.S.C. 8071, and in accordance with
generally accepted government auditing standards.
In commenting on a draft of this letter,           you agreed with our
findings and stated your intention          to implement our
suggestions.       Specifically,    you told us that you are
currently     expanding and clarifying      the Foundation's policies
and procedures to address several matters discussed in this
letter.     Also, you intend to augment the Foundation's staff
with an office manager to assist in irrplementing the revised
policies     and procedures.      Finally,  you indicated that you
intend to obtain guidance from professionals            with financial
management and reporting         expertise  to assist in implementing
our suggestions regarding cost allocations           and contribution
restrictions.        We will review the Foundation's status in
addressing these matters during our fiscal year 1997
financial     audit.
Statement of Financial Accounting Standards (SFAS) No. 117
requires not-for-profit          organizations       like the Foundation to
report expenses by functional            classification,      such as
pfosfr~,     administrative,      and   fundraising.       Since some
expenses --such as salaries           and office-supply      expenses--may
support more than one function,             a documented process should
exist for allocating         these expenses among the functional
categories.      In addition,       SFAS No. 117 requires reporting of
restrictions     on the use of particular            assets that affect the
assets' liquidity.          In 1996, this required the Foundation to
use cost assignments' to determine the amounts charged to
temporarily     restricted      cash.     These charges also impacted the
reporting and disclosure           for net assets released from
restrictions     and funds escrowed for council development.
During our fiscal year 1996 audit, we found that the
Foundation had no documented policies and procedures for

 'Cost assignments include       cost tracing and allocation.    cost
.tracing assigns a cost to        a cost object or an activity  using
 an observable measure of       the consumption of resources by the
 -activity    or cost object.     Cost allocation apportions or
  distributes    costs when a   direct measure does not exist.
 2              GAO/AIMD-97-126R       Congressional    Award Foundation
assigning certain       costs to the program, fundraising,        and
administrative      functions.      Similarly,   the Foundation had no
documented policy for determining the costs to be charged to
temporarily    restricted      funds.    In addition,    we found that
some reimbursable       costs of the Foundation, though charged
appropriately     to temporarily      restricted     funds, had not been
separately recognized as expenses of the Foundation.               The
lack of a documented cost policy,            and of associated
procedures to inq3lement such a policy,            increases the risk
that costs may be misclassified           on the Foundation's financial
statements.    It also increases the risk that management may
not have the cost information          it needs for effective
management and proper accounting.
We suggest that the Foundation document its policies       and
procedures regarding cost tracing and allocations.        The
policies  and procedures should identify      the types of costs
that can be directly      traced to each function and those that
support multiple     functions and thus need to be allocated.
For allocable    costs, the policies   and procedures should
specify the manner in which costs will be pooled as well as
the appropriate    bases for the allocation.
SFAS No. 116 requires      entities  to report contributions
,according to their   restrictive    status, as determined by any
donor specifications.        It also requires that contributims    be
classified   as either unrestricted,      temporarily  restricted, or
permanently restricted.
During our fiscal    year 1996 audit, we found that the
supporting documentation for several large contributions           we
tested did not clearly      indicate the restrictive     status of
these contributions.      Also, we found that the restrictive
status of a large contribution         that had been pledged and
recorded in fiscal    year 1995 as unrestricted      had to be
reclassified    as temporarily     restricted  due to a donor-imposed
restriction   on its use that was discovered when the
contribution   was actually     received during fiscal year 1996.
These problems were not identified          earlier because the
Foundation does not have formal policies           and procedures for
identifying,      tracking,   and confirming the restrictive      status
of .contributions.        This increases the risk that the
Foundation may fail to meet donor intentions.             It also
increases     the risk that the Foundation may misclassify

3               GAO/AIMD-97-126R      Congressional    Award Foundation

    contributions    and not detect the error      in time to prevent     its
    inclusion    in the financial  statements.
    We suggest that the Foundation develop and formalize policies
    and procedures for monitoring the restrictive          status of
    contributions.     The policies and procedures should, where
    appropriate,    use terminology consistent with SFAS No. 116
     (such as intention     to give, promise to give, conditional
    promise to give, and permanently restricted),          use unambiguous
    wording in the Foundation's pledge cards and other
    fundraising    materials,    and identify circumstances where
    confirmation    of donors' intent regarding     restrictions   on
    their contributions       is necessary.
            FOR MANAGING
    Management should monitor receivables      on an ongoing basis in
    order to identify    and follow up on those that are overdue.
    To facilitate   this, subsidiary records of receivables     shou.ld
    be reliable   and should provide management the information
    needed to readilv identifv     and antxonriatelv
                                                     --  ~-   to
    overdue receivables.         -
    During our fiscal year 1996 audit, we found that the
    Foundation did not sufficiently     monitor contributions       and
    accounts receivable to ensure that they were collectible.            As
    a result of our audit, the Foundation adjusted the valuation
    of accounts and contributions     receivable.     Although the
    Foundation has improved the information by which it manages
    receivables based on suggestions from our fiscal year 1995
    audit, additional    steps could be taken.      For example, during
    our fiscal year 1996 audit, we found that the Foundation's
    accounting policies and procedures do not specify the form
    and content of receivable subsidiary records, nor do they
    provide guidance on monitoring these records and
    investigating   and resolving overdue receivables..         This makes
    it difficult   for management to readily      (1) assure the
    reliability   of its reporting over receivables,        (2) identify
    its overdue receivables and pursue collection         efforts,
     (3) determine the need to record a valuation        allowance, and
     (4) write off uncollectible    receivables,    as appropriate.
      We suggest that Foundation management expand its accounting
      policies    and procedures    to require that receivable subsidiary
    'records     (11 be periodically    reconciled with detailed
      information    maintained in other Foundation databases to
     .-rove     the reliability     of receivables  reporting,   (2) reflect
      all pertinent     information necessary to assess the
     4               GAO/Am-97-126R       Congressional   Award Foundation
collectibility     of each receivable,  and (3) include an aging
of receivables     to highlight  those that are overdue so that
appropriate    allowances may be established   and uncollectible
amounts written off.

To ensure that financial      reporting  adjustments are reported
in conformance with applicable professional        standards and
management's intent,    they should be clearly     documented and
subject to supervisory review prior to being recorded in an
entity's  financial  reports.      The documentation supporting
these adjustments should be readily available         for review by
management and independent verification        by auditors.
During our fiscal year 1996 audit, we found that financial
reporting    adjustments prepared subsequent to the closing of
the general ledger for financial      statement presentation
 (i.e.,   worksheet adjustments) were not clearly documented.
This obscaired the audit trail    between the financial
statements and supporting records and made it more difficult
to verify    that the adjustments were authorized and
These problems, which we also identified        in the management
letter     from our fiscal year 1995 audit, occurred because the
Foundation's policies      and procedures do not contain
requirements for preparing, documenting, and approving
financial,     reporting adjustments.   The-absence of this
guidance increases the likelihood       that financial  reporting
adjustments will not be appropriately       documented and
We suggest that the Foundation amend its accounting policies
and procedures to require that all adjustments recorded in
the financial    statements be documented in writing and
approved by management prior to reporting    them in the
financial   statements.
Conducting bank reconciliations   is a key internal     control to
identify  and resolve differences   between an entity's    cash
balance and the corresponding cash balance reported by the
entity's  bank. Preparing bank reconciliations   provides

5              GAO/AIMS97-126R     Congressional   Award Foundation
assurance that any errors or irregularities     that        occur   are
promptly detected, investigated,  and resolved.
During our fiscal year 1996 audit, we found that the
Foundation did not always investigate        and resolve differences
promptly.     While the Foundation's accounting policies           and
procedures direct that bank reconciliations           be performed,
they do not prescribe how to do them. For example, the
policies    and procedures do not specifically        require that
differences     be investigated   and resolved or that completed
reconciliations     be subject to supervisory       review.    This
reduces the effectiveness       of the reconciliations       as an
internal    control and increases the risk that inappropriate
transactions     would not be promptly detected by management.
We also identified      this issue in the management letter         from
our fiscal    year 1995 audit.
We suggest that the Foundation expand its accounting policies
and procedures to specify that all outstanding          items
identified     during the course of conducting     bank
reconciliations      be promptly investigated   and resolved and
that completed bank reconciliations        be subject to appropriate
supervisory review.
An important internal   control objective   is that transactions
be supported by appropriate documentation subject to
meaningful supervisory review to ensure that transactions         are
processed in accordance with managmt's        intent.   Based on
this review, management should approve the transactions        in
writing prior to recording    them in the financial   records to
document that the review has taken place and that the
transactions  have been authorized.
 During our fiscal year 1996 audit, we found several expense
 transactions      that did not show evidence of supervisory         review
 or were not supported by appropriate documentation.               The
 Foundation's accounting policies            and procedures do not
 require written approval of transactions,             nor do they address
  the nature of supporting documentation to be retained.               As a
 result,     staff may misinterpret        or misunderstand related
 management policies         and not retain sufficient     documentation
  for meaningful supervisory         review.    This also increases the
.risk of inappropriate         transactions    being processed and
  reported.      We identified     a similar   issue in the management
 -letter   from our fiscal year 1995 audit.

 6              GAO/AIMD-97-126R Congressional         Award Foundation
We suggest that the Foundation expand its written accounting
policies   and procedures to clearly communicate management's
policy regarding      the nature and extent of the documentation
to be retained      in support of transactions  and to require
clear documentation of supervisory approval of all
transactions     prior to recording them in the accounting
records.     This would not only communicate management policy
more clearly     but also provide guidance to assist less
experienced staff      in performing internal  control functions.

We appreciate   the cooperation and assistance Foundation
management and staff provided during our audit of the
Foundation's  fiscal  year 1996 financial  statements.  If you
have any questions or need assistance in addressing these
matters, please contact me at (202) 512-9406 or Steven J.
Sebastian, Assistant   Director,  at (202) 512-9521.
Sincerely   yours,

    and Standards

7              GAO/AIMD-97-126R   Congressional   Award Foundation
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