oversight

Payment Processing: 'Negative Confirmation' of Receipt

Published by the Government Accountability Office on 1997-04-24.

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

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


          Accounting and Information
          Management Division


          EL?76232


          April 24, 1997

          Mr. James E. Reid
      -   Deputy Controller
          Department of Energy

      ’ Subject: Pavment Processinrr:“Negative Con&nation” of Receiut
          Dear Mr. Reid:

          This letter responds to your .requestfor an interpretation of the requirements of
          Title 7, “Fiscal Guidance,”of the GAO Policv and Procedures Manual for
          Guidance of Federal Agencies. Specifically, you asked if you could, under
          predefined circumstances, implement a “negative conikmation” process for the
          receipt and acceptance of goods and sensicescosting under $26,000ordered from
          vendors with whom an ongoing relationstip exists. This would be in lieu of the
          written verifkation Title 7 requires in most instances prior to payment
          certification for invoices. In contrast, the negative confirm&ion approach you
          propose would require a written notification only if an invoice should not be paid
          or if a payment modi&ation is necessary. In addition, in lieu of verifying receipt
          and acceptance on an at&r-the-fact b&s for each payment, you propose a
          veriiication process on a statiskal sampling basis.’

          As desmbed in your letter, the Department of Energy is evaluating its existing
          payment system to streamline its operations and reduce costs. You stated that
          the process modifications would eliminate low value-addedprocesses and
          achieve higher levels of operating efficiency, quality service, and customer
          satisfaction. Your staff explained that the modifications would greatly reduce the
          number of contacts made by Service Center employees to satellite offices to


           ‘Title 7 limits the use of stat&Cal sampling to vouchers in amounts not
           exceeding $2,600. However, although not specifically asked, we have addressed
           your questions to include a request to raise the limit to $26,000under the
           proposed negative confirmation process.
                                           GAO/~-97-77R       Payment Processing (Energy)
B-276232
confirm the receipt and acceptanceof goods, thus allowing the Center’s
employees to focus on more cost-effective work. Your staff e&mated that your
proposal would result in about $l23,30@annual savings or cost avoidance. We
support initiatives to create a government that works better and costs less. At
the same time, we believe that agencieshave the responsibility to protect the
government’s interest.

We contacted your staff to discuss your questions in more detail. Since we did
not test your process, our response only addressesyour questions conceptually.

Although the negative comirmation procedure you propose increases the risks of
overpayments to vendors, that risk could be acceptably mitigated if reasonable
assurance of recovery of overpaymentsto vendors exists. Combining a negative
confirmation process with a st&istical sampling procedure to examine invoices
under $26,000also increases risks. These risks would be acceptable provided
(1) an assessmentof the benefits of implementing the sampling plan compared tc
the additional risks associatedwith it reveals that the benefits exceed the
projected costs, (2) the risk of errors and irregularities occurring and going
undetected prior to payment is periodically assessed(through a stat&tical sample
taken from all invoices subject to a negative con&mation) and kept within
established thresholds, and (3) the agency has a continuing satisfactory
relationship with the vendor, thus minh&ing the risk of loss. Your proposal
addressesthese conditions; however, we have one obsenrabionand offer a
control procedure to address it. Based on our understanding of your proposal,
we do not object to its implementation provided that the control procedure we
 suggest is effectively implemented. Our assessmentof your proposal is discussec
in detail in the following sections.

ENERGY’S CURRENT SYSTEM

Energy’s payment certification and processing occur at 3 main F’inancial Service
Centers which currently support 11 satellite offices (16 are planned by September
30, 1997) where purchasing takes place. Each Service Center is assigned a
number of satellite offices to service.




 %our staff emphasizedthat this estimate is provided as a basis for making an
 initial determination to implement system modifications and is based on certain
 assumptions believed to be valid at the time the estimate is compiled.
                                 GAOLIIMD-97-77RPayment Processing (Energy)
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Your staff explained that satellite offices initiate purchase orders and obligate
funds. ‘Ike purchase orders contain the specific items and quantities ordered.
The satellite offices forward a copy of each purchase order to the appropriate
Service Center where it is filed awaiting receipt of the vendor’s invoice. Vendors
submit invoices to the cognizant Service Center where a daily Invoice Received
Report listing each invoice by originating satellite office is prepared. The report
contains the vendor’s name, related purchase order number, invoice receipt date,
invoice amount, discount information, and a special notation if obligated amounts
were exceeded for each invoice. Daily reports are forwarded to the satellite
office’s responsible mve            officer with a cover memo stipulating that a
30day limit is allowed for verifying receipt and acceptice of the goodskervices
ordered.

Adnkistrative officers are responsible for recording receipt and acceptance of
items ordered and for comparing quantities and items received and accepted with
items ordered. If discrepancies exist, notations are required on the Invoice
Received Report. For each invoice listed, the officer initials or signs indicating
(1) approval for payment, (2) payment modification based on adjustments he or
she made, or (3) disapproves payment by so noting. Also, if the invoice amount
exceeds the related obligation, the officer must either (1) use available
unobligated funds to cover the difference or (2) not approve payment for the
excess amount. The report is then signed and forwarded to the Service Center
for certification and payment. The signature of the administrative officer
provides evidence that the aforementioned responsibilities have been
appropriately discharged.

Your staff further explained that administrative officers discharge their
responsibilities differently. In some offices, the admM&Wive officer may verify
mathematical accuracy, verify that the costs per invoice are consistent with the
purchase order, and actually inspect the goods and/or services,received. Others
have staffs that perform these functions, and others may require written
confknation by program officials showing receipt and acceptance of goods
and/or services. However these functions are performed, your staff stated that
there must be an audit trail showing who is accountable for the discharge of
each responsibility.

Service Center employees verify the administrative officers’ initials or signature
indicating receipt and acceptance for each line item invoice; compare amounts
(quantities and dollars) on the invoice and the purchase order; and, if no
discrepancies are found, schedule the invoice for cert%Ecationand payment. If


                                 GAO&MD-97-77R Payment Processing (Energy)
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B-276232
discrepancies are found, the administrative officer is contacted to resolve
questions.
ENERGY’S PROPOSED SYSTEM MODIFICATIONS

Energy proposes to switch to a “negative confirmation” procedure for invoices
less than $26,000. The primary difference. between the existing procedures
involving a positive confirmation and the proposal is that instead of the
     . .
adnun&rative officer notifying the Service Center of receipt and acceptance,C-z
negative conWnation allows the Service Center to certify and process the
payment without obtaining evidence of receipt and ackeptancefrom the
     . .
admmshdve officer.
Your staff explained that the $26,000limit for negative confirmation was selecte
because at the time of selection, amounts under $26,000were considered small
or “simplified acquisitionsn3and Energy’s invoice stat&&s indicate $26,000as an
appropriate cut-off. Your staff further explained that based on invoices
processed during fiscal year 1996,the number of invoices less than $26,000that
would have been subject to the negative confkmation would have been about 40
percent of ail invoices processed by Energy. However, the dollar amount of
those invoices would have been less than 1 percent of the dollar amount of all
invoices processed for payment.
Your staff stated that the negative confhmation process would apply to those
vendors who have an ongoing satisfactory relationship with Energy and from
whom recovery (or off-set) arising from overpayment is likely. Your staff also
explained that the administrative officer at the satellite offices would continue tc
be responsible for documenting and ensuring receipt and acceptanceon each
invoice listed on the Invoice Received Report; however, the negative
confirmation procedure would only require notification for those line item
invoices on the Invoice Received Report if payment should not be made or
should be different than the invoice amount or purchase order.

Under the proposal, the admmkk&e officer would be sent the Invoice
Received Report along with a memo explaining that positive con&n&ion
(approval/rejection/modification) would be needed only for invoices listed on tk


 3Prior to the passageof the Federal Acquisition StreamWing Act of 1994,
 simplified acquisitions were defbred as acquisitions less than $26,000. That law
 raised the simplified acquisition threshold to $100,000.
                                   GAOMMD-97-77R Payment Processing (Energy:
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B-276232
report that meet at least one of several c&zia,4 and that these invoices would be
highlighted on the Invoice Received Report. All other invoices on the report
would be subject to negative confirmation.

Service Centers would initiate certification and payment processing on negative
confhmation invoices 20 days after the report is sent unless the administrative
officer no-es the Center that an invoice,should not be processed for payment.
To illustrate, this notification should occur if goods and/or services are not
received or accepted, or description, quantities, and invoice total cost do not
match those on the purchase order. Regarding vendors doing business with
Energy for the first time, your staff stated that positive con&nation would be
required initially to allow Energy to obtain evidence of the vendors’ability to
supply acceptable goods or services promptly and to submit accurate billings,
thus indicating Energy’s cotidence in the relationship with the vendor.

At the end of each month, the administrative officers would receive a Post
Payment Report listing aJl invoices received during the month that were paid or
rejected. The officers would be required to review the report and immediately
contact their Service Centers if any discrepancies are identified so that, among
other actions, recovery or off-set actions can be initiated, if necessary.

In addition, your letter stated that each quarter, Energy will closely monitor the
changes once implemented. Each Service Center would be required to determine
statistically projected error rates by analyzing a sample of payments made each
quarter. A statistical sampling of all invoices paid from the negative conf5xmaBon
procedure would be selected from the universe of all such payments to verify
that the process is operating as intended.’ For each item selected in the sample,
the Service Center would request evidence of receipt and acceptance from the
applicable satellite office. Center staff would compare the items listed on the
related purchase orders, invoices, and receiving evidence to ensure that the type
of goods and/or service received was ordered and that quantities, costs, and math
are accurate, complete, and proper.

4’The primary criteria are: invoices for $26,000or more, partial payment invoices
including contract payments for work in process, invoices where the risks of
recovering overpayments exceed established thresholds (such as those from poor
risk vendors and vendors doing businesswith Energy for the first time).
6you.r staff stated that they plan to adopt the sampling procedures discussed in
Title 7 that apply to payments under $2,600for the universe of negative
confirmation payments less than $26,000.
                                 GAOMMD-97-77R Payment Processing (Energy)
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Your staff stated that if errors uncovered are within tolerable thresholds, now z’
at 6 percent of the number of invoices subject to negative conf%mation, the
process would not be dusted, although the errors identified would be corrected
If however, the projected error rate exceededthis tolerance limit, the negative
confumation procedures would be adjusted to ensure that the rates do not
breach the established thresholds. Each quarter, after the initial implementation
period, the error rates would be assessedto determine if the thresholds are
exceeded and procedures need to be adjusted

Lastly, the Service Centers would be required to provide periodic training as
needed by the satellite offices. Each quarter, the Service Centers would review
the satellite offices’implementation of the new procedures to ensure adherence
to the modified payment process. The scope and depth of the reviews to
determine compliance with the procedures wU be left to Service Center officials.
The officials can visit the satellite offices, conduct telephone reviews, or use
other methods to obtain evidence of compliance.

GAO’S ASSESSMENTOF THE PROPOSAL,
The Federal Financial ManagementImprovement Act of 1996mandated that
agencies implement and maintain financial systems that comply with federal
financial management system requirements. The Joint Financial Management
Improvement Program (JFMIP) has issued a series of systems requirements
documents generally accepted as the systems standards to be followed by
agencies. In its “Framework for Federal Financial Management Systen~,~JFMTP
envisioned systems with standardizedinformation and electronic data exchange
to eliminate manual processes,reduce the risks of data loss or errors, and
eliminate manual reentry and interpretation.6 In discussing technology in
payment systems, Title 7 states that agenciesshould endeavor to establish
automated processing techniques (including data interchange) and controls
whenever feasible so long as the interest of the govemment is protected. We
believe that financial managementsystems will evolve to have the capabilities for
 automated data interchange between central offices and field offices. When the
 systems have evolved and are implemented, the information showing receipt and
 acceptance of goods recorded at the field offices would be atiable on-line to
 central offices’ staff so that payment certification and processing can be
 facilitated promptly with bruited subsequentcontacts between offices. In the


 ‘?ramework for Federal FinanciaItManagementSvstem~,JFMlP, January 1996,
 pp. 8 and 9.
                                  GAO/AlMD-97-77RPayment Processing (Energy)
 6
B-276232
interim, until agency systems evolve to full electronic data interchange
envisioned by JFMIP and alluded to in Tctie 7, other procedures such as the one
you propose could be considered to achieve payment control objectives at less
CO!&


The type of process you propose to implement is referred to as “fast pay” in Title
7. You propose to combine fast pay with. statistical sampling. Fast pay
procedures permit invoices to be paid before verification of receipt and
acceptance if there is a continuing relationship with the vendor and procedures
allow the agency to take advantage of prompt payment discounts or effect other
economies.’ Generally, to minimize the risks of overpayments, fast pay
procedures are used with reliable vendors which have an ongoing relationship
with an agency. Thus, if overpayment occurs, recovery is usually assured
through a process of off-set on subsequent invoices. As we understand your
proposal, such a continuing relationship would exist between Energy and the
vendors whose invoices would be processed under a fast pay, or negative
cor@.rmation,arrangement. Conversely, under your proposal, vendors initially
doing business with Energy and vendors identified as poor risks would require
positive confirmation of receipt and acceptance prior to payment certitication
until they establish a reliable relationship with the agency. If effectively
implemented, we believe that this fast pay arrangement may be used to pay your
invoices provided that the cost savings resulting from implementing such process
exceed potential losses.

Fast pay procedures normally require verification of receipt and acceptance of
purchases after payment certification. Title 7 requires that when &atistical
sampling is combined with fast pay and used for verification of receipt and
acceptance of purchases after certification as you propose, the plan must provide
for (1) invoice examination to be commensurate with the risk to the




‘The Office of Management and Budget Circular       A-126, “Prompt Payment,”
                                            . . . n Regulation,
December 12, 1989,and the Federal Accnusrt~o                    part 13.3, stipulate
several criteria to be satisfied before implementing fast pay procedures. These
criteria are designed to protect the interest of the government and to minimize
the risk that overpayments may not be recovered.
                                  GAO/~-97-77R        Payment Processing (Rnergy)
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8276232
govermnent,8(2) sampling of all invoices not subject to complete exammaSon,
(3) effective monitoring to ensure that the risks to the government remain within
tolerable limits, and {4) a continuing relationship with the vendor such that the
risk of loss is minimized.

Your staff stated that the proposal includes a sampling plan developed in
accordance with these Title 7 requirements and that during the initial months of
implementation and each quarter thereafter, your plan envisions a process to
assessthe risks of errors that occur as a result of implementing your proposal
and, if needed, modifying the procedures to ensure that errors remain within
tolerable thresholds. We have not tested your plan in operation to ensure that it
follows these requirements. However, we believe it is acceptable if it follows the
aforementioned Title 7 requirements and is effectively implemented for those
specified invoices less than $26,000.

Also, we have one other observation regarding your proposal. Since the 1982
enactment of the Federal Managers’Financial Integrity Act (FMFU), all agencies
are required to review their systems of internal accounting and administrative
controls and annually report material weaknesses. We believe that during the
initial period and/or the first full year the payment system modiIica;tions are
operational, Energy’s F%FIA reviews should speci&ally emphasize testing the
modifications by determinin g if the controls are effective and working as
designed. Therefore, we suggest that Energy’s FMF’IA reviews specif&Uy
emphasize testing the controls in the proposal at the end of the year in which tbe
implementation occurred if the modifications have been operational for most of
the year and that the emphasis be extended through the following year if
implementation occurred toward yearend.




%I developing a sample plan, agencies should ensure that the risk of loss
incurred by the government because it has not audited each invoice is offset by
the ee            cost savings achieved by using the sampling techniques. In
order to achieve savings defmed by Title 7, the costs of examming all vouchers
would exceed the combined costs of {l) examining the sample and (2) projected
losses due to undetected errors on invoices not examined Through analy!jis, the
plan must develop and identify a tolerable error rate (the point at which, or
below which, savings should occur), the number of vouchers to select for
 examimtion, and the selection method.
                                  GAOMMD-97-77R Payment Processing (Energy)
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E276232
The contents of this letter were disc-d    with Wendy Miller and Jefkey Payne
of your staff. We hope our comments are helpful as you implement system
motications best suited to your needs. If you have any questions or would like
to discuss these matters further, please contact me at (202) 612-9406or Bruce
Michelson, Ass&ant Director, at {ZOZ}612-9366.

Sincerely yam




 and Standards




(922233)

                               GAOIAIMD-97-77RPayment Processing (Energy)
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