oversight

Payment Processing: Validation After Payment on a Sampling Basis

Published by the Government Accountability Office on 1997-10-21.

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

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

Accounting and Information
Management Division

B-278123


October 21, 1997

Mr. William H. Eargle, Jr.
Deputy Chief Financial Officer
  for Accounting
U. S. Department of Housing and
  Urban Development

Subject:    Pavment Processing: Validation   After Pavment on a SamnlinP Basis

Dear Mr. Eargle:

This letter responds to your May 14, 1997, request for an interpretation of the
requirements of Title 7, “Fiscal Procedures,” of GAO’s Policv and Procedures
Manual for Guidance of Federal Agencies. Specifically, you asked if the
Department of Housing and Urban Development (HUD) could implement a
process, known as “fast-pay” under Title 7, which validates receipt and
acceptance of goods and services ordered and the accuracy of invoices after
payment certification for purchases costing $2,500 or less. This process would
be in lieu of the validation Title 7 requires in most instances prior to payment
certification.  In addition, in lieu of verifying receipt and acceptance and invoice
accuracy for each payment, you propose a verification process performed on a
statistical sampling basis,

As described in your letter and explained by your staff during subsequent
discussions, HUD is evaluating its existing invoice examination program with
the intention of streamlining its operations and reducing the cost of
government. We support initiatives to create a government that works better
and costs less. At the same time, agencies have the responsibility to protect the
government’s interest,

To supplement the information in your letter, we contacted your staff to discuss
your question in more detail. Since we did not test your current system, our
response only addresses your question conceptually.

Although payment certification prior to invoice validation increases the risk of
overpayments to vendors, that risk could be acceptably mitigated if reasonable
assurance of recovery of overpayments exists. Combining payment certification

                                    GAO/AIMD-9%8R       Payment Processing (HUD)
B-278123

prior to invoice validation with a statistical sampling procedure performed after
payment to examine invoices under $2,500 also increases risks. These risks
would be acceptable provided that (1) the agency has a continuing satisfactory
relationship with vendors, (2) an assessment of the benefits of implementing the
sampling plan compared to the additional risks associated with it reveals that
the benefits exceed projected costs, and (3) the risk of errors and irregularities
occurring and going undetected prior to payment is periodically assessed and
kept within established thresholds. Your proposal addresses the second and
third conditions; however, we have two concerns regarding the first condition
and offer a control procedure to address it. In addition, we have another
observation and 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 procedures we suggest are effectively implemented as
well. Our assessment of your proposal is discussed in detail in the following
sections.

HUD’S CURRENT SYSTEM

HUD’s payment certification and processing currently occurs at three main
administrative accounting centers (located in Washington D.C.; Atlanta, Georgia;
and Ft. Worth, Texas) which service 82 offices where the purchases take place.
Each center is assigned a number of offices to service. Beginning in fiscal year
1998, HUD is planning on consolidating the three centers into the F’t. Worth
center. The current payment processing system applied by the three centers
would continue to apply to the single Ft. Worth center. The system
modifications discussed in the following section would be implemented in Ft.
Worth.

Your staff explained that under the current system, purchases are initiated at
any of the 82 offices where contracts, purchase orders, and training requests are
completed and funds are obligated. Invoices are then sent to the appropriate
center for payment processing. All invoices are validated prior to payment
certification and each is examined to determine, among other things, that a
proper obligation was made, that the vendor is an approved vendor, that receipt
and acceptance is documented, and that invoice footings and extensions are
accurate. Verifying that the obligation is proper and the vendor is approved is
done in an automated process.

 HUD’S PROPOSED
 SYSTEM MODIFICATION

 You propose to modify your existing system by making payment on a “fast-pay”
 basis, thus validating receipt and acceptance and invoice accuracy on a
 statistical sampling basis after payment is made. Under your proposal, the

 2                                  GAO/AIMD-9%SR      Payment Processing (HUD)
B-278123

center will continue to receive invoices. Each invoice of $2,500 or less would
be examined in an automated environment to determine that a proper related
obligation was made and that the vendor is approved. The invoices would then
be scheduled for payment certification and paid.

After payment, at the beginning of each month, all invoices subject to this
procedure for the past month would be part of a universe from which a
statistical sample would be selected.’ All invoices selected in the sample would
be validated by being examined to determine, among other items, that proper
receipt and acceptance is documented and that invoice footings and extensions
are accurate. This new process would be monitored each month to ensure that
errors remain within tolerable limits. The results of the monthly samples from
the center would be analyzed to ensure that errors are within a 5-percent
tolerable limit or corrective action will be taken.

You propose these modifications because you believe them to be cost beneficial
to HUD. Ln planning and designing the proposed modified procedures, your
staff conducted tests and analyzed fiscal year 1997 data” to predict possible
costs savings. Based on the tests and analysis and considering projected losses
due to undetected errors or irregularities on invoices not examined, you
estimate that the total annual savings for HUD would be about $349,500.

OUR ASSESSMENT OF HUD’s
PROPOSED SYSTEM MODIFICATIONS

The Federal Financial Management Improvement Act of 1996 mandated 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 Svstems, JFMIP
envisioned systems with standardized information and electronic data exchange
to eliminate manual processes, reduce the risks of data loss or errors, and



‘Your staff explained that the sampling methodology would follow the
requirements of Title 7 of the Policv and Procedures Manual.

‘Fiscal year 1997 data projected by HUD included a total of 33,443 invoices for
about $231 million that will be processed for payment by HUD. Of these
amounts, 23,170 invoices totaling about $9 million were projected for invoices
of $2,500 or less. Invoices for $2,500 or less subject to the proposed modified
process were projected to be about 69.3 percent of the total number of invoices
processed, but only comprised of about 3.9 percent of the total dollar amounts.

3                                 GAOIAIMD-98-8R     Payment Processing (HUD)
B-278123

eliminate manual reentry and interpretation.3 In discussing technology in
payment systems, Title 7 states that agencies should endeavor to establish
automated processing techniques (including data interchange) and controls
whenever feasible so long as the interests of the government are protected.

We believe that financial management systems will continue to improve and
evolve to have the capabilities for automated validating of invoices and data
exchange between central and field offices. When the systems have evolved
and are implemented, invoices that could be tested for accuracy and
information showing receipt and acceptance of goods recorded at field offices
would be available on-line to central office staff so that payment certification
and processing could be facilitated promptly with limited subsequent contact
between offices. Title 7 recognizes that in the interim, until agency systems
evolve to full automation and full electronic data interchange envisioned by
JFMIP, other procedures, such as the one you propose, could be considered to
achieve payment control objectives at less cost.

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 and avoid
penalties or effect other economies.’ Your letter stated that the proposed
modifications should enable HUD to realize an estimated savings, part of which
would be attributable to late payment penalty avoidance or prompt payment
discounts.

We have previously reported5 that, generally, to minimize the risks of
overpayments, fast pay procedures are used with reliable vendors who have an
ongoing relationship with an agency. Thus, if overpayment occurs, recovery is
usually assured through an off-set process on subsequent invoices. As we



“Framework   for Federal Financial Management Svstems, JFMIP, January 1995,
pp. 8-9.

 ?he Office of Management and Budget Circular A-125, “Prompt Payment,”
 December 12, 1989, and the Federal Acauisition Regulation, 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.

 ‘Pavment Processing: “Negative Confirmation”   of Receir>t (GAO/AIMD-97-77R,
 April 24, 1997).

 ;1                                 GAO/AIMD-98-8R     Payment Processing (HUD)
B-278123

understand your proposal, such a continuing relationship would exist between
HUD and nearly all vendors whose invoices would be processed under a fast
pay arrangement. However, we have two concerns regarding the application of
fast pay procedures as proposed.

First, vendors doing business with HUD for the first time would not have a
prior relationship. Therefore, in order to determine the acceptability of vendors
and to establish an ongoing relationship, we believe that HUD should verify
receipt and acceptance and invoice accuracy prior to payment certification until
such time as confidence is gained in the vendor’s ability to provide timely and
quality goods and services and accurate billings.6 Second, for vendors identified
as poor risks, HUD should confirm receipt and acceptance and verify invoice
accuracy prior to payment certification until the vendor establishes a reliable
relationship with HUD.7 Therefore, we suggest that HUD implement a process
to identify first time vendors and vendors that are poor risks and verity receipt
and acceptance and invoice accuracy before payment certification until the
vendors are considered reliable. If these two concerns are addressed and your
proposal identifies these vendors and validates payment prior to certification,
this fast pay arrangement may be used to pay your invoices.

Fast pay procedures normally require verification of receipt and acceptance and
invoice accuracy on all purchases after payment certification.  Title 7 requires
that when statistical sampling is combined with fast pay, as you propose, the
plan must provide for (1) invoice examination to be commensurate with the risk
to the government,’ (2) sampling of all invoices under $2,500 not subject to



6We believe that identification of first-time vendors can be made in an
automated system where the system can be programmed to “flag” or highlight
such vendors. Once identified, receipt and acceptance and invoice accuracy for
those vendors can be verified a reasonable number of times until the vendors
are believed to be reliable.

‘We believe a cost-effective method, similar to the one identified in footnote 6,
could be implemented to identify vendors who are poor risks so that receipt
and acceptance and invoice accuracy can be verified prior to payment
certification.

‘In developing a sample plan, agencies should make sure that their proposed
procedures will produce savings while adequately protecting the government’s
interests. Savings defined by Title 7, would be achieved where the combined
costs of (1) examining the sample and (2) projected losses due to undetected
errors on invoices not examined are less than the cost of examining all
                                                                   (continued...)

5                                  GAOIAIMD-98-8R     Payment Processing (HUD)
B-278123

complete examination, (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 letter contained a detailed description of HUD’s estimated savings and
risks as well as your sampling plan. Also, your staff stated that the sampling
plan was developed in accordance with Title 7 requirements and that each
month after implementation your plan envisions a process to assess the risks of
errors that occur as a result of implementing your proposal and, if needed, to
modify the procedures to ensure that errors remain within tolerable thresholds.
We believe that, if properly implemented, your sampling and monitoring plans
meet the requirements of Title 7.

We have one other observation regarding your proposal. Since the 1982
enactment of the Federal Managers’ Financial Integrity Act (FMFIA), 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
modifications are operational, HUD’s FMFLA reviews should specifically
emphasize testing the modifications by determining if the controls are effective
and working as designed. Therefore, we suggest that HUD’s FMFIA reviews
specifically emphasize testing the controls contained in the proposal at the end
of the year in which the 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 year-end.



We appreciate the thoroughness of your written request and hope to provide it
as an example to other agencies intending to make similar requests. The
contents of this letter were discussed with Mr. Bill Humfleet, Field Comptroller,
Atlanta Administrative Accounting Center and Ms. Doris Neubert of your staff.




 ‘(...continued)
 vouchers. Through analysis, 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 examination, and the selection method.

 6                                  GAO/AlMD-98-8R     Payment Processing (HUD)
B-278123

We hope our comments are helpfui: If you have any questions or would like to
discuss these matters further, please contact me or Bruce Michelson, Assistant
Difector, at (202) 512-9406.

Sincerely yours,




                             v
Robert W. Gramling
Director, Corporate Audits
   and Standards




(922239)

7                                 GAO/AIMD-98-8R     Payment Processing (HUD)
Ordering    Information

The first copy of each GAO report and testimony is free.
Additional  copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent    of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting        Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony.   To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information         on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

httpzl/www.gao.gov




PRINTED ON (,+,a   RECYCLED   PAPER
United States
General Accounting Office                   Bulk Rate
Washington, D.C. 20548-0001           Postage & Fees Paid
                                               GA8
                                  !.’   Permit No. GlOO
Official Business
Penalty for Private   Use $300

Address Correction    Requested