Internal Controls: Matters Regarding Certain Transactions Processed by FMS

Published by the Government Accountability Office on 1999-05-17.

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


      May 17,1999

      Mr. Richard L. Gregg
      Financial Management Service
      Department of the Treasury

      Subject:   Internal Controls: Matters Regarding Certain Transactions Processed by
      Dear Mr. Gregg:

      We recently reported on the U.S. government’s financial statements for fiscal year
      1998.’ In connection with fulfilling our requirement to audit these financial
      statements, we performed audit procedures on cash balances maintained and internal
      controls over cash receipts and disbursements processed by the Department of the
      Treasury’s Financial Management Service (FMS) on behalf of the federal government”:
      This audit included testing FMS’manual internal controls over processes for

      l   recording Adjusting Journal Entries (Adjustments) needed to accurately reflect
          FMS’records of agencies’cash receipts and disbursements;
      l   opening, amending, or closing Agency Location Codes (ALC), which identify
          agencies and individual reporting locations within agencies on monthly reports of
          cash receipts and disbursements; and
      l   assigning or discontinuing Account Symbols, which are used to identify individual
          appropriations or spending authorizations.3 Agencies use Account Symbols to
          classify monthly receipts and disbursements by appropriations and spending

      %‘inancial Audit: 1998 F’inancial Report of the United States Government (GAOKMD-99-130,
      March 31,1999).
      231U.S.C. 331 (e) (1994).
      3Spending authorization is authority provided by laws other than appropriation acts to
      obligate the government to make payments. It includes contract authority, authority to
      borrow, and entitlement authority.

These processes are linked to FMS’overall responsibility to assist agencies in
reporting their receipts and disbursement transactions and in reconciling agencies’
Fund Balances with Treasury accounts. The proper reconciliation of these accounts
is important for ensuring that agencies accurately report cash receipts and
disbursements. Therefore, the purpose of this letter is to advise you of internal
control matters identified during our testing of these processes and to suggest

Results in Brief

Last year, we reported on and suggested internal control improvements over
Adjustments, ALC, and Account Symbol transactions: FMS’corrective actions
resolved all of our concerns regarding Account Symbol transactions. FMS has also
acted to resolve our concerns about the supervisory review and approval of
Adjustments and the Check Reconciliation Branch’s internal controls over its ALC
actions. However, this year our suggested improvements include matters we reported
on last year for which FMS’corrective actions were incomplete. Specifically, we are
reaffuxning our prior year suggestions for improvements to (1) the Financial Analysis
Branch’s documentation and reconciliation of Adjustments, and (2) the Budget
Reports Branch’s supervisory review and approval, documentation, and reconciliation
of its ALC actions.

Although the internal control matters discussed in this letter are not material in
relation to the federal government’s fiscal year 1998 financial statements, we believe
they warrant your attention. Also, some federal agencies continue to have problems
reconciling their F’und Balances with Treasury accounts. Sound controls at F’MS over
the processes we tested will help improve all agencies’ability to reconcile these

ScoDe and Methodolom

We performed audit procedures to reconfirm the existence and functioning of manual
controls over the Adjustments, ALC, and Account Symbols processes administered by
FMS. To determine if controls were in place, we tested selected transactions that
occurred after the dates that FMS officials informed us that they had implemented
our prior suggestions for improving controls. We performed our work in accordance
with generally accepted government auditing standards Bs part of our audit efforts on
the U.S. government’s fiscal year 1998financial statements for which an audit report
was issued on March 31,1999.

*IInternalControls: IssuesRenarding:CertainTransactionsProcessedbv F’MS(GAOIAIMD-98
188R,June 17,1998).

 2                 GAO/AIMD-99-147R Fund Balance.With Treasury Management Letter

Internal    Control Weaknesses Still Exist Over
Certain    Transactions Processed bv FMS

As in last year’s audit, we identified internal control weaknesses in three key areas-
supervisory review and approval, documentation, and reconciliation of transactions.
The following discussion provides the status of FMS’actions to address these
weaknesses in its manual processing of Adjustments and ALC actions and suggests
certain corrective measures that still need to be implemented.


FMS’Financia.l Analysis Branch (FAB) staff make Adjustments to assist agencies in
clearing differences identified between agency records of receipts and disbursements
and those reported by independent sources, such as the Federal Reserve, commercial
banks, and FMS regional financial centers. FAB tracks these differences in various
“differences” accounts, including Statement of Differences accounts and Budget
Clearing Accounts (BCAs).s FAB staff use journal voucher forms and control logs to
document and track the Adjustments they make to these accounts. It is important that
FAB staff make Adjustments promptly and accurately to assist agencies in reconciling
their Fund Balances with Treasury accounts and to ensure that Treasury records of
federal receipts and disbursements are accurate.

 Last year we suggested that FMS establish certain controls over Adjustments to
 Statement of Differences accounts that include procedures to ensure supervisory
 review and approval, complete documentation, and reconciliation of transactions to
 source documents. We also suggested that FMS enforce its existing procedures over
‘Adjustments to BCAs, until all accounts are closed, by requiring supervisors to review
 and approve Adjustments and to ensure that all Adjustments are adequately
 documented and that control logs are completed by staff and reconciled to source
 documents as necessary.

5Weuse the term Statementof Differences accounts to include all of the differences FAB
records in accounts 2OA1840tid 2OA1875,and the differences FAB identifies in its checks
issued audit system. FAB identifies and reports these differences to agencies as a result of the
monthly reconciliation of Fond Balances with Treasury account activities. Through April
1998, FAB used BCAs (account numbers F3878 and F3879) to track differences that agencies
had not reconciled within 6 months from the initial month the differences were reported to
them by FAB. After April, FAB stopped transferring differences over 6 months old from the
Statement of Differences accounts to BCAs and started tracking differences in the Statement
of Differences accounts unul they are cleared, regardlessof age. FAB also established a
requirement for agencies to clear all differences re maining in BCAs by September 30,1998.
However, at that date, some agencies still had unresolved differences in their BCAs.

3                 GAO/AIMD-99-147R Fund Balance With‘Treasury Management Letter

Our follow-up testing found that FAB has implemented controls for supervisory
review and approval of Adjustments to Statement of Differences accounts and BCAs.
We also found that FAB has implemented controls to maintain adequate supporting
documents for the Adjustments it makes to these accounts. However, FAR has not
implemented controls to ensure that its staff consistently logs the Adjustments they
make to Statement of Differences accounts and BCAs. In addition, we found that
FAB has not implemented controls to ensure that its staff reconcile the Adjustments
they record in the accounting system to source documents to ensure that the data
recorded in the system are accurate and complete for Statement of Differences
accounts and BCAs.

Without complete documentation and periodic reconciliation of transactions, F’MS
management has no assurance that staff are properly adjusting agency accounts.
Accordingly, the risk of errors occurring and not being detected in a timely manner is
increased. We reaffirm our prior year suggestion that you direct $he Assistant
Commissioner for Financial Information to ensure that FAB implements controls to
ensure complete documentation and reconciliation of all Adjustment transactions.
We also suggest that you direct the Assistant Commissioner for Financial Information
to monitor FAB’s efforts in this area and take steps necessary to ensure compliance.

Agencv Location Codes

The Treasury Financial Manual requires agencies to establish ALCs and use these to
identify and report their cash receipts and disbursement transactions. Agencies
submit request letters for establishing, closing, or changing ALCs to either the Checks
Reconciliation Branch (CRB) or the Budget Reports Branch (BRB), depending on
whether an agency disburses its own funds or uses Treasury as its disbursing agent.
FMS staff at these branches are required to log all incoming agency ALC requests and
complete request forms for each ALC transaction processed.

Last year we suggested that FMS ensure effective supervisory review and approval of
all ALC request forms and logs, ensure that its staff completely document all ALC
transactions, and require reconciliation of all ALC transactions. Our follow-up testing
found that CRB had corrected the internal control weaknesses identified in its ALC
processes. However, we found that BRB had not effectively implemented procedures
to correct the control wealmesses associated with supervisory review and approval,
documentation, and reconciliation of the ALC transactions it processes. Although
BRB officials stated that procedures had been established to correct the weaknesses
we identified last year, our follow-up testing found that these procedures were not
being followed.

 Without effective review and approval, complete documentation, and proper
 reconciliation of all transactions, FMS has no assurance that errors are detected in a
 timely manner and that ALC actions are processed accurately. To ensure that BRB
 effectively implements corrective actions, we suggest that you direct the Assistant

 4                GAO/AWID-99-147RFund Balance With Treasury Management Letter

Commissioner for Financial Information to monitor BRB’s efforts in this area and
take necessary steps to ensure compliance.

Agencv Comments

In commenting on this letter, the Commissioner of FMS generally concurred with all
of our findings and suggestions for improvements. He stated that FMS is committed
to getting these issues resolved as quickly as possible. We plan to follow up on these
matters during our audit of the federal government’s fiscal year 1999 financial

This letter is intended for use by Treasury’s management and Office of Inspector
General, and the Congress. We are sending copies of this letter to Senator Fred
Thompson, Chairman, and Senator Joseph Lieberman, Ranking Minority Member,
Senate Committee on Governmental Affairs; Representative Dan Burton, Chairman,
and Representative Henry Waxman, Ranking Minority Member, House Committee on
Government Reform; the Honorable David C. Williams, Inspector General,
Department of the Treasury; and Donald Hammond, Fiscal Assistant Secretary,
Department of the Treasury. This letter is a matter of public record and its
distribution is not limited. Consequently, copies will be made available to others
upon request. We appreciate the cooperation and assistance of FMS management and
staff during our fiscal year 1998 audit. If you have any questions, please call me at
(202) 512-3406 or Suzanne Murphy, Audit Manager, at (404) 679-1940.

Sincerely yours,

Gary+ Engel ’
Associate Director
Governmentwide Accounting and
 Financial Management Issues


5                  GAO/AlMD-99-147R Fund Balance With Treasury Management Letter
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