oversight

Congressional Award Foundation: Management Action Needed to Establish Control Requirements and Related Procedures

Published by the Government Accountability Office on 1999-07-15.

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

      United States

GAO   General Accounting
      Washington,
                           Office
                    D.C. 20548

      Accounting and Information
      Management Division


      B-283047



      July 15,1999

      Mr. James F. Manning
      National Director
      Congressional Award Foundation

      Subject: Congressional Award Foundation Management Action Needed to Establish
               Control Reauirements and Related Procedures

      Dear Mr. Manning:

      In May 1999, we issued a report’ expressing our opinion on the Congressional Award
      Foundation’s fiscal year 1998 financial statements and on management’s assertions
      regarding the Foundation’s system of internal control as of September 30,1998. We
      also reported on the results of our tests of the Foundation’s compliance with selected
      provisions of relevant laws and regulations during fiscal year 1998. We conducted our
      audit pursuant to the Congressional Award Act, as amended (2 U.S.C. 807), and in
      accordance with generally accepted government auditing standards. The purpose of
      this management letter is to (1) reemphasize the need to establish and document
      control requirements and appropriate procedures in certain internal control areas
      identified during prior audits and (2) advise you of additional internal control matters
      identified during our fiscal year 1998 audit.

      Results in Brief

      In conducting our fiscal year 1998 audit, we found that the Foundation had made
      progress in strengthening internal controls related to accounts receivable, restricted
      contributions, and facsimile invoices-three of five areas of control weakness
      identified during our fiscal year 1997 audit.2 During fiscal year 1998, the Foundation
      strengthened accounts receivable and contribution-related controls by establishing
      separate subsidiary databases which enabled the Foundation to more effectively

      ’Financial Audit: Congressional Award Foundation’s 1998 and 1997 F’inancial Statements
      (GAO/AIMD-99-173, May 14,1999)
      ’ Congressional Award Foundation: Continuing Attention Needed to h-move Internal
      Controls (GAO/AlMD-9&229RJuly 31,1998)


                                           GAO/AIMD-99-224R Congressional Award Foundation
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(1) monitor overdue accounts receivable and assesstheir collectability and (2) track
restricted contributions and circumstances associated with their release. With
respect to processing of facsimile invoices, the Foundation began reviewing vendor
files and invoice payment lists in an effort to identify potentially duplicate invoices
prior to payment. However, the Foundation had not yet established and documented
control requirements and related procedures for Foundation staff to follow in
processing accounts receivable and facsimile invoices and in monitoring the status of
restricted contributions. Likewise, we found that management had not yet
progressed in establishing control requirements and related procedures with respect
to the other two areas of internal control weakness identified during the fiscal year
 1997 audit-documenting and approving accounting adjustments and following up on
bank reconciliations. Without established and documented control requirements and
related procedures, the Foundation faces the continuing risk that the processing of
transactions and preparation of financial reports may not be consistently followed,
monitored, and controlled.

In commenting on a draft of this letter, you agreed with our conclusions and
suggestions regarding the need to establish and document internal control
requirements and related procedures and expressed your intention to implement our
suggestions. Furthermore, you advised us that the Foundation has hired a director of
operations whose responsibilities include strengthening the Foundation’s system of
internal control. Also, you told us that our suggestion to establish an audit committee
will be addressed at the next meeting of the full board. We will review the
Foundation’s status in addressing these matters during our fiscal year 1999 financial
audit.

MANAGING RECEIVABLES AND MONITORING
RESTRICTED CONTRIBUTIONS

During fiscal year 1998,the Foundation acted to strengthen controls over accounts
receivable and monitoring of restricted contributions. Specifically, the Foundation
established subsidiary databases for accounts receivable and for contributions. It
used the information in the accounts receivable database, which included invoice
numbers, to help it follow up on overdue receivables and assess the collectability of
its older accounts receivable. Similarly, it used information in thecontributions
database to help it track the specific nature and extent of donor-imposed restrictions
and monitor events associated with their release.

While the use of these databases served to improve receivable collections, increase
the reliability of recorded accounts receivable information, and enhance monitoring
of donor-imposed restrictions, the Foundation has not yet established formal control
requirements and related procedures for processing, managing, monitoring, and
controlling accounts receivable and restricted contribution information.



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GAO’s Standards for Internal Controls in the Federal Governmen requires that
transactions and other significant events be promptly recorded and properly
classified. However, during our fiscal year 1998 audit, we found that, after
circumstances prevented the Foundation from satisfying a donor’s intention regarding
a $5,000 restricted contribution, it took the Foundation over 9 months to ask how the
donor wanted to handle the unspent contribution. Although the Foundation tracked
restricted contributions on its database during fiscal year 1998, the Foundation had
no documented requirement or procedure to ensure that it promptly notified a donor
when circumstances prevented the Foundation from using a contribution for the
purpose specified by the donor.

Without formal control requirements and related procedures to assist the staff in
dealing with such situations, the Foundation increases the risk that recorded amounts
may not be accurate, properly classified, or reliably reported.

CONTROLS OVER FAX INVOICES

Because facsimile invoices may precede or actually substitute for an original invoice,
it can be difficult to identify a duplicate invoice received for processing. During our
fiscal year 1997 audit, we found that management authorized invoice payments to
vendors who submitted facsimile invoices. Because management had not established
additional control procedures to provide increased protection against duplicate
payments, management did not identify a duplicate facsimile invoice processed
during fiscal year 1997 and as a result made a duplicate $2,500 payment to a
consultant. We suggested that the Foundation establish specific control requirements
and related procedures to provide added assurance that vendor files are reviewed for
evidence of an existing invoice prior to making a payment associated with a facsimile
invoice.

During our fiscal year 1998 audit, we noted that the Foundation successfully
recovered the $2,500 duplicate invoice payment identified during our 1997 audit. In
addition, while the Foundation continued to authorize vendor payments based on
facsimiles of invoices, it initiated additional reviews prior to approving facsimile
invoices for payment. According to Foundation management, vendor files and a
historical list of invoices (both paid and pending) were reviewed to reduce the risk of
making duplicate payments. While we did not identify any duplicate payments during
our tiscal year 1998 audit, our review of vendor payments based on facsimile invoices
did not identify documentary evidence that the additional reviews were performed.
In addition, Foundation management had not established a formal requirement to
conduct the additional reviews and document their results. To reduce the risk that

%?hileGAOhas proposedrevisionsto the standards(Exposure Draft Standardsfor Internal
Control in the Federal Government GAO/AI&ID-99.21.3.1issued May 1999), the proposed
revisions retain these specific requirements.



3                                       GAOIAIMD-99-224R Congressional Award Foundation
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future additional reviews might not be performed, we suggest that the Foundation
require formal control documentation detailing the nature and extent of the additional
reviews as well as develop a mechanism for documenting the fact that the reviews
have actually been performed.

PREPARATION AND APPROVAL OF FINANCIAL
STATEMENTS AND RELATED ADJUSTMENTS

During our fiscal year 1997 audit, we noted that the Foundation had not developed
formal control requirements and procedures to ensure that worksheet adjustments
needed to prepare and support the Foundation’s financial statements were clearly
documented and reflected management’s review and approval before they were
included in the financial statements. During our fiscal year 1998 financial statement
audit, we found that the Foundation had not yet established control requirements and
related procedures that ensure financial statement worksheet adjustments are
documented, reviewed, and approved as part of the financial statement preparation
process. In addition, we found that the lack of documentation, review, and approval
requirements and procedures extended to the year-end process for closing the books.
The lack of such requirements and related procedures contributed, in part, to errors
in both year-end closing and statement preparation for fiscal year 1998.

For example, we found that in closing the books for fiscal year 1998, management did
not ensure that $30,705 of certain professional fees were reclassified to program,
promotion, and travel expenses consistent with the Foundation’s fiscal year 1997
financial statements. While management initiated the reclassification during the
fiscal year 1997 statement preparation process, management did not act to ensure
that the fiscal year 1998 year-end closing or statement preparation processes were
modified to ensure that the fiscal year 1998 reclassification was made prior to the
preparation of draft financial statements. By not modifying the closing and statement
preparation process to require the reclassification and subsequent management
review, management contributed to classification errors in the Foundation’s draft
financial statements for fiscal year 1998 year.

Also, in developing certain financial information needed for footnote disclosure in the
fiscal year 1998 financial statements, various errors were made that should have been
detected by management during a review of the draft fmancial statements and related
supporting documentation. For example, we noted that percentages on a key
allocation schedule were not consistent with dollar amounts presented. In addition,
we found that incorrect assumptions were made in allocating certain salary expenses
to functional expense categories such as selecting an employee whose time wasspent
primarily on program matters as a basis for allocating the salary of a former
administrative assistant who worked almost exclusively on administrative matters.

The nature of these errors demonstrates the need for Foundation management to
establish documented control requirements and related procedures to govern (1) the

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preparation of year-end closing entries, (2) the development of supporting
documentation for all closing/adjusting entries, and (3) management review and
approval.

FOLLOW-UP ON RECONCILIATIONS

During our fiscal year 1998 audit, we found that the Foundation did not consistently
follow-up on outstanding checks, including those outstanding for an extended period.
Bank reconciliations that include following up on unusual outstanding items should
be performed regularly to ensure that assets are properly safeguarded and controlled.
Performing reconciliations without timely following up on unusual outstanding items
serves to diminish the value and usefulness of the reconciliation as a control.

Our review of the fiscal year 1998 bank reconciliations found that the Foundation
failed to follow-up on a $1,050 check that had been outstanding for about 8 months.
Not following up on the outstanding check prevented the Foundation from learning
that the check had been voided. This problem occurred, in part, because the
Foundation did not have documented requirements and related procedures to identify
and follow up as appropriate, on unusual reconciling items, and for managerial review
and approval of completed reconciliations. Without such requirements and related
procedures to help ensure that effective bank reconciliations are performed, the
Foundation faces increased risk that assets are not properly safeguarded and
transactions are not properly recorded and summarized.

SEPARATION OF DUTIES

According to GAO’s Standards For Internal Controls in the Federal Government, key
duties and responsibilities in authorizing, processing, recording, and reviewing
transactions should be separated among individuals to reduce the risk of errors or
fraud and the chance that such actions may go undetected. During our fiscal year
1998 audit, we noted that the Foundation’s bookkeeper is responsible for recording
expenditures in the general ledger and for reconciling the Foundation’s checking
account. These responsibilities require the bookkeeper to have access to the
Foundation’s checkbook. Providing an individual, whose responsibilities include
recording revenue and expense transactions in the general ledger, with access to the
Foundation’s checkbook and register to perform reconciliations, represents
inadequate separation of duties.

Management of any organization is ultimately responsible for designing and
implementing internal controls based on their associated costs and benefits. While,
small organizations, such as the Foundation, face particular challenges in establishing
adequate separation of duties, management should take steps to reduce the risk
posed by inadequate separation of duties. We suggest that management establish
compensating controls such as requiring the National Director to review monthly
bank statements, canceled checks, and the results of the monthly reconciliation

5                                   GAOIAIMD-99-224R Congressional Award Foundation
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process. In addition, the Foundation’s administrative assistant could review the
checkbook before and after (1) authorized disbursements have been made and
recorded and (2) the periodic bank reconciliation has been performed.

MANAGEMENT ACTION NEEDED

For the past several years, following the completion of our financial statement audits,
we have emphasized the need for Foundation management to establish, document,
and implement control requirements and related procedures. The relative importance
of doing this increased in April 1999, with the departure of the Foundation’s former
national director. Given the Foundation’s relative size and limited staffing, the former
national director, who held the position for the last 10 years, played a very significant
and central role in the Foundation’s system of internal control. With the lack of
established control requirements and related procedures, the loss of her knowledge
and experience increases risks associated with not properly recording and
summarizing transactions and safeguarding assets. Moreover, it heightens the need to
establish, document, and implement appropriate control requirements and related
procedures. We suggest that the Foundation obtain technical assistance to establish
and document these internal control requirements and related procedures.

To oversee and monitor management’s progress in establishing, documenting, and
implementing control requirements and related practices, the Foundation’s Board of
Directors may wish to consider forming an audit committee. In the private sector,
audit committees are typically charged with overseeing and monitoring an
organization’s financial management, reporting, and internal control activities as well
the annual audit process. Trtforming an audit committee of the Board, we suggest
that the Board consider including one or more individuals with specific knowledge of
and experience in fmancial accounting and reporting applicable to not-for-profit
organizations, as well as internal control-related issues applicable to small private
organizations.

Because of the heightened need to establish, document, and implement control
requirements and related procedures, we are sending copies of this letter to
Thomas D. Campbell, Chairman, Board of Directors, and Janice Griffin, Foundation
Treasurer and member of the Board of Directors. This report is intended for the use
of the Foundation’s management, its Board of Directors, and members of Congress.
However, this report is a matter of public record and as such will be made available to
other interested parties upon request.




 6                                   GAO/AIMD-99-224R
                                                    CongressionalAward Foundation
B-283047


We appreciate the cooperation and assistance Foundation management and staff
provided during our audit of the Foundation’s fiscal year 1998 financial statements. If
you have any questions regarding this letter, please contact me or John Reilly at
(202) 512-9406. Key contributors to this assignment were Yola Lewis and Ben Smith.

Sincerely yours,




Robert W. Gramling                v
Director, Corporate Audits
 and Standards




(917798)

7                                     GAO/AIMD-99-224R Congressional Award Foundation
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