oversight

Smithsonian Institution's Banking Practices for Private Funds

Published by the Government Accountability Office on 1977-09-20.

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

                          DOCUMENT RESUME
03473 - [A26.3830)

[Smithsonian nstitution's Banking Practices for Private Funds].
 GGD-77-67; E-133332. September 20, 1977. 9 pp.
Report to Sn. Robert C. Byrd, Chairman, Senate Committee on
Appropriations: Interior Subcommittee; Sen. Ted Stevens, Ranking
Minority  ember; by Elmer B. Staats, Comptroller General.
Issue Area: Accounting and Financial Reporting (2800).
Contact: General Government Div.
Budget Function: General Government: Other General Government
     (806).
Organization Concerned: Smithsonian Institution.
Congressional Relevance: Senate Committee on Appropriations:
    Interior Subcommittee. SeD. ed Stevens.

           The Smithsonian Institution maintained 41 accounts
 financial institutions and the United States Treasury. Most in
                                                              of
these were small checking accounts used to pay expenses at
Smithsonian locations outside the District of Columbia. The
                                                              use
tf five principal accounts was reviewed, two at the American
Security and Trust Company, two at the Riggs National Bank,
                                                              and
a depcsit suspense account in the United States Treasury.
Findings/Ccnclusions:   The Smithsonian Institution has adopted
adequate procedures for the management of cash in its private
funds. It strives to maintain only sufficient funds in its two
principal ncn-interest-bearing cecking accounts to pay the
payrcll checks and other checks presented for payment each day.
Through the use of repurchase areementc, a savings account, and
short-term investments, the Smithsonian attempts to earn
interest on any funds not needed immediately to pay its
expenses. However, during the period January through April,
1977, it made no attempt to earn interest on the American
Security and Trust checking account float. The Smithsonian keeps
separate accounting records for the Smithsonian Research
Foundation. (Author/SW)
               COMPTR(IftUR   NEIRAL iF THE UNITIED "ATS
                          WAI1NGTON,~
                                   .      0141




3-133332                                    September 20, 1977



To the Chairman
  and Ranking Minority Member
Subcommittee on Interior
Committee on Appropriations
United States Senate

     This report discusses the Smithsonian Institution's
private funds banking practices,, which your Subcommittee
asked us tc look into. and which Dere not discussed in our
March 31, 1977. report (GGD-77-.43) on the Smithsonian.

     As of April 30, 1977, the Smithsonian maintained
41 accounts in f:.nancial institutions and the Un.ited States
Treasury.  Most of these are small checking accounts used
to pay local expenses at Smithsonian locations outside
Washington, D.C.

     Our review was limited to analysis cf the use of five
principal accounts--two at the American Security and Trust
Company, two at the Riggs National ank, and a deposit
suspense account in the United States Treasury.  In our
view the Smithsonian has established adequate procedures
to keep non-interest-bearing checking account balances at
minimum levels sufficient to serve its needs.

FUNDS MANAGEMENT

     The Smithsonian Treasurer has overall responsibility
for the,Smithsonian's financial assets.  The investments
accounting division in the Office of the Treasurer is
responsible for cash management and cash needs forecasting.
One employee in the accounting division of the Office of
the Treasurer is engaged full-time in monitoring and ana-
lyzing the bank accounts and in providing the investments
accounting division with information needed in its cash
management responsibilities.


                                                                 GGD-77-67
B-133332


     The invesl:ment:s accounting division. attempts through
various methods to invest, on a short-term basis, any
operating fund3 which ae temporarily available.      In the
past 2 years sveral different methods have been used.
Currently, any e::cess operating funds are deposited in a
savings account at American Se-urity and Trust or invested
in a hort-tern :.nvestment pool.

     When the irision's forecasts show that a large amount
of cash beyond foreseeable current needs will be accumulated,
the Smithsonian Treasurer obtains authorization from the
Board of Rlegents to tran3fr the excess cash to one of four
investment trust accounts nmaintained at Riggs. These funds
are available for longer term investment by three profes-
sionai investment firms.

U.S. TREASURY SSPENSE ACCOUNT

     The Smithsonian has had a    posit suspense account at
the U.S. Treasury for its private fuids since 1874.   Deposits
into the Treasury account consist of grants, gifts, receipts
from auxiliary activi":ies such as magazine and museum shop
sales, and the various other sources cf Smithsonian private
funds.  Some of these receipts, such as grants and museum
shop sales, are now first deposited in a Riggs collection
account and then transferred daily to the Treasury account.
At one time the Treasury account served as the Smithsonian's
principal checking account from which payroll and other pay-
ments were made. However, that function is now handled pri-
marily through a Rggs payroll account and the American
Security and Trust operating account. Withdrawals are made
from the Treasury account for transfers to the American
Security and Trust operating account, Riggs payroll account,
and the other checking accounts.   When excess funds accumu-
late in the Treasury account, they are transferred to an
American Security and Trust savings account.

     We were advised by the Smithsonian that the Treasury
account is also used, in a limited way, for payroll purposes
and for payment of some accounts payable. The account is
charged for salary payments to private employees who want
checks sent to a bank, thus enabling Treasury to merge into
one document both Federal and private salary payments of
Smithsonian employees who designate the same bank. Occa-
sionally checks are also drawn on the account to pay vendors
who submit bills for work chargeable in part to the Smith-
sonian's private funds and in part to its appropriated funds.



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B-133332



The vendors get one check to cover the appropriated fund and
private fund charges.  Using the deposit suspense account
for these two purposes, according to Smithsonian officials,
faci.itates the cccunting work for the Smithsonian, assures
prompt and safe receipt of paychecks for those Smithsonian
employees designating banks, and eliminates confusion for
vendors who would otherwise ceceive two checks for partial
payment of each bill.

     In calendar year 1976 the Treasury account had an
average daily balance of $442,000, according to the Smith-
sonian's books. The Smithsonian later decided to keep the
balance at about $250,000 by transferring the excess to the
savings account. A Smithsonian official recently told us
that they would reassess the use of the account and the
average balance nay be further reduced.

ACCOUNTS AT ANERICAN
SECURITY AND TRUST

     In March 1966, the Smithsonian opened an account at the
American Security and Trust Company for the purpose of de-
positing receipts from museum shop sales.  Later, payments
under Federal grants and contracts were deposited in the
account. Originally the only checks written on this account
were for monthly or bimonthly withdrawals for deposit in the
Smithscnian's Treasury suspense account.  In July 1968, the
Smithsonian began drawing checks on the American Security
and Trust account to pay some operating expenses and began
making deposits to it, when necessary, from the Treasury
suspense account. The account became the Smithsonian's
primary operating account--taking over that role from the
Treasury suspense account. The change was made because the
Smithsonian Treasurer believed that the private bank pro-
vided more timely service and information on the operating
transactions flowing through the account.

     In April 1977, the Smithsonian discontinued using the
American Security and Trust operating account as the initial
depository for museum shop sales receipts and payments under
Federal grants and contracts. All such receipts now go to
the Riggs collection account. Thus, the only deposits to
the American Security and Trust account are transfers from
the Treasury suspense account to cover checks issued in pay-
ment of operating expenses.




                           -3-
B-133332



Investment: of excess cash

      In Jne 1975 the Smithsonian entered into a repurchase
agreement with American Security and Trust whereby the Smith-
sonian would withdraw daily from the operating account excess
funds whict: American Security and Trust would invest in short-
term money market securities (usually Treasury bills and notes)
with the tipulation that American Security and rust would
repurchasE: them from the Smithsonian to fulfill any Smithson-
ian cash needs. Pior to this agreement the Smithsonian
invested   ts excess operating funds primarily in Certificates
of Deposit:. According to the Smithsonian the repurchase
agreement provided greater liquidity with a comparable rate
of return.

     In late 1975     Smithsonian analysis of the operating
account. chowed that: there was an opportunity to s/so earn
interest on the "float" resulting from the timing difference
between t:he writinc of the checks on the operating account
and their being chairTed against the account. To accomplish
this the Smithsonian broadened its repurchase agreement with
American Security and Trust on December 3, 1975.

     Under the new agreement American Security and Trust exam-
ined the Smithsonian's operating account at the start of busi-
ness each day,  If the balance exceeded whatever amount the
Smithsonian had designated as necessary for daily operations
(that is, necessary to pay the checks which it expected to
clear that day) American Security and Trust would invest the
excess. If the balance went below the Smithsonian-designated
minimum, American Security and Trust would sell or repurchase
for its own account enough of the notes and bills it was hold-
ing for the Smithsonian to bring the balance up 'to the desig-
nated minimum. American Security and Trust did not charge the
Smithsonian directly for this service but recovered its costs
by giving the Smithsonian a slightly lower rate of interest
than the bank earned on the funds invested for the Smithsonian.

     The use of the repurchase agreement for investment of
excess operating funds and checking account float was inter-
rupted twice after December 1975. The first occasion was
early in 1976 when interest rates available on money market
investments fell below the rate of interest which American
Security and Trust paid on savings accounts. The Smithsonian




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8-133332



opened a savings account at American Security and Trust
on March 18, 1975, and kept the excess operating funds
and the checking account float in the saving account.
When needed, transfers were made from the savings account
to the checking account to cover checks presented for pay-
ment. On May 28, 1976, it was again more profitable to
use the repurchase agreement, and the Smithsonian then
discontinued using the savings account.

     The second interruption lasted from January 3 to
Anril 21, 1977, when Smitthsonian officials were rmaking
a general reassessment of Smithsonian bank accounts.
During this interruption the savings account was used
for investment of excess operating funds, but no attempt
was made to earn interest on the checking account float.
On Aril 21, 1977, the Smithsonian reverted to using the
repurchase areement with American Security and Trust
for investment of the checking account float, after judg-
ing   t to be the most effective method for investing such
funds.   Excess operating funds were retained in the sav-
ings account.

     Our review of the daily bank statement balances in the
operating account showed that the Smithsonian was most ef-
fective in maintaining this balance at minimum levels when
it was investing both excess oerating funds and the float.
From July 1, 1975, through November 30, 1975, when the
Smithsonian retained sole management of the American Secur-
ity and Trust account, investing only the excess operating
funds uncer the repurchase agreement, the average daily bank
balance in the account was $798,000.  For the 13 mo-ths
(Dec. 1975 to Dec. 1976) that the checking acco,:..c fluat,
in addition to the excess operating fund.,      invested
through the repurchase agreement or in a savings account
with American Security and Trust sharing in the managemert
of the funds, the average daily bank balance dropped to
$2',000. During January and February of 1977, when the
Smithsonian again had sole management of the funds and used
the savings account for invescing only the excess operating
funds, the average daily bank balance in the operating
account was $850,000.  However, the average daily check
book balance was about $225,u00--the difference of $625,000
represented by outstanding checks or the float. Investment
of the checking account float, as well as the excess operat-
ing funds, with daily contact between American Security and




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B-133332


                                               the most effec-
                       officials seeras to be the
Trust and Smithsonian nonearning balance  in      operating
tive way to keep the
account to a minimum.
                                                 and Trust
     The operating account at American Security       check-
                                           principal
was used extensively as the Smithsonian's
                                               During  the
ing account for payments other than payroll.
                                           an average  of
15-month period ended September 30, 1976,            a month
over 2,600 transactions (deposits and withdrawals)
                                               deposits   to
                                          only
were handled by this account. Since the               Treasury
                                            from the
the operating account as of April 1977 are
                                        operating funds no
account to cover  issued checks, excess
longer accumulate in this account.

     Excess operating funds are transferred periodically
                                            Security and Trust
from the Treasury account to the Aim.rican   balance gets larger
savings account. When tie savings   account
                                            are  transferred to
than needed for operating liquidity, sums       or to the outside
                                         pool
the Smithsonian's short-term investment             The savings
investment managers for longer term investment.
                                $1.4 million on June 22, 1977,
account had a balance of aboutbeen
the day after $1 million had       transferred to an investment
manager for long-term investment.

Secretary's relationship to
American Security and Trust
                                                        by the
      The Secretary of the Smithsonian was appointed        to
                                                  employee
 Board of Regents in 1963 as a private payroll
 assume his duties in 1964.   He became a member of the board
 of directors cf American  Security and Trust in February 1967
                                                    !976.   His
 and resigned after 10 years service in Decembe        committee
 service on the board was approved  by the   executive
                                            The Smithscnian In-
 of the Smithsonian's Board of Regents. Foundation opened
 stitution and the Smithsonian  Research
                                             Trust in 1966,
 bank accounts with American Security and
                                    of  the  bank's board of
 before the Secretary was a member
                                              he was appointed
 directors, and they were maintained after
                                     not the first accounts
 to the board. However, these were Security
                      with American            and Trust. The
 the Smithsonian had
                                               bank in 1927.
 Smithsonian first opened an account at the
                                                  Foundatijn's
      Although the Secretary is a member of the          when
                                         at the  meeting
 board of directors, he was not present           Security and
 it was decided to open the account at  American




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B-133332



Trust. At that time, however, he was serving as president
of the Foundation. We were advised by the Smithsonian that
the Secretary no longer owns the American Security and Trust
stock which he as required to hold as a director of the bank.

ACCOUNTS AT THE
RIGGS NATIONAL 3ANK
     The Smithsonian opened its payroll checking account at
Riggs National 3ank in 1955.  It is usd to pay employees on
the private payroll who do not have their paychecks sent to
a bank.

     The Smiths'onian's usual procedure for administering the
payroll account is as follows.   For each 2-week pay period
the Smithsoniar deposits in two increments the total amount
of the paychecks written against the account for that period,
The first deposit, usually for $150,000, is made on the same
day for which the paychecks are dated. The second deposit,
for the remaincer of the payroll, follows 3 to 5 days later.
The average da4ly bank balance in the account from July 1,
1975, to Januaiy 31, 1977, wa, about $96,000.
     The Smith::onian also has a collection account at Riggs.
'he account wa;i: opened in April 1976 for receipt of mail
order payments for museum shop items. Three times daily
Riggs' messengers pick up the mail orders from a post office
box rented in the ZS.ithsonian's name.   The same day the mail
is picked up, Riggs deposits any checks received into the
collection account and forwards a deposit receipt and a ist-
ing of the checks received to the Smithsonian.

     In April 1977, the use of this account was expanded to
include receipts from over-the-counter museum shop sales and
payments received under letters of credit on Federal grants
and contracts. Previously these receipts were initially
deposited in the American Security and Trust operating account.
Money is transferred daily from the collection account to the
Treasury suspense account. The balance in the collection
account is maintained, together with the payroll account bal-
ance, at a level high enough to reimburse Riggs for its pay-
roll and collection services.

     Smithsonian officials advised us that use of the collec-
tion account reduces the amount of clerical work performed




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3-131332



by Smithsonian employees and results in receipts from
revenue-producing activities becoming available to the
Smithsonian more quickly than if the receipts were
deposited directly into the Treasury suspense account.

     Four separate trust accounts are also maintained at
Riggs to temporarily held funds awaiting investment by
professional investment managers engaged by the Smithson-
ian for this purpose. These funds; are used for long-term
investment, as opposed to the day-to-day investing of op-
erating funds by Smithsonian officials through the check-
ing account repurchase agreement or the savings account at
American Security and Trust.

CONCLUSION

     In our opinion, the Smithsonian has adopted adequate
procedures for the management of cash in its private funds.
It strives to maintain only sufficient funds in its two
principal non-interest-bearing checking accounts to pay
the payroll checks and other hecks presented for payment
each day. Through the use of repurchase agreements, a
savings account, and short-term investments, the Smithson-
ian attempts to earn interest on any funds not needed im-
mediately to pay its expenses. We believe that beginning
in December 1975 it did this successfully, except during
the period January 3 through April 20, 1977, when it made
no attempt to earn interest on the American Security and
Trust checKing account float. On April 21, 1977, the
Smithsonian resumed earning interest on that float.

Private, nonprofit corporations

     The Smithsonian Research Foundation maintained a bank
account with American Security and Trust for about 11 years
beginning in June 1966.  In Januar? 1977, the Smithsonian
began acting as the Foundation's fibsal agent and custodian
and closed the Foundation's account at American Security
and Trust on May 3, 1977. As needed, the Foundation's funds
are now withdrawn from the Smithsonian's appropriated fund
accounts and deposited in the Smithsonian's U.S. Treasury
suspense account. Foundation funds are then withdrawn from
the Treasury account and deposited in the Riggs payroll
account or the American Security and Trust operating account
for the Foundation's se in paying payroll and other costs.
B-133332



The Smithsonian keeps sepa::!'ate accounting records for the
Foundation's funds.

     tn the 15-month period from July 1, 1975, to Septem-
ber 30, 1976, the average ieposits per month in the f'oun-
dation's bank account totaled $166,144, while an average
of 300 checks were paid pel: month, totaling $162,766,
The average daily balance in the account for the 15-nionth
period was $64,185.        l
      Although the Smithsonian Science Informatior Exc:hange
has a small checking accouit at the Madison Naticnal Bank
for satisfying minor immediate needs, its major cash trans-
actions have been handled :Dy the Smithsonian in     man:ner
similajr to that currently .:sed fer the Smithsoniain Rsearch
Foundzltion.

Scope of review

     We reviewed the Smithsonian's policies and rocedure
for the use of bank accour'ts and banking services; in,man-
aging its private funds.   In this regard, we examined spe-
cifically the transactions, recorded in two principal bank
accounts--the American Security and Trust operating account
and the Riggs payroll acc unt--during the 15-month period
ended September 30, 1976. We conducted followup work con-
cerning several bank accot'nts to find out the current status
of the Smithsonian's banking practices.

     We also discussed the Smithsonian's banking practices
with Smithsonian officials and the certified public account-
ants who examined Smithsonian private funds, including those
on deposit at financial institutions and the United .'tates
Treasury.  Smithsonian officials reviewed the draft report
and we considered their comments in preparing our final
report.




                                 Comptroller General
                                 of the United States




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