_ l... . “I”_.....----.-“__.I -..___.__ -.-.- .._-.----... Ihw~rlrlM~r I!)!N) FINANCIAL MANAGEMENT Internal Control Weaknessesin l?FWs Civil Penalty Program I I ullll 142869 --....-- -..--..._l.l.--l^-ll... .---”.._.- _.~ .._-. -.- .--.- -..- -.._..- --“- __----~._ (;Ao,/It~:f51,-!~1-~17 United States GAO General Accounting Office Washington, D.C. 20648 Resources, Community, and Economic Development Division B-241898 December26,199O The Honorable Samuel K. Skinner The Secretary of Transportation Dear Mr. Secretary: As part of our continuing effort to describe how federal agenciesare improving internal controls under the Federal Managers’Financial Integrity Act of 1982 (31 U.S.C.3612 (b)), we are issuing this report on internal control weaknesseswe identified within the financial manage- ment of the Federal Railroad Administration’s (FXA)civil penalty pro- gram. This program, which is managedby FRA’SOffice of Chief Counsel (occ) and Office of Financial Services(OF@,assessesrailroads’ penalties for violations of safety regulations that pose an immediate safety hazard. We performed this work during our review of the effectiveness of FRA’S safety enforcement program which we will be reporting on to the Chairman, HouseEnergy and CommerceCommittee, in the next few months. We found internal control weaknessesin the financial managementof Results in Brief FRA’S civil penalty program that undermined compliance with federal standards for settlement, collection, accounting, and recordkeeping. Additionally, FRA’S actions did not comply with its own internal stan- dard operating procedures and policies, Specific problems included the following: l occ did not keep adequate records of railroad correspondencein numerous casesand was therefore unable to readily determine which railroads had and had not respondedto notifications of safety violations and potential civil penalty assessments. . OFSdid not establish accountsreceivable for millions of dollars in civil penalty payments becauseocc staff did not follow required procedures, resulting in a loss of control over government receipts. . CKXdid not processand OFS did not deposit somereceipts in a timely manner, leading to a loss of revenuesdue to foregone interest earned on deposits. . occ frequently did not enforce provisions for charging interest and administrative costs for overdue civil penalty payments. As a result, the federal government lost potential revenues. . occ was not timely in settling railroad violation casesand collecting civil penalties, resulting in increased federal government borrowing. Page 1 GAO/RCED-91-47 Financial Management Systems _______--.- R-241898 FRA is responsiblefor establishing and enforcing safety regulations for Background the railroad industry. FRA inspectors monitor railroads’ compliance with these regulations by routinely inspecting railroads. When inspectors identify violations (defects) that pose an immediate safety hazard, they prepare violation reports that are submitted to FRA’SOffice of Chief Counsel.The occ Safety Division reviews the reports for adequacy of evidenceand consistencywith enforcement policy and aggregatesthem ’ into casesfor assessmentagainst individual railroads. occ determines the appropriate penalties for each caseand issuesa notification letter to a railroad that summarizesthe violations contained in the caseand iden- tifies evidencesupporting FRA’Sposition. Oncea railroad is notified of a safety violation and of associatedcivil penalties, the processfor settling the casebegins. In hazardous materials cases,railroads have 30 days to reply to FXAon the validity of the viola- tions, according to federal regulations, If a railroad doesnot reply within the allowed time, it must pay the fine immediately and forfeit its rights to an administrative hearing, However, in casesinvolving the rail safety acts,’ FRAgives railroads more time to investigate. After their own investigations, the railroads may negotiate a settlement with FRA. Larger railroads usually negotiate settlements annually with FRA in con- ferencesthat include technical experts and attorneys from both the rail- road and FRA. When FRAand the railroad reach agreementon the settlement amount, CKCputs the agreementin writing and requests pay- ment. The railroad then has 30 days to pay the full settlement amount to avoid paying interest and late charges. When a civil penalty casehas been settled, the responsibleocc attorney prepares a settlement sheet including the basis of settlement and a “Railroad Accounting Division (RAD) - 41” memorandum. This memo- randum indicates the fines and fees to be collected from the subject rail- road, as well as the due date(s). The attorney delivers these documents to occ administrative staff, who then deliver the RAD41memorandum to FIU’SOffice of Financial Services,which operates FRA’S centralized accounting system, and file the others. When OFSreceivesthe RAD-41 memorandum, it establishesan account receivable for the settlement amount in m’s accounting system. *The Safety Appliance Ad, 46 USC. 1716;the Locomotive Inspection Act, 46 USC. 22-34; the Acci- dent Reports Act, 46 USC, 3843; the Hours bf Service Act, 46 U.S.C. 61-64b; Feakai Railroad Safety Act of 1970,46 USC. 421 5 s; and the Signal Inspection Act, 49 USC. app. Sec. 26. Page 2 GAO/RCED-9147 I4nancia.l Management Systems R-241898 In fiscal year 1989, FRA sent letters to railroads concerningviolation reports that occurred mostly in fiscal year 1987 or before. These viola- tions were potentially worth $5.6 million in civil penalties. Additionally, through negotiation of 800 cases,FRA settled 6,577 violation reports received in fiscal year 1989 and before totalling $4.62 million in civil penalties. Standards for the financial managementof the federal government’s claims, such as FRA's ci alties, have been establish Congressand GAO. 1Claims Collection Act o&a 508,80 Stat. 308 (1966)), as amended,2sets federal requirements for the prompt settlement of the government’s claims, including the civil penal- ties FRA assessesagainst railroads for safety violations. Additionally, GAO'S Policy and ProceduresManual for Guidanceof Federal Agencies provides financial managementguidance and establishesrequired proce- dures for accounting and internal controls. FRA’SOFS has also developed standard operating procedures for managing FXA’Scivil penalty collec- tion activities. (App. II contains details on internal financial control requirements.) We found internal control weaknessesthat undermined the integrity of Internal Control the financial managementsystem for FRA'S civil penalty program. FE4 Weaknesses complied with neither governmentwide requirements nor its own internal standard operating procedures and policies in four areas. First, records of significant transactions were frequently inadequate or non- existent. Second,FRA did not establish accountsreceivable for millions of dollars in civil penalties assessedagainst railroads. Third, FRA deposited numerous civil penalty receipts later than federal standards allow. Last, FRA enforced neither statutory nor FRA'S policy for assessinginterest and administrative chargeson late railroad penalty payments. These problems resulted from a general inattention and lack of importance attached to internal control standards as well as from strained resources.Although occ’s Safety Division hired four additional attor- neys to alleviate staff resource strains between May 1988 and March 1990, these internal control problems continued to exist. Recordkeeping Inadequate GAO'S Policy and ProceduresManual, Title 8, “Records Management,” ” informs federal agenciesthat they are required to keep records of agency transactions and functions in order to protect the government’s 2Amended by Ikbt Collection Act of 1982 (P.L. 97-366,96 Stat. 1749 (1982)). Page 3 GAO/RCED91-47 Financial Management Systems B241898 interests. However, occ did not comply with these federal recordkeeping requirements. For example, occ has records that were designedto account for casesthat have been settled; however, as of May 1990, these records were not current. Administrative staff responsible for updating the records were involved in other duties and had not made any entries between September 1989 and May 1990, even though FRAhad settled civil penalty casesfor more than 3,000 violations during that period. GAO'S Policy and ProceduresManual, Title 8, points out that federal agenciesare required to make and preserve records of agency transac- tions so that the legal and financial rights of the government are pro- tected. Thus, records of railroad responseto FRA’Sletters stating that rail safety violations have occurred must be maintained in order to pro- tect the government’s legal and financial interests. Railroad responseis especially important‘in,hazardous materials cases.Federal hazardous materials regulations (49 C.F.R.209.107) state that a failure to respond to a Notice of Probable Violation constitutes forfeiture of all rights to any administrative hearing and requires the railroad to pay the penalty immediately. For both hazardous materials and rail safety violations, FRA'S letters that notify railroads that violations have occurred request a response,in accordancewith these requirements. Railroads respond both in writing and by telephone. occ attorneys are responsible for maintaining records of these responses.An occ official told us that rail- road correspondenceis generally retained by the responsible attorney and not put in the official casefile. We found that FRA’Srecords of railroad responsesto civil penalty notifi- cation letters were inadequate in certain cases.For example, only 27 of 197 official files we reviewed for civil penalty casesclosed during fiscal year 1988 contained records of railroad responses.Similarly, only 25 of 49 official files for “top priority” civil penalty casesinitiated during fiscal year 1986 through December1989 contained records of railroad responsesto notifications of violations, even though FM'S letters clearly requested a railroad responsewithin 30 days of receipt of the letter. Therefore, in these cases,it was impossible to determine from the offi- cial files which railroads had and had not responded.As a result, in sev- eral hazardous materials casesclosedduring fiscal year 1988, we found it difficult to determine whether a railroad owed an immediate payment. Furthermore, in over 60 percent of the top priority casefiles reviewed, we could not determine how quickly railroads respondedto FRA’Snotifi- cation becauseno record of railroad responsewas evident. Page 4 GAO/RCRD-91-47 Financia.l Management Systems R-241898 Accounts Receivable GAO'S Policy and ProceduresManual, Title 2, requires federal agenciesto System Ineffective establish accountsreceivable. FRA'S centralized accounting system is operated by OFSand includes standard operating procedures for the establishment and maintenance of accountsreceivable which consist pri- marily of civil penalty payments from railroads. However, from October 1988 through January 3 1, 1990, civil penalty checkstotalling $3.26 mil- lion were received by OFSwithout corresponding accountsreceivable records. In these cases,the ~~-41 memorandum was not prepared by occ attorneys and forwarded to 01%to initiate an account receivable, as required. Consequently,there was a loss of control over these govern- ment receipts becauseOFSstaff did not know how much money was owed by specific railroads or when payments were due. Furthermore, in certain casesin which FRA followed its procedures for establishing accountsreceivable, control over civil penalty receipts was compro- mised. For example, in October 1988,two civil penalty checkstotalling $139,000 were lost in occ offices. Although an account receivable had been established, occ staff did not realize the checkswere missing. These checks were not discovered and deposited until nearly 3 months later. Additionally, OFSdid not record dates of payment receipt in many . cases,thereby undermining FRA'S ability to monitor the status of pay- ments being processed. Debt Payments Deposited GAO'S Policy and ProceduresManual, Title 7, describesDepartment of Late the Treasury standards that require agenciesto deposit debt payments within 5 days from their receipt. Furthermore, FRA'S internal provisions require occ to forward monies mistakenly sent by railroads to occ to FRA'S 0~swithin 2 businessdays. However, FRAregularly did not comply with requirements for timely deposit and handling of debt payments. In someof the casesin which railroads mistakenly sent civil penalty checksto occ instead of to OES,the checkswere not forwarded to OFSor deposited within the established time limits. We found that normally one administrative staff member is responsible for opening OCC’S mail, accounting for civil penalty checks sent to occ, and handcarrying these checksto OF%This individual had numerous other administrative duties in addition to handling payments. We found that between October 1,1987, and December31,1989, rail- roads made 263 civil penalty payments totalling $8.94 million to FRA.Of these, at least 16 were received in occ and not forwarded to OFSwithin established time limits. Furthermore, FFSdeposited 24 payments total- ling $1.68 million, about 19 percent of the total payments, between 3 and 92 days later than required. As a result, FRApostponed interest that Page 5 GAO/RCED-91-47 l!imu~cial Management Systems B241898 should have been paid to the federal government on deposited railroad debt payments. An FRAofficial told us that checksmistakenly sent by railroads to occ attorneys occasionally remained unprocessedfor extended periods and were therefore not deposited within required time limits. For example, in October 1988, two civil penalty checkstotalling $139,000 which a railroad sent to occ remained in an occ attorney’s inbox until January 1989. The attorney said that he did not sort through hi8 inbox until January 1989 becausehe was temporarily assignedto writing regulations. Provisions for Charging Both the Federal Claims Collection Act and FRA'S own statements in set- Interest and tlement agreementsrequire that late payment penalties be assessedon overdue debts owed to the government. However, FRA regularly did not Administrative Expenses enforce these requirements. For example, during the period October 1, Not Enforced 1987, through December31,1989,10 accountstotalling over $325,000 were either overdue or paid in installments. FXA’Ssettlement notices sent to railroads state that interest and administrative chargeswill be levied for failure to pay the full settlement amount by the date specified. How- ever, no interest, penalties, or administrative chargeswere assessedfor these late or extended payments. Instead, occ attorneys simply amended the settlement agreementswith new due dates. As a result, the federal government lost potential revenuesfrom interest and administrative chargesthat FFUshould have collected. However, due to data limita- tions, we could not determine the amount. GAO'S Policy and ProceduresManual, Title 4, requires effective agency Settlement Goals Not debt-collection programs that are comprehensive,vigorous, and uni- Met formly applied. These programs should provide for timely, forceful, and persistent action to collect payment of debts. We found that occ’s debt collection efforts do not meet these financial managementobjectives. Since 1986, a backlog of casesawaiting transmittal to railroads has existed becauseattorney staff turnover, combined with an administra- tive staff shortage, affected the rate at which an increasing number of violation reports and casescould be processed.Currently, FRA takes about 3 years to transmit and settle a civil penalty case. FRA’Sbacklog has undermined efforts to set and maintain firm goals for transmitting and settling outstanding civil penalty casesand collecting penalty payments. In May 1988, occ issued its 1988 enforcement proce- dures that listed December31, 1988, as the goal for settlement of pre- 1987 civil penalty cases.However, since as early as 1986, a backlog of Page 6 GAO/RCED-9147 Financial Management Systems B-241898 civil penalty caseswaiting to be transmitted to railroads has existed and continues to grow. In May 1986, there were 5,334 violation reports in the backlog. In February 1988, the backlog had grown to 11,000viola- tion reports. By the end of 1989, the backlog was almost 18,000 viola- tion reports. Thus, when it becameapparent that the 1988 goal would not be met, occ issued a subsequentmemorandum that changedthe set- tlement goal for pre-1987 casesto December31,1989. However, as of that date, 1,241 pre-fiscal year 1987 violation reports contained in cases transmitted to railroads had not been settled. Furthermore, occ had taken no action on an additional 363 pre-fiscal year 1987 violation reports received in cxc from FRAregional offices. These untimely actions to settle and collect civil penalties resulted in reduced federal revenuesbecausethe funds accruing from these settle- ments were not available to offset potential federal borrowing of the settlement amounts. For example, if FRAhad collected the $3.04 million from pre-fiscal year 1987 casesthat were settled in fiscal year 1989 6 to 12 months earlier, the potential interest savings to the federal govern- ment would have been between $140,000 and $240,000. FRA’Scompliance with federal financial managementstandards has been Conclusions undermined by internal control weaknessesin its civil penalty program. As a result, FRA (1) could not ascertain whether or not railroads respondedto numerous civil penalty notification letters; (2) lost control over millions of dollars in government receipts; (3) postponed interest that would have been paid on timely deposits of receipts; (4) lost poten- tial federal revenuesfrom interest and administrative chargesnot levied on late civil penalty payments; and (6) increasedfederal borrowing costs as a consequenceof not meeting its claims settlement goals. Although the systems and procedures we discussedabove were in place to effectively managethese activities, inattention to internal financial control standards coupled with strained resourcesresulted in noncom- pliance in this important area. A rigorous program to enforce adherence to internal control principles, which could include training and more continuous oversight, would help to prevent a recurrence of these condi- tions. Furthermore, such a program will both strengthen the financial managementof FRA’Scivil penalty program and increaserevenuesto the government. We recommendthat you direct the Administrator, FRA,to initiate a pro- Recommendations gram to enforce adherenceto internal controIs by FRApersonnel so that Page 7 GAO/RCED-91-47 Financial Management Systems B-241898 the integrity of the civil penalty program’s financial managementis not compromised.In particular, this program should emphasize . updating and maintaining civil penalty caserecords, including docu- menting railroads’ responsesto penalty notifications and negotiations in official casefiles; . establishing formal accountsreceivable records when railroads are ini- tially notified that violations have been cited and civil penalties assessed; l forwarding receipts directly received by occ to OFSwithin required time limits and ensuring that deposits are made in accordancewith federal requirements; and l enforcing statutory and agency provisions for charging interest, penal- ties, and administrative costs on overdue civil penalty debts. ‘,, In addition, we recommendthat you direct the Administrator to set real- istic goals for the settlement of claims against railroads basedon analy- sesof attorney and administrative staff workloads. We also recommendthat occ begin enclosing envelopesthat are pread- dressedto OFSwhen settlement agreementsare sent to railroads. This would reduce the recurrence of situations in which railroads mistakenly send civil penalty checksdirectly to occ. We obtained information for this report during our review of FRA’S Scopeand safety enforcement program. We contacted FRAofficials and reviewed Methodology documentsand records from FRAheadquarters in Washington, D.C. The Chairman, HouseCommittee on Energy and Commerce,requested that we report on our findings directly to the Secretary of Transportation. A more complete description of our objectives, scope,and methodology appears in appendix I. Our review was conducted between April and September 1990 in accordancewith generally acceptedgovernment auditing standards. We discussedthe contents of this report with the FRAAdministrator and Views of Agency the FRA Chief Counsel,who generally agreedwith our findings. Officials Page 8 GAO/RCEB91-47 Financial Management Systems B-241898 The head of a federal agency is required by 31 U.S.C.720 to submit a written statement on actions taken on our recommendationsto the SenateCommittee on Governmental Affairs and the HouseCommittee on Government Operations not later than 60 days after the date of this letter and to the House and SenateCommittees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this letter. We are sending copies of this report to the FRA Administrator. We are also sending copiesto the House and SenateCommittees mentioned above; the Chairman, HouseCommittee on Energy and Commerce;and the Director, Office of Managementand Budget. Copieswill also be made available to others upon request. This work was performed under the direction of Kenneth M. Mead, Director, Transportation Issues,who may be reached at (202) 275-1000. Major contributors to this report are listed in appendix III. Sincerely yours, jtDFq Assistant Comptroller General Page 9 GAO/WED-9147 Financial Management Systems Contents Letter Appendix I Objectives, Scope,and Methodology Appendix II Financial Management Requirements Appendix III Major Contributors to This Report Abbreviations FRA Federal Railroad Administration General Accounting Office Y GAO occ Office of Chief Counsel(FRA) OFS Office of Financial Services(FRA) Page 10 GAO/RCED-9147 Financial Management Systems Page 11 GAO/RCEBBl-i? Financial Management Syatema Appendix I Objectives,Scope,and Methodology During our review of the Federal Railroad Administration’s (FRA) enforcement activities, requested by the Chairman, HouseCommittee on Energy and Commerce,we found a number of internal control weak- nessesin FRA'S financial managementof its civil penalty program. As agreed with the Chairman’s office, we are reporting on these findings directly to the Secretary of Transportation. Our objective was to deter- mine the extent to which the financial managementof FRA'S civil penalty program complied with federal claims collection standards, our accounting and internal control requirements, and FRA'S own standard operating procedures. We conducted our work at FRA headquarters in Washington, DC. We col- lected and reviewed documents and records from FRA'S Offices of Chief Counsel(OCC),Financial Services(OF@,and ManagementSystems.We also interviewed officials from each of these offices. To determine the standards with which FRAmust comply, we reviewed federal laws and regulations, as well as policy and procedure guidance, pertaining to debt collection and internal financial controls. We also reviewed FRA'S policy and procedural guidance documentson this subject. To determine the extent to which FRAcomplied with internal control and financial managementstandards, we examined FRA occ records for the civil penalty program. Specifically, we reviewed (1) log books showing penalty collections status and checksreceived, (2) computer records showing the aging of advances,receivables,and payables, and (3) files and documents regarding accountsreceivable and deposit records. We also obtained, through discussionwith FRA officials, information on FRAinternal controls procedures,occ processingof civil penalty settle- ments and collections, and procedures for processingrailroad payments made to FRA. Additionally, to determine what internal control weak- nessesFRA had previously identified and addressed,we examined recent FRAFederal Managers’Financial Integrity Act reports. We conducted our review between April and September 1990 in accor- dance with generally acceptedgovernment auditing standards. Page 12 GAO/RCED-9147 Financial Management Systems Appendix II F’inancid Management Requirements GAO'S Policy and ProceduresManual for Guidanceof Federal Agencies sets forth the financial managementrequirements that all federal agen- cies must follow. Title 2 of the Manual states that the head of each agency is responsible for establishing and maintaining adequate systems of accounting and internal control. These systemsmust conform to the accounting principles, standards, and related requirements and internal control standards prescribed by the Comptroller General. In addition, the Federal Claims Collection Act of 1966, as amended,sets legal requirements for prompt settlement of the government’s claims, including FRA'S civil penalties against railroads. Also, FRA’SOffice of Financial Serviceshas developedstandard operating procedures for managing m’s civil penalties program. According to GAO'S Policy and ProceduresManual, Title 2, “Accounting,” sound agency financial managementdependson strong financial man- agementsystems including sufficiently disciplined accounting systems, reliable financial information, and effective internal controls. Included in these systems are standards for recordkeeping, accountsreceivable, and handling and deposit of debt collections. A principal requirement is that federal agenciesmake and preserve records containing adequate documentation of essential transactions so that the legal and financial rights of the government are protected. Additionally, Title 7 of GAO'S Policy and ProceduresManual points out that records must be main- tained of all collections in sufficient detail to readily identify the collec- tions if called upon to do so. Agenciesmust also establish and maintain accountsreceivable in their accounting records. According to Title 2 of GAO'S Policy and ProceduresManual, amounts receivable by the agency from other entities should be recorded and accounted for as assetsfrom the time events giving rise to such claims are completed. These amounts should be categorizedinto agency accounting records under the heading “Accounts Receivable.” There are also requirements intended to minimize the potential for loss of government revenues.For example, GAO'S Policy and Procedures Manual, Title 7, describesthe standards for the timely handling and deposit of debt payments found in the Treasury Financial Manual, Volume I, part 6, chapter 8000. Receiptsof $1,000 or more should be deposited daily, while receipts of less than $1,000 may be accumulated and deposited when that total reaches$1,000. In no caseshould the date of deposit exceed5 days from receipt. Additionally, the Federal Claims Collection Act, as amended,requires agenciesto assessinterest, penal- ties, and administrative costs on overdue debts owed to the United States. Specifically, 4 C.F.R. 102.13 requires that (1) interest accrue Page 13 GAO/RCED-9147 Financial Management Systems A~pendlr II Financial Management Requirement8 from the date on which the notice of debt is first delivered, (2) the rate of interest assessedbe the rate of the current value of funds to the U.S. Treasury, and (3) administrative chargesto cover the additional costs incurred in processingand handling the debt becauseit becamedelin- quent be assessed.No interest or penalties may be collected on debts paid within 30 days of notice. When a debt is paid in partial or install- ment payments, amounts received from the debtor must be applied first to outstanding penalty and administrative cost charges,secondto accrued interest, and third to outstanding principal. In addition to the above requirements, FRA’SOffice of Financial Services has developedstandard operating procedures for managing FRA’S civil penalty collections. Theseprocedures describethe responsibilities and steps for managing accountsreceivable for civil penalty fines. Also, FRA has accounting proceduresto record interest receivable which is levied for failure to pay settlement amounts on time. Furthermore, occ’s enforcement.procedures set forth standards for handling civil penalty payment receipts. Page 14 GAO/RCED-91-47 l%ancial Management Systems Appendix III Major Contributors to This Report Roy J. Kirk, Assistant Director Resources, John S. Kalmar, Jr., Assignment Manager Community, and Peter E. Plumeau, Evaluator-in-Charge Economic Development Division, Washington, D.C. Michael G. Burros, Attorney Office of the General Counsel, Washington, D.C. Gwenetta A. Blackwell, Site Senior Chicago Regional Sarah R. Brandt, Evaluator Office Jacqueline B. McFarlane, Evaluator (342820) Page 15 GAO/lWED-9147 Finanti Management Systems 1J.S. Gc~ueral Accounting Offi~ I’. 0. Hex 60 15 Gait.h(~rsburg, MI) 20877 Orcl(brs may also bet placed by calliug (202) 275(i241. First -(:l;tss Mail I’ostitgt~ I% Fws Paid GAO I I’vrmit. No. (; 100 I
Financial Management: Internal Control Weaknesses in FRA's Civil Penalty Program
Published by the Government Accountability Office on 1990-12-26.
Below is a raw (and likely hideous) rendition of the original report. (PDF)