oversight

RTC Asset Management: Contracting Controls Need to Be Strengthened

Published by the Government Accountability Office on 1990-09-24.

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

                    United States General Accounting Office
                    Testimony




For Release          RTC Asset     Management:
on delivery          Contracting     Controls     Need      to   Be Strengthened
Expected    at
9:30 a.m.,
Monday,
September     24,
1990




                     Statement     of
                     Charles     A. Bowsher
                     Comptroller      General    of   the    United    States



                     Before   the
                     Subcommittee    on Federal    Services,           Post     Office
                        and Civil  Service
                     Senate  Committee     on Governmental            Affairs




GAO/T-GGD-90-53
                                                                            GAO Form 160 (12/87)
Mr.     Chairman         and Members of the                      Subcommittee:

We are pleased              to be here                today      to    discuss          the     Resolution                   Trust
Corporation's              (RTC) contracting                     practices.


Over the        years,           the     government           has been plagued                    by serious
breakdowns          in     its      internal           control         and financial               management
systems.         Unless           something            more is         done to          correct            the        material
deficiencies             in management                 information             and accounting                     systems            and
material        weaknesses               in    internal          controls,           major        losses              of     federal
funds      and the         collateral                fraud     and abuse will                  continue.                    That
fact,      based     on work we have done over                               the     years        in many agencies,
and agency          assessments                of their          own problems                 in response                   to the
Federal      Manager's              Financial             Integrity          Act,       makes it            critical                that
RTC operate          its         contracting             activities            well.


From RTC's          inception,                we have been concerned                          about        its
vulnerability              to     fraud,         waste,        and abuse because                      of     (1) the
unprecedented              dollar            value     of the         assets        under       RTC's            control;
(2) heavy          reliance             on a large            number      of private              sector
contractors,             which          creates        an inherent             vulnerability                     to        fraud,
waste,      and abuse;                 and     (3) weak management                     information                systems             and
oversight          capabilities                at this         point      in time.              For these                   reasons,
in January          1990 I cited                 RTC as 1 of            14 highly              vulnerable                   federal
programs.
RTC, to         its      credit,             has proceeded                 somewhat         cautiously                 in the
contracting              area.          It        has tried           to take         the      time       to     adequately
develop         policies              and procedures                  that     its     decentralized                    staff      must
follow       in developing                    contracts             with      thousands            of     different
companies.               On the         other         hand,         the      volume        of assets             that      RTC must
deal     with         continues              to     increase.              Thus,      the      corporation               faces      a
real     dilemma.               It     must try             to    develop           and implement                good
policies,             procedures,                 and practices               while        at the         same time
produce         results              in terms         of properly              managing            and quickly
disposing             of these          assets.              From our perspective,                         it     is
absolutely             critical              that     RTC have adequate                     policies,             procedures,
and internal                 controls             before         embarking           upon a massive                 contracting
operation.


The number             of     institutions                  and the          high     dollar          value       of the
assets       under           RTC's      control             provide          an indication                of the         enormous
scope       of RTC's management                         responsibilities.                       From August                1989
through         June         1990,      RTC took             into      conservatorship                    454 thrifts             wit
$244 billion                 of assets.               As of June 30,                  1990,        RTC had resolved
207 thrifts              and still                controlled              $168 billion             of     assets,
including             real     property              with        a book value              of about             $16 billion
representing                 over      40,000         properties.                   By comparison                the     former
Federal         Savings              and Loan Insurance                      Corporation                (FSLIC)         and
Federal         Asset         Disposition               Association                 were    only        managing           about
$10 billion              in total             assets         in     1988.
PROGRESS IN DEVELOPING
SOUND CONTRACTING ENVIRONMENT


Reliance         on contractors            to    carry               out        a major      portion            of the
agency's         mission       makes it         essential                   that        RTC have effective
management          control      over      the     contracting                         process.         This          requires
(1) an appropriate               organizational                       structure             for     selecting
contractors          and monitoring              their               performance;                 (2)    sufficient
numbers         of competent           personnel               to     award            and monitor          contracts;
and (3) an internal                control         system                  to    safeguard          assets            against
waste,      loss,      unauthorized             use,           and misappropriation                         and ensure
that     the     government        gets      what         it         pays        for     under      contracts.


In the         13 months       since      RTC's          inception,                    progress         has been made
toward      developing          a management                   structure                to mitigate             its
vulnerability           to     fraud,      waste,              and abuse.                  Actions        include
establishing           a decentralized                   organization,                     hiring        staff,          and
developing          policies       and procedures.                              However,          more needs             to be
accomplished           in these          areas      if         RTC is            to have effective
management          controls       over      the         management                    and disposition                 of
assets.


Structure


Conceptually,           the     organizational                       structure             should,         if     properly
implemented,           provide          management                  with        the     overall         framework           for

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planning,               directing,                 and controlling                      the         contracting              operations.
This      includes              lines         of authority                     and responsibility,
communication                   channels,                 reporting              relationships,                      and separation
of authority.                     The structure                        also      affords                provisions           for
supervision,                   training,                 and motivation                     of employees.


RTC has developed                           a highly            decentralized                       organizational
structure               with      delegations                   of      authority                  to    its     regional           staff.
Headquarters                   asset         management                 activities                  are organized                  into      three
major      functions--marketing,                                  asset          and contract                    management,               and
disposition.                    A field             structure                 consisting                 of     4 regional            offices
and 14 consolidated                           offices             has been set                      up to        do much of the
work but           is not             yet     fully            staffed.


Communication                   between             the        field          offices              and headquarters                   is     still
evolving.                What is             happening                 is     that      the         RTC approach              to dealing
with      contracting                  and other                issues           is     evolving                through       responses
to     specific            problems                that        arise.            As questions                    arise       in the
regions        on how to                    deal      with        a particular                      issue,        calls       are made to
headquarters                   officials.                  The issues                  are         discussed          and eventually
positions               are taken.                  It     is     natural              in     such cases              for     there          to be
some concern                   that         decisions             are not              made as quickly                      as everyone
would      like.               But given                 RTC's massive                  job,            and the       intense             public
scrutiny           it      knew it            was going                 to     face,          it        is     understandable                that
RTC has taken                   some time                 to    resolve               issues.                We would        expect          that
the     corporate               operating                 procedures                  should            be emerging           as RTC gets

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its      policies               and procedures                   in place            and its               staff      gets
experience.


Since        this       critical              area        is     still        evolving,               it      warrants           continued
oversight            to     ensure            that        the         appropriate            organization                   is
developed            and effectively                       implemented.


Staffina            and Traininq


It    is     critical             that        RTC be staffed                      with     managers                and employees
who maintain                and demonstrate                           (1) personal               and professional
integrity,                (2)     a level            of    skill          necessary              to help            ensure
effective            performance,                    and        (3)      an understanding                      of the        internal
controls            being         used to            effectively                  discharge            their
responsibilities.                         These elements                     are vital                to the         effectiveness
of management's                    control            over         the      contracting                process            because
(1) RTC's mandate                        is    to     contract              out     as much work                    as possible;
and        (2) much of RTC's                     staff           is      either          new to        the         government          or
from the            Federal          Deposit              Insurance               Corporation                 (FDIC)       where       the
normal        practice             was to            do its            own asset           management                and
disposition               rather          than        working             through          contractors.


Overall,            RTC has onboard                       about          59 percent              of    its         planned        6,200
staff.          As of July                20,        1990,         the      staffing             levels            at the
consolidated                sites,            where        most of the                   asset        contracting                and
monitoring              work will              take        place,           varied         greatly,                from    about       74

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percent       of planned                capacity             in Kansas         City,         Missouri,                to    37
percent       in Rolling                Meadows,             Illinois.             While         regional             office
staffing       ranged               from      a low of          40 percent            of planned                 capacity          in
the     Western       Region            and a high              of       64 percent          in the             Central
Region,       headquarters                    had reached                57 percent          of     its         planned          672
staffing       level.


In April       RTC established                     a Training               Task Force,              which            was
responsible           for       assessing              the      overall        training             needs          and
identifying           where           training          should            be strengthened.                       RTC is          now in
the     process       of developing                    a training             program         for         its      staff         based
on preliminary                 Task Force              recommendations.                      In the             interim,          RTC
has been holding                     a series          of     regional         seminars             to     orientate
staff      to RTC's            operating           procedures.


Internal       Controls


RTC's progress                 in     implementing                internal          controls              has not           been as
good as we would                     like.       RTC's          internal           control          system            should
include,       at a minimum:                      (1) policies,                procedures,                 and other
directives          to      guide            and assist           staff       in    carrying              out      their
duties;       (2)     separation                of duties            to     reduce         the      risk         of error,
waste,       or wrongful                acts      or to         reduce        the     risk        of their             going
undetected;              (3)    adequate           supervision                of personnel;                     and
(4)     information             systems           to    capture,            record,          summarize,                and report
results       of    operations.                   Information                should        be presented                    in

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financial        and related             quantitative             terms         so managers             can measure
whether       or not      the      policies          and procedures                they      have promulgated
are having        the     desired         and intended                effect       on achieving            their
goals.        While      RTC has developed                some essential                   controls,        as we
shall       now discuss,           many have not             yet         been tested          and others               need
additional        development.


          Contractor        Reaistration


Defined       policies          and procedures            will           be especially            important             for
RTC staff        to effectively               implement            its     regulations            for     contractor
qualification            and performance                standards.               Financial         Institutions
Reform,       Recovery,           and Enforcement             Act         of    1989      (FIRMA)         provisions
and RTC regulations                 establish           minimum standards                    of competence,
experience,           and integrity            for      contracting              with      RTC.         Those

standards        bar     individuals           or firms            from        contracting         with     RTC that
have been convicted                 of a felony;             have been barred                   from the
banking       industry         by any federal             banking              agency;       have caused
substantial           losses       to    a federal        deposit              insurance        fund;      are
currently        in     default         on an obligation                  to the        FDIC,     FSLIC,        or RTC
or an insured            depository           institution;                or have demonstrated                     a
pattern       or practice           of defalcation                 regarding            obligations          to
insured       depository           institutions.


In February            1990,      RTC adopted           a rule           on ethical          standards           for
firms       seeking      to provide           services           to      RTC.      The rule,            which      is

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applicable             to     asset       managers,             real      estate      brokers,          appraisers,
and others,             requires               them to        register        with      the      agency        and self-
certify         that         they       and their            related       entities          meet these
standards.


Further,         firms          are to          submit        other       information           to establish              their
capability,             expertise,               and service              area.       This      information             is
used to determine                     whether          the      firms      meet minimum requirements                         and
standards          of        fitness.            RTC may use its                  discretion          to deny
registration                in questionable                   cases.        Any firm           that    cannot          certify
that      the    mandatory               ineligibility                 conditions        do not        exist       must be
denied        registration.


As of July             31,      1990,         19 firms          had been disqualified.                        In
addition,         18 firms              that      had not         met certain            discretionary
standards         specified               in     implementing              regulations           were       granted
waivers.          Six         of them were granted                       contract        waivers,           and 12 of
them had discretionary                          qualifications                waived      to permit            their
registration.


The self-certification                          process          has been useful                to RTC for
identifying             a pool          of potentially                  qualified        contractors.                  But   it
does not        eliminate               the     need      for     a thorough           pre-award            examination
of the      background               and qualifications                     of contractors,                 principals,
officers,         and the            key personnel                to be assigned                to    a specific
contract.              RTC's        Office        of     Investigations               carries         out    the   pre-

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award        investigations               of    such personnel                   on the         basis       of the            data
provided           by the      proposed           contractor                 as well       as information
developed           by the       investigating                   officials            themselves.


To date,           only     a few asset               management              contracts           have been awarded
under        the    system.            As the         volume          of awards           increases,             it     is
essential           that      RTC controls               provide             effective          oversight              of how
well      the      pre-award           investigations                  are done.


          Asset      Manaaement               Controls


Another         control        that      RTC has developed                       is      a Standard             Asset
Management           and Disposition                   Agreement.                The agreement,                  released             in
June      1990,      in most           instances          will         be executed              with      a contractor
for    the      management             of a pool          of      like        assets       in     a given
geographical               location.            The agreement                   requires          contractors                 to
prepare         a business             plan     for      the      management              and disposition                     of the
assets,         provide        asset          management              services,           and sell          the        assets.


A key aspect               of this       agreement               is    a fee       structure             that         creates
incentives           for     RTC's       contractors                  to maximize           proceeds              from        the
sale      of assets.             Generally,              the      contractor's              compensation                  will
consist         of three         different             components:                (1)     a management                 fee,
(2)     a disposition             fee,         and     (3)       an incentive              fee.          The management
fee     is    compensation              for     managing              the     assets.           The disposition                      fee
varies        depending          upon how well                 the          contractor          either          matches,

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exceeds,            or falls             short             of meeting               the     expected           recovery       value             of
the       asset.          Both         the          management                fee     and the          disposition           fee are
evaluated            separately                     as part           of the         contractor            selection          process.
The incentive                    fee     rewards               the         contractor           for     speed       in selling
the       assets.           That         is,         the       sooner          an asset          is     sold     the      higher          the
payment.


RTC is        just         starting                 to place               assets       under         management          contracts.
By December                1990,         it         expects           to have about                   $30 billion          of the          $40
billion        of assets                 held            in    receiverships                  as of June 30,               1990,
managed by contractors.                                       Thus,         RTC's       controls          must provide              for
carefully            monitoring                     and evaluating                    the     management            agreement             to
determine            if     it     is         achieving               RTC's goals.


Contract            Monitorinq


The responsibility                            for        monitoring             asset         management            contracts             will
rest       primarily              with         RTC staff                   in the         consolidated           field       offices.
However,            RTC has not                     set       up a viable                 contract        administration
structure            to     effectively                       monitor          the        execution        of    its      contracts.
We found            no detailed                     instructions,                   procedures,            or other          guidance
to help            regional            personnel                 monitor            the      activities          of contractors.


                                                                                                                              I I n
On May 15,                1990,        RTC issued                    its      &sset         Manauement          and Disrsosltlo
Manual.             This         manual             is        to be used by all                   involved           in the        asset
management                and disposition                        process,             including,           but      not     limited

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 to, those           contractors                 employed             under         the     Standard                 Asset
 Management           Agreement                 contract.               It     provides            a set             of general
 policies           and guidelines                    to      standardize             and simplify                     RTC's      asset
 management           responsibilities.


The only            guidance             in the         manual          addressing               the      issue          of contract
monitoring            is      the        following                paragraph:


         "E.         Oversiaht              and Evaluation


         RTC staff                will     provide                continuing          oversight                by
         monitoring                the      activities                of contractors.                         Firms       found
         to be performing                        below            an acceptable                 level         will      be
         notified,                informed            where         they      are     deficient,                 and
         placed        on probation.                         As long          as a firm             remains             on
         probation,                they      will           not     be offered             new opportunities
         to work            for      the     RTC.            If,     within         a reasonable                     period       of
         time,        the         firm     is     not        performing             at an acceptable
         level,        existing              contracts               will      be terminated."


During        our    work          in RTC's            Southwest              Region,            we found              that    neither
the   regional             office          nor        the     two consolidated                      offices             we visited
had implemented                    plans        for        monitoring           contractor                performance.
Officials           at these              offices            told      us that            the     broad          guidance
distributed            by headquarters                        was insufficient                      for        field
application.                 Further,             in the            Western         Region,             the      regional

11
contracting            staff      said      they      had not       developed          any local
policies,        procedures,              or practices            to      implement         the    contract
monitoring         requirement.


RTC estimates             that      about          1,700     RTC employees           will     be involved          in
monitoring         contract            performance,             and many of these                 individuals
will   be new to RTC and the                         government.            Therefore,            we believe
more specific             guidance          will      be necessary           to ensure            that     contracts
are monitored             in     a consistent               and effective           manner by RTC's
decentralized             organization.




DISPOSITION            AmEARLY            RTC WORK


Over the        past      several         years,       the      federal      government            has managed
and disposed            of a wide           range          of assets       under     the


--     seized          and forfeited                assets     programs           of the     Marshals         Service
       and the          Customs          Service;


--     loan      asset         sales      programs           of the       Farmers     Home
       Administration                  and the        Departments           of Education,                Housing   and
       Urban      Development,                and Veterans             Affairs;        and,       of     course,


--     failed          bank      and thrift           assets      disposal          programs           of FDIC and
       FSLIC.

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Our work has shown that                             these       programs             often            did    not      require        the
 appropriate              information               from       contractors                 or have good contract
monitoring               for     sound management.                      Both         of these               controls         will
need to be present                        and working            effectively                    for      RTC to ensure               that
contractors               are providing                  the    best      possible                   services        and the
interests            of the         government              and the           public            are protected.


On the           basis         of our previous                 asset      management                   and early            RTC work,
we have           identified              the    following             problems             RTC must watch                   for     and
avoid       if     possible:


--      Net oroceeds                  from       asset         sales      not        calculated.                    Our past
        work         in the         seized          assets       programs             showed a lack                    of
        adequate                financial           information               for     managing               the     programs
        well.            We recently                reported           that         Department               of Justice             and
        Customs            Service           managers           did     not         know how much money was
        recovered                (after         costs)         from the             sale        of     forfeited            noncash
        assets           managed by government                          contractors.


--      Good Derformance                        measures         difficult                 to    define.             Our previous
        work        on failed               banks     and thrifts                   showed that               developing             good
        performance                 measures          for       monitoring                 contractor               liquidation
        activity               can be difficult,                  because             sales            volumes         and asset
        prices           are      affected           by asset           quality             and prevailing                   economic
        conditions.                  RTC has not                yet     developed                the        asset      management

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      performance              measures          needed          to     determine              satisfactory
      contractor            performance,                nor      has it           issued        guidance           to tell
      field      people         how to use the                   specific              contract          monitoring
      tools.            Consequently,             it         is very          difficult           at present              for
      RTC to monitor                contracts,                evaluate           performance,                  and hold
      contractors              accountable.                   For example,                RTC'S Interim
      Contracting              Activity          Reporting              System provides                   RTC staff
      with      overall         statistical                  and status               information              on the
      contract           award process                 but     does not              provide        performance
      measurement              information              to     track          contractor            progress.


--    Insufficient              manaffement             information              .      We also          reported          in
      July     1990 that            RTC has been making                          a number           of    automation
      decisions           without         establishing                  the      strong         leadership              and
      comprehensive               information                 resources              management           planning
      needed       to     effectively             manage its              information                resources.l
      This     increases            the    risk         that      the     information                technology               RTC
      develops          or acquires           may not             adequately               support         its         mission
      objectives.               RTC's      individual                 information              systems           are not
      integrated           and do not             allow         access           to     summary level
      information              across      the     organization.                        Additionally,                  RTC has
      experienced              an array       of data            accuracy               problems          in     its
     national           real     property          owned database.




1 Resolution   Trust             Coroo at'o     .. St o ae                           I nfor ation          Technoloav
Leadershin   Needed             (GAO/IiTEt-:O-76:      yuli                          23, 1!90).
14
.   RTC is taking                 steps        to    improve        its     information           systems.
    Subsequent          to        our     July       1990 report,             RTC created           an Office           of
    Corporate          Information                  and appointed             a senior      information
    resources          manager            to     lead     the     office.        This      office         will     be
    responsible           for       the        overall         development         and administration                      of the
    agency's          information                systems.           RTC also       has plans             to    improve       the
    quality      of the            real        estate         inventory        by requiring              regions        to
    verify      the      accuracy              of the         inventory's        data.           We will         monitor
    their      progress            carefully.




    In view      of the            unprecedented                 federal       contributions              to the        thrift
    crises,      the      magnitude                 and value         of the     assets          being        managed by
    RTC, and RTC's                 heavy         reliance         on a large          number        of private             sector
    contractors,             it     is     extremely             important       that      RTC have effective
    management           control           over         the     contracting        process.              RTC has made

    progress       but       needs         to       do more to ensure              that     it      has an effective
    management           structure               in place         to manage the            assets          under     its
    control,          a full        cadre           of well-trained             staff,      sound          contracting
    procedures,           and effective                   controls.


    This      concludes            my prepared                statement,        Mr.      Chairman.             We would          be

    pleased      to      respond           to       questions.




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