Financial Management

Poor internal controls have affected the monitoring of licensees and the completeness and accuracy of royalty income received by the National Institutes of Health (NIH). In fiscal year 1999, NIH's Office of Technology Transfer (OTT) did not follow up--with one exception--on the biennial audits of licensees' sales to ensure that licensees with sales that exceed $2 million had been properly audited. In the audited exception, GAO found that there were $9.4 million in uncollected royalty payments, with another $1.2 million projected. OTT also did not exercise its right to designate auditors to conduct reviews and verifications of semiannual royalty reports and royalty payments that could provide OTT assurance that royalty income received from its licensees is based on accurate sales amounts. Additionally, OTT did not enforce its collection policies and procedures to ensure timely payment of royalty fees. NIH's Office of Financial Management system to track royalty payments is not integrated with OTT, making monthly reconciliation labor-intensive. Delays in recording royalty income in its own general ledger increase the risk that financial and budgetary reports to Treasury may be inaccurate and delay distribution of funds.

GAO noted that: (1) although NIH has established policies and procedures for administering its royalty income, GAO identified deficiencies in internal controls that affect the monitoring of licensees and the completeness and accuracy of royalty income received; (2) specifically, with the exception of one licensee, the Office of Technology Transfer (OTT) did not follow up on the biennial audits of licensees' sales to ensure that licensees with sales that exceed $2 million had been properly audited; (3) OTT's follow-up on one licensee yielded previously uncollected royalty payments of $9.2 million and the expectation that another $1.2 million would be collected; (4) given the experience with this licensee, it would seem reasonable for OTT to obtain assurances that the net sales from these more lucrative licensees be routinely and timely audited; (5) also, OTT did not exercise its right to designate auditors to conduct reviews and verifications of semiannual royalty reports and payments for the majority of its licensees; (6) these biennial audits and verifications of semiannual royalty payments could provide OTT assurance that royalty income received from licensees is based on accurate sales amounts; (7) GAO also found that OTT did not enforce its collection policies and procedures to ensure timely payment of royalty fees; (8) as a result, institutes and inventors may not be receiving their share of royalty income in a timely manner; (9) in addition, NIH's systems and processes hampered proper management of royalty income; (10) the systems maintained by the Office of Financial Management (OFM) and OTT that are used to account for royalty income were not integrated; (11) as a result, the monthly royalty income reconciliation process was labor-intensive and was not always performed in a timely manner; (12) licensees are instructed to remit payments to a Treasury lockbox administered by a commercial bank; (13) OFM, which receives payment information from the Treasury lockbox, did not record royalty income received from licensees in its general ledger in a timely manner; (14) delays in recording royalty income in its own general ledger increase the risk that financial and budgetary reports to Treasury will be inaccurate and may tend to delay distribution of funds; and (15) timely posting of royalty income to its general ledger could help provide assurance that royalty income is properly accounted for and reported.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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