U.S. Coast Guard National Pollution Funds Center
Improvements Are Needed in Internal Control Over Disbursements
Gao ID: GAO-04-340R January 13, 2004
The Oil Spill Liability Trust Fund (Fund) is a $1 billion fund that has two major components: the Emergency Fund and the Principal Fund. The Emergency Fund is used for paying for federal removal actions and the initiation of natural resource damage assessments by designated federal, state, or Indian tribe officials, resulting from oil spills or the substantial threat of oil spills to the waters or shorelines of the United States. The Principal Fund is used for paying certain claims for uncompensated removal costs and damages resulting from oil spills or the substantial threat of oil spills to the waters or shorelines of the United States. The Fund is administered by the National Pollution Funds Center (NPFC) of the U.S. Coast Guard (USCG). In May 2002, we issued a legal opinion related to the uses and limitations of the Fund and concluded that the Fund is not available to pay employee salaries and other operating expenses. The USCG reported that from fiscal years 1998 through 2002, $32.8 million from the Fund was used to pay costs associated with processing claims, including salaries and other operating expenses. In April 2003, the USCG returned the $32.8 million to the Fund. In light of our conclusion regarding the appropriate use of these funds, Congress asked that we review the control over disbursements from the Fund and assess the propriety of these disbursements. We reviewed disbursements for operating expenses and removal costs to determine whether (1) the design of existing internal control provided reasonable assurance that improper payments would not occur or would be detected in the normal course of business, (2) they were made in accordance with established USCG and NPFC policies and procedures, and (3) they were made in accordance with the uses specified in the Oil Pollution Act of 1990 (OPA) and other federal laws and regulations, and represented a proper use of government funds.
The USCG and NPFC have established a system of internal control over operating expenses and Emergency Fund disbursement processes. However, we found some weaknesses in the design and operation of internal control over operating expenses and disbursements from the Fund that increase the risk of improper payments. Weaknesses in the design of control included a lack of documented reconciliations of the amounts included in removal cost reports with those recorded in USCG's accounting system. We found additional internal control weaknesses in that USCG/NPFC did not always follow established policies and procedures that are intended to help ensure the validity of disbursements. Of the nonstatistical selection of 467 disbursements obtained through data mining for fiscal years 1998 through 2002, we found that 33, or 7 percent of these disbursements, totaling $43,425, lacked adequate supporting documentation. Of the 33 disbursements, 9 transactions lacked purchase receipts such as invoices, 10 additional transactions lacked purchase request forms, and 14 lacked both purchase receipts and purchase request forms. We also found that 25, or 5 percent of the 467 disbursements, totaling $26,182, lacked proper approvals. Specifically, 3 transactions lacked proof of approval from supervisors, 18 additional transactions lacked proof of approval from fund certifying officers before purchases were made, and 4 lacked proof of approval from supervisors and fund certifying officers. Another 39 transactions totaling $155,994 for payments to contractors and other government agencies, and reimbursements to employees and others lacked documentation of supervisory review and approval before payments were made. In addition, equipment purchases totaling $62,700 were not recorded in the property tracking system. We also used the nonstatistical selection of disbursements obtained through data mining to determine whether these disbursements complied with certain federal laws and regulations and represented a proper use of government funds. We found that (1) NPFC did not properly document their justification for using federal funds to reimburse $14,481 in travel expenses for 11 nonfederal potential claimants to attend natural resource damage (NRD) seminars, (2) the USCG Finance Center (FINCEN) incurred a total $24,546 in late payment fees and lost discounts, and (3) the validity of 17 disbursements tested totaling $6,589 was questionable because adequate supporting documentation was missing. The weaknesses we identified in the design and operation of internal control over the disbursement processes, if left uncorrected, increase the Fund's vulnerability to future improper payments. In addition, during fiscal year 2003, NPFC continued to improperly use the Fund to pay about $645,000 in operating expenses and obligated another $151,000 against the Fund. NPFC officials told us that they are in the process of transferring these transactions from the Fund into a newly established account created for recording NPFC operating expenses. As with the $32.8 million previously returned, this transfer will not compensate the Fund for lost interest. NPFC's continued improper use of the Fund to pay for operating expenses is a violation of federal law. Not only does this practice expose the Fund to misuse, but we estimate that the Fund may have lost as much as $1.6 million in interest as a result.
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.
Director:
Team:
Phone:
GAO-04-340R, U.S. Coast Guard National Pollution Funds Center: Improvements Are Needed in Internal Control Over Disbursements
This is the accessible text file for GAO report number GAO-04-340R
entitled 'U.S. Coast Guard National Pollution Funds Center:
Improvements Are Needed in Internal Control Over Disbursements' which
was released on January 13, 2004.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
January 13, 2004:
The Honorable Lane Evans
Ranking Democratic Member
Committee on Veterans Affairs
House of Representatives:
The Honorable Bob Filner
Ranking Democratic Member
Subcommittee on Coast Guard and Maritime Transportation
Committee on Transportation and Infrastructure
House of Representatives:
The Honorable Corrine Brown
House of Representatives:
Subject: U.S. Coast Guard National Pollution Funds Center: Improvements
Are Needed in Internal Control Over Disbursements:
The Oil Spill Liability Trust Fund (Fund) is a $1 billion fund that has
two major components: the Emergency Fund and the Principal Fund. The
Emergency Fund is used for paying for federal removal actions and the
initiation of natural resource damage assessments by designated
federal, state, or Indian tribe officials, resulting from oil spills or
the substantial threat of oil spills to the waters or shorelines of the
United States. The Principal Fund is used for paying certain claims for
uncompensated removal costs and damages resulting from oil spills or
the substantial threat of oil spills to the waters or shorelines of the
United States. The Fund is administered by the National Pollution Funds
Center (NPFC) of the U.S. Coast Guard (USCG).
In May 2002, at your request, we issued a legal opinion related to the
uses and limitations of the Fund and concluded that the Fund is not
available to pay employee salaries and other operating
expenses.[Footnote 1] The USCG reported that from fiscal years 1998
through 2002, $32.8 million from the Fund was used to pay costs
associated with processing claims, including salaries and other
operating expenses. In April 2003, the USCG returned the $32.8 million
to the Fund. In light of our conclusion regarding the appropriate use
of these funds, you asked that we review the control over disbursements
from the Fund and assess the propriety of these disbursements.
On September 17, 2003, we briefed your offices on the results of our
review of internal control over claim payments made from the
Fund.[Footnote 2] We provided a second briefing on December 3, 2003,
related to our review of internal control over disbursements for
operating expenses paid from the Principal Fund and removal costs paid
from the Emergency Fund. This report summarizes the information
provided during that second briefing. The enclosed briefing slides
highlight the results of our work and the information provided.
We reviewed disbursements for operating expenses and removal costs to
determine whether (1) the design of existing internal control provided
reasonable assurance that improper payments would not occur or would be
detected in the normal course of business, (2) they were made in
accordance with established USCG and NPFC policies and procedures, and
(3) they were made in accordance with the uses specified in the Oil
Pollution Act of 1990 (OPA) and other federal laws and regulations, and
represented a proper use of government funds. Also at your request, we
are providing information about NPFC's payroll expenses and claim
activity fluctuations for fiscal years 1998 through 2003. This
information is included in appendix I of the attached slides.
Results in Brief:
The USCG and NPFC have established a system of internal control over
operating expenses and Emergency Fund disbursement processes. However,
we found some weaknesses in the design and operation of internal
control over operating expenses and disbursements from the Fund that
increase the risk of improper payments. Weaknesses in the design of
control included a lack of documented reconciliations of the amounts
included in removal cost reports with those recorded in USCG's
accounting system. We found additional internal control weaknesses in
that USCG/NPFC did not always follow established policies and
procedures that are intended to help ensure the validity of
disbursements.
Of the nonstatistical selection of 467 disbursements obtained through
data mining[Footnote 3] for fiscal years 1998 through 2002, we found
that 33, or 7 percent of these disbursements, totaling $43,425, lacked
adequate supporting documentation. Of the 33 disbursements, 9
transactions lacked purchase receipts such as invoices, 10 additional
transactions lacked purchase request forms, and 14 lacked both purchase
receipts and purchase request forms. We also found that 25, or 5
percent of the 467 disbursements, totaling $26,182, lacked proper
approvals. Specifically, 3 transactions lacked proof of approval from
supervisors, 18 additional transactions lacked proof of approval from
fund certifying officers before purchases were made, and 4 lacked proof
of approval from supervisors and fund certifying officers. Another 39
transactions totaling $155,994 for payments to contractors and other
government agencies, and reimbursements to employees and others lacked
documentation of supervisory review and approval before payments were
made. In addition, equipment purchases totaling $62,700 were not
recorded in the property tracking system.
We also used the nonstatistical selection of disbursements obtained
through data mining to determine whether these disbursements complied
with certain federal laws and regulations and represented a proper use
of government funds. We found that (1) NPFC did not properly document
their justification for using federal funds to reimburse $14,481 in
travel expenses for 11 nonfederal potential claimants to attend natural
resource damage (NRD) seminars, (2) the USCG Finance Center (FINCEN)
incurred a total $24,546[Footnote 4] in late payment fees and lost
discounts, and (3) the validity of 17[Footnote 5] disbursements tested
totaling $6,589 was questionable because adequate supporting
documentation was missing. The weaknesses we identified in the design
and operation of internal control over the disbursement processes, if
left uncorrected, increase the Fund's vulnerability to future improper
payments.
In addition, during fiscal year 2003, NPFC continued to improperly use
the Fund to pay about $645,000 in operating expenses and obligated
another $151,000 against the Fund. NPFC officials told us that they are
in the process of transferring these transactions from the Fund into a
newly established account created for recording NPFC operating
expenses. As with the $32.8 million previously returned, this transfer
will not compensate the Fund for lost interest. NPFC's continued
improper use of the Fund to pay for operating expenses is a violation
of federal law. Not only does this practice expose the Fund to misuse,
but we estimate that the Fund may have lost as much as $1.6 million in
interest[Footnote 6] as a result.
Recommendations for Executive Action:
To improve the design of internal control over disbursements from the
Fund, we recommend that the Commandant of the U.S. Coast Guard direct
the Director of the National Pollution Funds Center to establish
policies and procedures to require that:
* case officers document the reconciliation of removal costs reports to
amounts paid in the accounting system, and:
* case officers' supervisors document their review of these
reconciliations.
To establish better compliance with U.S. Coast Guard/National Pollution
Funds Center policies and procedures, we recommend that the Commandant
of the U.S. Coast Guard direct the Director of the National Pollution
Funds Center to:
* reinforce documentation and approval requirements by instituting
training for all relevant employees,
* institute monitoring techniques such as periodic spot checks to help
ensure that such requirements are consistently followed, and:
* establish a mechanism to ensure that accountable assets are properly
recorded in USCG's fixed assets system.
To enforce compliance with the Oil Pollution Act of 1990 and other
federal laws and regulations and reduce the risk of improper payments,
we recommend that the Commandant of the U.S. Coast Guard direct the
Director of the National Pollution Funds Center to:
* expedite actions needed to cease using the Fund to pay operating
expenses as advised in our May 2002 legal opinion,
* record obligations against USCG's annual operating expense
appropriation in order to ensure that adequate funds are available to
reimburse the Fund for any unreimbursed or future use of the Fund to
pay operating expenses,
* complete the transfer of all operating expenses that were improperly
paid from the Fund in fiscal year 2003 to the new operating expense
account,
* ensure proper justification exists for nonfederal travelers to be
reimbursed to attend NRD seminars in advance of any such travel, and:
* follow up on transactions that were missing purchase invoices to
determine what was purchased and whether the items were for legitimate
government needs.
We also recommend that the Commandant of the U.S. Coast Guard direct
the Chief Financial Officer of the U.S. Coast Guard to:
* reinforce documentation and approval requirements for disbursements
from the Fund by instituting training for all relevant employees, and:
* institute a monitoring system such as periodic spot checks to help
ensure that such requirements are consistently followed.
Agency Comments:
We obtained oral comments on a draft of our briefing slides from the
Director of the U.S. Coast Guard National Pollution Funds Center and
other officials. They agreed with our recommendations. The officials
emphasized that at the time they initially began using the Fund to pay
operating expenses, they had an opinion from the USCG Chief Counsel
that this was a proper use of the Fund. As noted earlier, we concluded
in May 2002 that the Fund is not available to pay NPFC operating
expenses. The officials also emphasized that they now have electronic
approvals that they believe provide better supervisory review and
oversight. They provided technical and clarifying comments, which we
incorporated as appropriate.
Scope and Methodology:
To determine whether the design of existing internal control over
operating expenses and Emergency Fund removal costs disbursement
processes provide reasonable assurance that improper payments will not
occur or will be detected in the normal course of business, we (1)
reviewed USCG/NPFC's policies and procedures related to operating
expenses and Emergency Fund removal costs disbursements, (2) considered
the Comptroller General's Standards for Internal Control in the Federal
Government,[Footnote 7] (3) interviewed staff and officials in the USCG
and the NPFC offices, and (4) performed walkthroughs of the operating
expenses and Emergency Fund removal costs disbursement processes, and
compared the results to USCG/NPFC's policies and procedures and the
Standards for Internal Control in the Federal Government.
To determine whether disbursements were made in accordance with USCG/
NPFC's policies and procedures, we (1) performed data mining of
operating expenses paid from the Fund during fiscal years 1998 and 2002
to identify unusual transactions and patterns including personal use
items, Internet purchases, training and travel, equipment purchases,
employee reimbursements, contract payments other than removal costs,
and late payment fees, and (2) used a nonstatistical selection of 467
disbursements obtained through data mining and tested for adequate
documentation, proper approvals, and adequate safeguarding of assets.
We also used the nonstatistical selection of disbursements obtained
through data mining to determine whether these disbursements were made
in accordance with OPA and other federal laws and regulations and
represent a proper use of government funds. Specifically, we reviewed
OPA and federal laws and regulations to obtain an understanding of
allowed costs, and reviewed purchase receipts or invoices to ensure
that purchases were made for official government use and were allowed
costs. We did not project our test results to the universe of NPFC
disbursements in fiscal years 1998 through 2002.
To determine the fluctuations in payroll expenses and claims activity,
we obtained data from the USCG and NPFC and identified significant
fluctuations in payroll and claims activity for fiscal years 1998
through 2002, and obtained USCG/NPFC's explanations for these
fluctuations. We did not verify the accuracy of the amounts included in
NPFC's payroll and claim systems.
We requested comments on a draft of the enclosed briefing slides from
the Commandant of the U.S. Coast Guard or his designee and have
included any comments as appropriate in the letter and enclosed slides.
We conducted our work from November 2002 through November 2003, in
accordance with generally accepted government auditing standards.
This report is available at no charge on our home page at [Hyperlink,
http://www.gao.gov]. If you have any questions about
this report, please contact me at (202) 512-9508 or Rosa R. Harris,
Assistant Director, Financial Management and Assurance, at (202) 512-
9492. You may also reach us by e-mail at [Hyperlink, calboml@gao.gov]
or [Hyperlink, harrisrr@gao.gov].
Additional contributors to this assignment were Lisa Crye, Anh Dang,
Tyshawn Davis, Christine Fant, Ryan D. Holden, Gabriella Kusz, Robert
Preshlock, and Sandra S. Silzer.
Linda M. Calbom:
Director, Financial Management and Assurance:
Signed by Linda M. Calbom:
Enclosure:
[End of section]
Enclosure:
[See PDF for image]
[End of figure]
[End of section]
(190118):
FOOTNOTES
[1] These costs are to be paid out of an annual operating expense
appropriation.
[2] U.S. General Accounting Office, U.S. Coast Guard National Pollution
Funds Center: Claims Payment Process Was Functioning Effectively, but
Additional Controls Are Needed to Reduce the Risk of Improper Payments,
GAO-04-114R (Washington, D.C.: Oct. 3, 2003).
[3] Data mining applies a search process to a dataset, analyzing for
trends, relationships, and interesting associations. For instance, it
can be used to efficiently query transaction data for characteristics
that may indicate potentially improper activity.
[4] Of the 467 disbursement transactions, the USCG FINCEN incurred a
total of $8,868 in late payment fees and lost discounts. We extended
our test beyond the 467 disbursements to include all late payment fees
and lost discounts incurred during fiscal years 1998 through 2002. As a
result, we found that NPFC incurred an additional $15,678 for a total
of $24,546.
[5] As discussed earlier, 23 disbursements lacked adequate supporting
documentation. Of the 23 disbursements, 17 were missing purchase
receipts or invoices and were therefore questionable. Another 6 had
partial supporting documentation and were not considered questionable.
[6] To calculate interest, we multiplied the average 6-month rate for
U.S. Treasury bills (the rate at which the Fund earns interest) times
the average operating expense balance for each fiscal year.
[7] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999).
