[Federal Register Volume 64, Number 35 (Tuesday, February 23, 1999)]
[Proposed Rules]
[Pages 8733-8735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4410]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 64, No. 35 / Tuesday, February 23, 1999 / 
Proposed Rules  

[[Page 8733]]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 274

RIN 0584-AC71


Food Stamp Program: Electronic Benefits Transfer Benefit (EBT) 
Statement on Auditing Standards 70 (SAS 70) Audit Requirements

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: The Food and Nutrition Service (FNS) proposes to revise Food 
Stamp Program (FSP) regulations about approval of Electronic Benefits 
Transfer (EBT) systems and how States arrange for those systems to be 
audited. States with EBT systems delivering FSP benefits would be 
required to obtain an annual audit of their FSP EBT system. States 
could direct their EBT system contractor to have audits done, contract 
separately for the audits, or have competent state personnel conduct 
them. The audits would be a new requirement recommended by the United 
States Department of Agriculture (USDA) Office of the Inspector General 
(OIG). EBT audits must comply with the American Institute of Certified 
Public Accountants (AICPA) Statement on Auditing Standards No. 70, 
Reports on the Processing of Transactions by Service Organizations (SAS 
70). Audits would also follow EBT review guidelines developed by the 
USDA OIG to the extent the guidelines refer to FSP benefits.

DATES: Comments must be received on or before May 24, 1999 to be 
assured of consideration.

ADDRESSES: Submit comments in writing to Jeffrey N. Cohen, Chief, 
Electronic Benefit Transfer Branch, Benefit Redemption Division, Food 
and Nutrition Service, USDA, 3101 Park Center Drive, Alexandria, 
Virginia 22302. Comments may also be datafaxed to Mr. Cohen at (703) 
605-0232 or they may be sent via e-mail to [email protected]. 
Comments will be open for public inspection at the office of the Food 
and Nutrition Service during regular business hours (8:30 a.m. to 5 
p.m., Monday through Friday) at 3101 Park Center Drive, Room 718, 
Alexandria, Virginia 22302.

FOR FURTHER INFORMATION CONTACT: Questions regarding this proposed 
rulemaking should be addressed to Mr. Cohen as above or by telephone at 
(703) 305-2517.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be not significant for purposes of 
Executive Order 12866 and therefore has not been reviewed by the Office 
of Management and Budget.

Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
Food and Nutrition Service generally must prepare a written statement, 
including a cost-benefit analysis, for proposed and final rules with 
``Federal mandates'' that may result in expenditures to State, local or 
tribal governments, in the aggregate, or to the private sector, of $100 
million or more in any one year. When such a statement is needed for a 
rule, Section 205 of the UMRA generally requires the Food and Nutrition 
Service to identify and consider a reasonable number of regulatory 
alternatives and adopt the least costly, more cost-effective or least 
burdensome alternative that achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of UMRA) for State, local and tribal governments 
or the private sector of $100 million or more in any one year. Thus 
this rule is not subject to the requirements of sections 202 and 205 of 
the UMRA.

Executive Order 12372

    The Food Stamp Program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.551. For the reasons set forth in the final 
rule in 7 CFR 3015, Subpart V and related Notice (48 FR 29115), this 
Program is excluded from the scope of Executive Order 12372 which 
requires intergovernmental consultation with State and local officials.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). Shirley R. 
Watkins, the Under Secretary for Food, Nutrition and Consumer Service, 
has certified that this proposed rule will not have a significant 
economic impact on a substantial number of small entities. State 
agencies and their EBT contractors will be the most affected to the 
extent that they administer the Program.

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This rule is intended to have preemptive effect with 
respect to any State or local laws, regulations or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect. 
Prior to any judicial challenge to the provisions of this rule or the 
application of its provisions, all applicable administrative procedures 
must be exhausted.

Paperwork Reduction Act

    This rule does not contain additional reporting or recordkeeping 
requirements other than those already approved by the Office of 
Management and Budget (OMB) under the Paperwork Reduction Act of 1995. 
Those reporting and recordkeeping requirements are assigned OMB control 
number 0584-0083.

Background

Electronic Benefits Transfer (EBT) Systems and Financial Statements

    All States must change from paper coupon systems to EBT systems for 
the issuance of Food Stamp Program (FSP) benefits by October 1, 2002. 
Currently, thirty-seven States have implemented EBT systems and more 
than 50 percent of FSP benefits are issued through those systems. State 
agencies contract individually for EBT systems. Some States work 
together in groups to solicit and select an EBT contractor; however,

[[Page 8734]]

each State signs its own contract with the winning bidder.
    For the FSP, EBT systems move money from Federal accounts held in 
the name of each State to accounts at banks and other financial 
institutions held by food retailers. Each food retailer must first be 
authorized by the Food and Nutrition Service (FNS) to accept food stamp 
benefits. Currently, about $1.3 billion in food stamp benefits are paid 
to food retailers for recipient purchases each month. Over half of that 
amount, about $700,000,000, is now being moved by EBT systems each 
month.
    States usually contract for EBT systems that deliver the benefits 
of several programs, not just food stamp benefits. Data from EBT 
systems are reported to State and Federal financial systems and used in 
financial statements of many agencies. State EBT systems report food 
stamp data to FNS financial systems which in turn provide data used in 
the annual FNS financial statements. Annual audits of EBT systems would 
ensure that EBT systems are secure and that data used in financial 
systems and statements is correct. Annual audits would provide 
government auditors of state and federal agencies financial statements 
with an independent assessment of EBT data.

Statement on Auditing Standards 70

    The American Institute of Certified Public Accountants (AICPA) 
produces standards for accounting which are generally accepted by 
government and business. This rule requires EBT audits to follow the 
Statement on Auditing Standards No. 70, Reports on the Processing of 
Transactions by Service Organizations (SAS 70). SAS 70 is available 
from AICPA located at 1211 Avenue of the Americas, New York, NY, 10036-
8775, phone (212) 596-6200 or at 1455 Pennsylvania Avenue, Washington, 
DC, 20004-1081, phone (202) 737-6600.

EBT Review Guidelines

    The United States Department of Agriculture's Office of the 
Inspector General (USDA's OIG) is the lead agency for EBT issues for 
the President's Council on Integrity and Efficiency (PCIE). The PCIE 
was created by Executive Order 12805, May 11, 1992, to identify 
weaknesses and to promote efficiency in Federal programs. USDA's OIG, 
with the help of a PCIE work group, drafted guidelines to assist 
auditors of EBT systems. The guidelines are titled ``Review Guidelines 
for Service Organizations Providing EBT Services for Government 
Programs'' (EBT guidelines). The PCIE work group included Federal, 
State, and public accounting representatives. Comments were obtained 
from the Office of Management and Budget, the Government Accounting 
Office, and from the AICPA.
    The guidelines are being revised now. They will be available by 
March 1, 1999. We propose to require States to use the final guidelines 
in auditing FSP EBT systems to the extent the guidelines refer to FSP. 
The draft EBT guidelines are available from FNS or USDA's OIG. The 
final guidelines will be also be available on the FNS website at http:/
/www.usda.gov/fcs/stamps/ebt.htm.

Efficient Audits

    EBT companies often have EBT contracts with several states for the 
delivery of many program benefits. This rule is based on the idea that 
one annual audit at each company, covering all the States and all 
programs handled by that company, is most efficient. The review 
guidelines anticipate that kind of audit. Individual States would meet 
FNS' requirement for an annual SAS 70 audit if their EBT system 
contractor has been audited as part of a SAS 70 audit which covered all 
the States and programs handled by that contractor. FNS encourages 
States to complete audits this way to save costs.

Costs of EBT Audits

    The way the State arranges for the audits is not being addressed in 
this proposed rule. States may contract directly with auditing 
companies, they may require their EBT contractor to arrange for audits, 
competent State staff may conduct the audits, and there may be other 
possibilities. Therefore, the way the State is billed for costs will 
vary. Costs could be directly billed by an auditing firm, or contained 
in a monthly case fee charged by their EBT contractor, or charged 
separately by their EBT contractor. If a single audit is done for 
several States and programs as anticipated by the EBT review 
guidelines, the costs must be appropriately allocated to each State and 
each program covered by the audit.
    FNS will reimburse States for 50 percent of their costs related to 
the FSP audit work. The only limit on reimbursement from the FSP for 
EBT costs is the already existing limit of cost neutrality in the food 
stamp regulations at 7 CFR 274.12(c)(3).

Whose Work Must Be Audited

    SAS 70 audits review ``service organizations'' that perform 
transactions which affect the financial statements of ``user 
organizations.'' In the FSP EBT environment, EBT contractors are the 
service organizations and States are the user organizations. States 
usually have a contract with one company, called the EBT primary 
contractor. The primary contractor often has many subcontractors to do 
some of the work for the EBT contract. Some or all of the contractors 
and subcontractors may be reviewed as part of the audit. This will 
depend on which contractors or subcontractors perform the functions 
required to be reviewed by the SAS 70 or the EBT review guidelines.
    States sometimes do EBT work themselves instead of hiring a 
contractor. For example, one State is acting as EBT primary contractor 
and handling all subcontracts. Another State is producing and 
distributing EBT cards. Only the work of contractors would be covered 
by this rule and the SAS 70 audit requirements. State work would be 
exempt from this proposed SAS 70 audit requirement. State work would, 
however, be subject to review by FNS or audit by USDA's OIG.

EBT Management Reports Requirements

    Regulations at 7 CFR 274.12(j)(2) require States to obtain reports 
from and about their EBT systems. This rule adds an annual SAS 70 audit 
report using the EBT review guidelines as a required report in the 
section. States would be required to provide the EBT SAS 70 audit 
report to USDA's OIG auditors or to FNS within 30 days of a written 
request.

Additional Audits or Reviews

    USDA's OIG and FNS reserve the right to conduct other audits or 
reviews of EBT if they find that is needed.

Implementation

    The Department is proposing that this rule should be effective 
during the first Federal Fiscal Year that begins after the date of 
publication of the final rule.

List of Subjects in 7 CFR Part 274

    Administrative procedures and practices, Food Stamps, Grant 
programs-social programs, Reporting and recordkeeping requirements.
    Accordingly, for the reasons set forth in the preamble, 7 CFR part 
274 is proposed to be amended as follows:

PART 274--ISSUANCE AND USE OF COUPONS

    1. The authority citation for 7 CFR part 274 continues to read as 
follows:

    Authority: 7 U.S.C. 2011-2032.

    2. In Sec. 274.12:
    a. Revise the heading of paragraph (j); and
    b. Add new paragraph (j)(5).

[[Page 8735]]

    The revision and addition read as follows:


Sec. 274.12  Electronic Benefit Transfer Issuance System approval 
standards.

* * * * *
    (j) Reconciliation, Management Reporting, and Audits. * * *
    (5) Audits. (i) The state agency must obtain an annual audit of 
their EBT system contractors regarding the issuance, redemption, and 
settlement of Food Stamp Program benefits. The audit must comply with 
American Institute of Certified Public Accountants (AICPA) Statement on 
Auditing Standards No. 70 (SAS 70). The audit must also follow the EBT 
review guidelines developed by the United States Department of 
Agriculture (USDA), Office of the Inspector General to the extent the 
guidelines refer to food stamp benefits. EBT work done by the State 
does not have to be audited in this manner but may be subject to audits 
by USDA's Office of the Inspector General or to reviews done by the 
Food and Nutrition Service.
    (ii) The state agency must retain a copy of the SAS 70 report. If 
the Food and Nutrition Service or the USDA Office of Inspector General 
asks for the SAS 70 audit report in writing it must be provided within 
thirty days of the receipt of the written request.
    (iii) The Food and Nutrition Service and the USDA Office of 
Inspector General reserve the right to conduct other reviews or audits 
of the State's Food Stamp Program EBT system or parts of the EBT 
system.
* * * * *
    Dated: February 16, 1999.
Samuel Chambers, Jr.,
Administrator, Food and Nutrition Service.
[FR Doc. 99-4410 Filed 2-22-99; 8:45 am]
BILLING CODE 3410-30-U