FMS' Monitoring of Lockbox Bank Operations: Internal Control Weaknesses
Identified and Actions Taken (Correspondence, 07/26/2000,
GAO/AIMD-00-225R).
Pursuant to a legislative requirement, GAO reviewed the Financial
Management Service's (FMS) internal control actions to improve the
monitoring of lockbox bank operations.
GAO noted that: (1) FMS has taken significant steps to strengthen its
monitoring of its lockbox bank operations but additional actions are
needed to assure that federal collections are adequately safeguarded and
properly processed; (2) last year, GAO reported on weaknesses in, and
recommended improvements to, FMS' monitoring of lockbox operations
related to on-site reviews and lockbox bank audits; (3) FMS has
addressed GAO's concerns related to on-site reviews; (4) in addition,
FMS acted on GAO's recommendations related to requiring and providing
guidance for lockbox bank audits; (5) however, due to the timing of the
bank audits, FMS had not obtained the results of such audits as of the
end of GAO's fieldwork; (6) it was too early to assess the effectiveness
of FMS' enforcement of the audit requirement, review of the audit
results, and follow-up on weaknesses identified, if any, in lockbox
operations, as GAO recommended; (7) in performing the fiscal year 1999
testing, GAO found that additional actions are needed to: (a) follow up
on problems at lockbox banks identified by the federal agencies for
which the lockbox services are provided; and (b) ensure the sufficiency
of collateral pledged by the lockbox banks; (8) while FMS performed some
procedures to investigate thefts identified by one agency at its general
lockbox bank site, FMS' actions did not include determining what
deficiencies at the bank allowed such thefts to occur; (9) therefore,
FMS was unable to assess whether the corrective actions taken by the
bank were adequate to prevent such thefts from occurring in the future;
(10) once GAO brought this matter to FMS' attention, FMS investigated
the thefts further and found that additional controls were needed at the
bank to adequately safeguard the collections; (11) GAO found that FMS
had not monitored the sufficiency of the collateral pledged by the
lockbox banks since 1995 when it entered into lockbox service agreements
with the banks, even though its internal procedures require that
reassessments be performed every 2 years; (12) after GAO identified this
problem, FMS reassessed the collateral pledged by the banks and found
that three of the four lockbox banks were significantly
undercollateralized; and (13) without effectively monitoring banks'
lockbox operations, FMS does not know whether the banks are adequately
safeguarding and properly processing billions of dollars of federal
collections.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-00-225R
TITLE: FMS' Monitoring of Lockbox Bank Operations: Internal
Control Weaknesses Identified and Actions Taken
DATE: 07/26/2000
SUBJECT: Lending institutions
Financial management
Cash management
Internal controls
Deposit funds
Government collections
Financial statement audits
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GAO/AIMD-00-225R
GAO/ AIMD- 00- 225R Monitoring Lockbox Operations
United States General Accounting Office Washington, DC 20548
Accounting and Information Management Division
B- 285674 July 26, 2000 Mr. Richard L. Gregg Commissioner Financial
Management Service Department of the Treasury
Subject: FMS' Monitoring of Lockbox Bank Operations: Internal Control
Weaknesses Identified and Actions Taken
Dear Mr. Gregg: We recently reported on the U. S. government's financial
statements for fiscal year 1999. 1 In connection with fulfilling our
requirement to audit these statements, we tested certain internal controls
over cash receipts collected through lockbox banks and processed by the
Department of the Treasury's Financial Management Service (FMS) on behalf of
the federal government. 2 We also followed up on FMS' actions to implement
recommendations we made last year to improve monitoring of lockbox bank
operations.
On behalf of federal agencies, FMS enters into lockbox service agreements
with commercial banks to collect certain payments made to the federal
government. FMS uses two lockbox networks: the general network for all
payments except federal taxes and the Internal Revenue Service (IRS) lockbox
network for federal tax payments. 3 The banks establish post office boxes
and electronic accounts to receive payments. The banks deposit the funds
they collect in Treasury Demand Deposit Accounts until they transfer funds
to the Treasury General Account at the Federal Reserve Bank of New York.
They also submit collection reports to the federal agencies and FMS.
1 Financial Audit: 1999 Financial Report of the United States Government(
GAO/ AIMD- 00- 131, March 31, 2000). 2 31 U. S. C. 331( e) (1994).
3 Network is the term used by FMS to describe the group of banks that
provides lockbox services. FMS had agreements with four banks to provide
lockbox services during fiscal year 1999. Each of these banks provides
general and IRS lockbox services and has multiple lockbox sites. In fiscal
year 1999, there were 11 lockbox sites nationwide.
B- 285674 GAO/ AIMD- 00- 225R Monitoring Lockbox Operations Page 2 The banks
are responsible for safeguarding and processing the funds in accordance
with their agreements with FMS and the federal agencies. FMS performs on-
site reviews and requires that the banks obtain internal and external audits
of their lockbox operations to determine the effectiveness of the banks'
controls. FMS, lockbox banks, and each of the federal agencies for which the
lockbox services are provided also establish memorandums of understanding.
These three- party agreements set forth procedures for processing
collections that are designed to meet the specific processing and reporting
requirements of the individual federal agencies. The federal agencies are
also responsible for monitoring lockbox operations and reporting any
performance problems to FMS. Also, Treasury requires banks to pledge
collateral to protect federal funds collected through their lockbox
operations and deposited at the banks. 4 FMS initially establishes the
amount of collateral each bank must pledge based on expected average daily
deposits and then adjusts the amounts based on actual collection information
obtained from the banks.
In fiscal year 1999, FMS reported total lockbox collections of about $288
billion, of which $269 billion was federal tax payments in the IRS lockbox
network and $19 billion was nontax payments in the general lockbox network.
Because funds collected through lockbox banks go directly to the banks, FMS
must ensure that the banks adequately safeguard the collections they
process. Thus, FMS' monitoring of lockbox banks' operations and collateral
is intended to be a key internal control for providing reasonable assurance
that funds collected through the lockbox banks are protected against fraud,
waste, and mismanagement. The purpose of this letter is to advise you of
certain internal control matters identified during our testing and to
recommend improvements.
Results in Brief
FMS has taken significant steps to strengthen its monitoring of its lockbox
bank operations but additional actions are needed to assure that federal
collections are adequately safeguarded and properly processed. Last year, we
reported on weaknesses in, and recommended improvements to, FMS' monitoring
of lockbox operations related to on- site reviews and lockbox bank audits. 5
FMS has addressed our concerns related to on- site reviews. In addition, FMS
acted on our recommendations related to requiring and providing guidance for
lockbox bank audits. However, due to the timing of the bank audits, FMS had
not obtained the results of such audits as of the end of our fieldwork.
Thus, it was too early to assess the effectiveness of FMS' enforcement of
the audit requirement, review of the audit results, and follow- up on
weaknesses identified, if any, in lockbox operations, as we recommended.
4 Title 31 , Code of Federal Regulations, Part 202, requires lockbox banks
to pledge collateral security in an amount required by the Secretary of the
Treasury prior to receiving federal deposits. 5 Internal Controls: FMS'
Monitoring of Lockbox Bank Operations Needs Improvement( GAO/ AIMD- 99- 219,
August 20,1999).
B- 285674 GAO/ AIMD- 00- 225R Monitoring Lockbox Operations Page 3 In
performing the fiscal year 1999 testing, we found that additional actions
are
needed to (1) follow up on problems at lockbox banks identified by the
federal agencies for which the lockbox services are provided and (2) ensure
the sufficiency of collateral pledged by the lockbox banks. Specifically, we
found that while FMS performed some procedures to investigate thefts
identified by one agency at its general lockbox bank site, FMS' actions did
not include determining what deficiencies at the bank allowed such thefts to
occur. Therefore, FMS was unable to assess whether the corrective actions
taken by the bank were adequate to prevent such thefts from occurring in the
future. Once we brought this matter to FMS' attention, FMS investigated the
thefts further and found that additional controls were needed at the bank to
adequately safeguard the collections. Also, we found that FMS had not
monitored the sufficiency of the collateral pledged by the lockbox banks
since 1995 when it entered into lockbox service agreements with the banks,
even though its internal procedures require that reassessments be performed
every 2 years. After we identified this problem, FMS reassessed the
collateral pledged by the banks and found that three of the four lockbox
banks were significantly undercollateralized. For example, at one bank,
about half of its average daily collected balances of approximately $150
million during the peak tax collection periods were not covered by
collateral. After its reassessment, FMS instructed the banks to pledge the
additional collateral needed to cover the deficiencies and protect the
government's collections.
Although the internal control matters discussed in this letter are not
material in relation to the federal government's fiscal year 1999 financial
statements, we believe they warrant your attention. Without effectively
monitoring banks' lockbox operations, FMS does not know whether the banks
are adequately safeguarding and properly processing billions of dollars of
federal collections. To assist FMS management in addressing the matters we
identified, this letter contains two detailed recommendations. In commenting
on a draft of this letter, FMS informed us that it concurred with our
findings and that it has actions in process to correct the matters we
identified.
Scope and Methodology
To meet our objective of evaluating the effectiveness of FMS' internal
controls over lockbox operations, we reviewed FMS' policies and procedures
for performing onsite reviews and audits of lockbox bank operations. This
included reviewing the guidelines and checklists used by FMS in performing
on- site reviews and the guidance and instructions FMS issued to lockbox
banks on internal and external audits of lockbox operations. We also
observed physical safeguards over receipts and related taxpayer data at two
IRS lockbox sites. We interviewed FMS officials, including the Assistant
Commissioner for Federal Finance, Director of FMS' Cash Management
Directorate, Director of FMS' Financial Services Division (FSD), and FSD's
Bank Management Team Leader to determine the status of FMS' actions to
correct problems identified in our prior year audit. We also reviewed FMS'
corrective action plan for resolving the weaknesses we reported last year
and status reports on actions taken. In addition, we reviewed the federal
regulations that require lockbox banks to pledge collateral to cover
collections deposited in Demand Deposit
B- 285674 GAO/ AIMD- 00- 225R Monitoring Lockbox Operations Page 4 Accounts
and FMS' internal procedures for establishing collateral levels and
monitoring the sufficiency of collateral pledged by the banks. Our work did
not include evaluating FMS' methodology for reassessing banks' collateral
levels or valuing the collateral pledged by the banks. We conducted our work
from December 1999 through March 2000 in accordance with generally accepted
government auditing standards. We requested comments on a draft of this
letter from the Commissioner of FMS. The Commissioner's comments are
discussed in the “Agency Comments” section of this letter and
included in the enclosure.
Additional Actions Are Needed to Strengthen FMS' Monitoring of Lockbox Bank
Operations
As in last year's audit, we identified weaknesses in FMS' monitoring of
lockbox operations. The Comptroller General's Standards for Internal Control
in the Federal Government 6 requires that management establish policies and
procedures to provide reasonable assurance that assets are safeguarded
against loss from unauthorized use or disposition and transactions are
executed accurately and timely in accordance with management directives.
Although FMS has taken steps to address the weaknesses we reported last
year, we found during our fiscal year 1999 audit that additional actions are
needed to (1) follow up on problems at lockbox banks identified by the
federal agencies for which the lockbox services are provided and (2) ensure
the sufficiency of collateral pledged by the lockbox banks.
Follow- up on Identified Problems Thorough follow- up on identified problems
at lockbox banks is necessary to provide assurance that problems are
corrected in a timely manner and that corrective actions are adequate to
prevent similar problems from occurring in the future. However, we found
that FMS did not perform thorough follow- up on thefts identified by one of
the federal agencies at a general lockbox bank.
FMS officials told us that five instances of employee theft were identified
at one of the general lockbox sites during fiscal year 1999. According to
FMS officials, one of the bank's employees had stolen five checks that were
sent to the bank with the agency payee line left blank. In this case, the
agency discovered the problem and notified the bank after the agency was
contacted by one of the remitters of the stolen checks. In a letter to FMS,
while not describing the deficiencies that existed, the bank stated that it
thoroughly reviewed its existing security procedures and had taken steps to
improve its controls, such as enhancing mail opening procedures and using a
stamp to complete the agency payee line. However, we found that FMS'
original follow- up did not include determining what deficiencies at the
bank allowed such thefts to occur and thereby assessing whether the actions
taken by the bank, as stipulated in its letter, were adequate to safeguard
collections against such thefts in the future.
6 GAO/ AIMD- 00- 21.3.1, November 1999.
B- 285674 GAO/ AIMD- 00- 225R Monitoring Lockbox Operations Page 5 After we
brought this issue to FMS' attention, FMS obtained additional information
from the bank on the circumstances surrounding the thefts and determined
that other control procedures were needed. For example, FMS found that the
bank did not log incoming blank payee checks, a standard mailroom procedure
to help ensure that checks are not lost or stolen. Also, the bank did not
include blank payee checks in its “seeding” program-- a control
technique used by banks that involves submitting dummy or false transactions
that include cash and other negotiable instruments, and tracking the results
to determine whether staff are processing transactions in accordance with
established procedures. FMS notified the bank that these procedures should
be implemented immediately. FMS officials told us that they plan to verify
that these controls are in place during the next on- site visit tentatively
scheduled for summer 2000. FMS officials also said that they plan to include
a requirement for “seeding” checks with blank payee lines in all
lockbox bank agreements when such agreements are renewed in 2001.
Monitoring of Collateral Pledged by Lockbox Banks FMS is responsible for
determining the amounts and types of securities lockbox banks pledge as
collateral to cover deposits in their lockbox Treasury Demand Deposit
Accounts during peak and nonpeak tax collection periods. 7 FMS' internal
procedures require that every 2 years, it reassess the sufficiency of the
banks' collateral to cover these accounts. However, we found that FMS had
not periodically reassessed the sufficiency of the banks' collateral, in
accordance with its procedures, since 1995 when it initially entered into
lockbox service agreements with the banks.
After we brought this issue to FMS' attention, it reassessed the amount of
collateral the banks had pledged to cover lockbox funds deposited in their
Demand Deposit Accounts and found collateral deficiencies ranging from 30
percent to 97 percent at three of the four lockbox banks. All three banks
had collateral deficiencies for nonpeak tax collection periods. One of the
banks had an average daily collected balance during the nonpeak collection
period of $3.5 million and only had pledged collateral valued at $103,500--
a 97 percent collateral deficiency. Another bank had a $79 million, or 52
percent, collateral deficiency for its peak tax collection periods in
addition to a nonpeak deficiency. This bank had pledged collateral valued at
about $71 million when it needed $150 million to cover its average daily
collection balances. Based on the results of these recent reassessments, FMS
required the three banks to pledge additional collateral to cover their
Demand Deposit Accounts sufficiently during both peak and nonpeak collection
periods. FMS' Bank Management Team Leader also told us that he assigned a
staff analyst to serve as the focal point for monitoring all lockbox banks'
collateral.
7 FMS establishes two levels of collateral (referred to as peak and nonpeak
levels) for the banks because of significant fluctuations in the amount of
lockbox deposits during the year. Peak collateral levels are set to cover
lockbox collections during the peak tax collection months of January, April,
June, and September, and nonpeak levels are set to cover collections during
the other 8 months.
B- 285674 GAO/ AIMD- 00- 225R Monitoring Lockbox Operations Page 6 Actions
Taken by FMS to Improve Its Monitoring
of Lockbox Bank Operations Last year, we reported on weaknesses in FMS'
monitoring of lockbox bank operations related to on- site reviews and bank
audits and made recommendations for improvements. FMS developed a plan to
address all of our recommendations and has already implemented our
recommendation to perform on- site reviews of general lockbox bank
operations. FMS has also taken steps to address our concerns related to bank
audits.
Specifically, FMS established a requirement for the banks to obtain
semiannual internal and biannual external audits of their IRS lockbox
operations; provided the banks specific guidance on the scope and type of
external audits or other services; and required the banks to deliver to FMS,
by December 31 of each year, a schedule of the internal and external audits
to be performed at its IRS and general lockbox operations. FMS also
developed and implemented a policy that requires banks to provide it with
copies of audit reports on the banks' lockbox operations and calls for FMS
staff to review the audit results and follow up on any weaknesses identified
by the auditors. According to FMS officials, the banks had scheduled
internal audits beginning in January 2000 and the majority of external
audits were scheduled for 2001. Due to the timing of the bank audits, FMS
had not received the results of the audits as of the end of our fieldwork.
Therefore, we were unable to assess the effectiveness of FMS' (1)
enforcement of the audit requirement, (2) review of the audit results, and
(3) follow- up to ensure that any weaknesses identified were corrected.
However, subsequent to our audit fieldwork, FMS advised us that it had
received the internal audit reports of two lockbox banks. For one of the
banks, the auditors reported instances of noncompliance and internal control
weaknesses at its IRS and general lockbox operations. For example, the
auditor found that cash remittances at one of the bank's general lockbox
sites were not properly secured in safes before being deposited. The auditor
also reported that a cash seeding program had not been established at the
bank's general lockbox operation sites. FMS officials stated that as part of
the next on- site review of this bank's lockbox operations, they will follow
up with the bank to ensure that corrective actions are taken. The weaknesses
identified in this audit further emphasize the importance of FMS' monitoring
of required bank audits.
Conclusion
Without effective monitoring of lockbox bank operations through thorough
follow- up on problems agencies identify at the banks, such as the thefts
that occurred at one of the general lockbox banks, and periodic monitoring
of the sufficiency of the collateral pledged by the banks, FMS does not have
assurance that the banks are adequately safeguarding federal collections
against loss or theft and processing collections in accordance with the
terms of the lockbox agreements.
B- 285674 GAO/ AIMD- 00- 225R Monitoring Lockbox Operations Page 7 Because
of the timing of the internal and external audits of the lockbox banks'
operations, it was too early to assess the effectiveness of FMS' enforcement
and review of the audits. We will continue to monitor FMS' efforts in this
area. It is important that FMS continue with its plans to obtain and review
the results of the bank audits and follow up with the banks and agencies to
ensure that any weaknesses identified are corrected.
Recommendations
To correct the new weaknesses we identified in FMS' monitoring of lockbox
operations, we recommend that the Commissioner of FMS direct the Assistant
Commissioner for Federal Finance to ensure that the Financial Services
Division (1) establishes procedures to thoroughly follow up on problems
agencies identify at lockbox banks, such as the thefts identified at one of
the general lockbox banks, to ensure that problems are corrected in a timely
manner and that adequate corrective actions are taken to prevent similar
problems from occurring in the future and (2) performs periodic
reassessments of collateral pledged by lockbox banks, as prescribed in FMS'
internal policies and procedures.
Agency Comments
In commenting on a draft of this letter, FMS concurred with our findings and
recommendations. The Commissioner of FMS indicated that FMS will continue to
strive for additional improvements to assure that federal collections are
adequately safeguarded and properly processed. The Commissioner also stated
that FMS is already taking actions to address the internal control matters
that we identified and plans to have them completed by September 30, 2000.
We plan to follow up on these matters during our audit of the federal
government's fiscal year 2000 financial statements.
---- This letter contains recommendations to you. The head of a federal
agency is required by 31 U. S. C. 720 to submit a written statement on
actions taken on our recommendations. You should send your statement to the
Senate Committee on Governmental Affairs and the House Committee on
Government Reform within 60 days of the date of this letter. You must also
send a written statement to the House and Senate Committees on
Appropriations with the agency's first request for appropriations made over
60 days after the date of this letter.
We are sending copies of this letter to Senator Fred Thompson, Chairman, and
Senator Joseph Lieberman, Ranking Minority Member, Senate Committee on
Governmental Affairs; Representative Dan Burton, Chairman, and
Representative Henry Waxman, Ranking Minority Member, House Committee on
Government Reform; other interested congressional parties; the Honorable
Lawrence Summers, Secretary of the Treasury; Donald Hammond, Fiscal
Assistant Secretary, Department of the Treasury; the Honorable Jeffrey Rush,
Jr., Inspector General, Department of
B- 285674 GAO/ AIMD- 00- 225R Monitoring Lockbox Operations Page 8 the
Treasury; and the Honorable Jacob J. Lew, Director, Office of Management and
Budget. Copies will be made available to others upon request. If you have
any questions regarding this letter, please contact me at (202) 512- 3406.
Key contributors to this assignment were Christine Robertson, Suzanne
Murphy, and Jerry Marvin.
Sincerely yours, Gary T. Engel Associate Director Governmentwide Accounting
and
Financial Management Issues Enclosure
Enclosure GAO/ AIMD- 00- 225R Monitoring Lockbox Operations Page 9
Comments From the Financial Management Service
Enclosure GAO/ AIMD- 00- 225R Monitoring Lockbox Operations Page 10 (919513)
*** End of document. ***