Financial Management: Review of Education's Grantback Account (Letter
Report, 08/18/2000, GAO/AIMD-00-228).

Pursuant to a congressional request, GAO reviewed the Department of
Education's grantback account.

GAO noted that: (1) as a result of financial management system
deficiencies, inadequate systems of funds control, and manual internal
control weaknesses that GAO and other auditors have identified and the
manner in which the grantback account was used, there is increased risk
of fraud, waste, and mismanagement of grant funds; (2) in terms of funds
control, these deficiencies increase the risk that Anti-Deficiency Act
violations could occur and not be promptly identified and reported; (3)
because of these deficiencies, GAO was unable to determine whether any
Anti-Deficiency violations occurred; (4) the deficiencies identified at
Education relate five areas; (5) education's pooling method of
accounting for grant drawdowns used prior to May 1998 contributed to out
of balance conditions and the need for significant grant reconciliation
efforts involving hundreds of millions of dollars; (6) GAO testified in
March 2000, that continued weaknesses in general computer controls, over
key Education financial management systems, increase the risk of
unauthorized access or disruption of services, and make Education's
sensitive grant and loan data vulnerable to inadvertent or deliberate
misuse, fraudulent use, improper disclosure, or destruction, which could
occur without being detected; (7) the grantback account balances between
the fiscal year ended September 30, 1993, and December 31, 1999, ranged
from a high of about $698 million as of September 30, 1996, to a low of
about $314 million as of December 31,1999; (8) GAO found that Education
could not provide documentation to support the validity of certain
activity in the grantback account; (9) Education did not consistently
adhere to certain of its policies and procedures relating to obtaining:
(a) independent certifications of recipients' records in connection with
its Eduacation Payment Management System grant recipient
reconciliations; and (b) supervisory approval of manually prepared
journal entries; (10) Education has taken or plans to take various
actions to address the grantback account issues; and (11) in addition,
Education analyzed the portion of the grantback account balance at
September 30, 1999, that represented actual grantback activity and, in
March 2000, returned to Treasury about $10 million.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-00-228
     TITLE:  Financial Management: Review of Education's Grantback
	     Account
      DATE:  08/18/2000
   SUBJECT:  Financial management systems
	     Educational grants
	     Federal agency accounting systems
	     Internal controls
	     Accounting procedures
IDENTIFIER:  Dept. of Education Grantback Account
	     Dept. of Education Grant Administration and Payment System
	     Dept. of Education Payment Management System

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GAO/AIMD-00-228

Accounting and Information
Management Division

B-285684

August 18, 2000

The Honorable Pete Hoekstra
Chairman
The Honorable Charlie Norwood
Vice Chairman
Subcommittee on Oversight and Investigations
Committee on Education and the Workforce
House of Representatives

You requested that we review the Department of Education's grantback
account. As you requested, this report includes general information on the
intended purpose of the grantback account; the annual grantback account
balance since inception; and the grantback account balance as of December
31, 1999. You also requested that we evaluate how the grantback account has
been used since inception; whether there is support for the transactions in
the grantback account; whether the transactions in the grantback account are
valid; and whether any federal laws have been violated by the existence and
management of the grantback account.

Education provides grants for various education programs, such as
postsecondary, special education, and vocational programs, and has over 150
appropriation accounts to fund its grant programs, over 16,000 grant
recipients, and for fiscal year 1999 reported about $30 billion in grant
expenses.1 Grant recipients meeting certain thresholds2 are required by law
to have audits (referred to as Single Audits3) which include tests of their
compliance with requirements that have a direct and material effect on a

major program.4 If the Single Audits or other audits (such as those that
Education might perform itself) identify certain noncompliance, recipients
must repay Education the amount related to the noncompliance. If the grant
recipient meets certain conditions, including correcting the noncompliance,
Education may return up to 75 percent of the amounts recovered in the form
of grantback payments. Ultimately, any remaining funds would be returned to
the Department of the Treasury. In 1991, Education established a deposit
fund with the Treasury to retain availability of funds needed to make
grantback payments and account for the grantback activity. This deposit fund
is referred to as the grantback account.

To provide the information you requested and address your specific
questions, we evaluated Education's financial management system and manual
internal controls over grantback activity and related funds control, and
reviewed the actions already taken and planned by Education to address
grantback account issues that we and other auditors have identified. On May
3, 2000, we briefed your staff on the results of our work. This report
summarizes the information provided at that briefing. The attached briefing
slides provide the detail on the results of our work and the information
provided at the briefing. (See appendix I.) Also, these matters were
included in our May 24, 2000, testimony on Education's financial management
problems.5

As a result of financial management system deficiencies, inadequate systems
of funds control, and manual internal control weaknesses that we and other
auditors have identified and the manner in which the grantback account was
used, there is increased risk of fraud, waste, and

mismanagement of grant funds. In terms of funds control,6 these deficiencies
increase the risk that Anti-Deficiency Act violations could occur and not be
promptly identified and reported. Because of these deficiencies, we were
unable to determine whether any Anti-Deficiency violations occurred. The
deficiencies identified at Education relate to the following five areas.

ï¿½ Pooling method of accounting for grant drawdowns. Education's pooling
method of accounting for grant drawdowns used prior to May 1998 contributed
to out of balance conditions and the need for significant grant
reconciliation efforts involving hundreds of millions of dollars. Using the
pooling method, grant recipients with multiple awards were not required to
match drawdowns to specific awards as the funds were withdrawn from a pool
of grant funds. In accounting for these transactions, Education first relied
on a complex formula (called "the algorithm") to approximate the actual
expenditures for the specific grant awards and allocate the drawdowns.
However, according to Education officials, the algorithm did not properly
calculate the drawdown allocations, and contributed to differences between
Education's records of grant activity and those of the recipients. In
addition to the problems associated with the original allocation, Education
officials told us that untimely reporting by some recipients of actual
expenditures for individual grant awards also contributed to inaccurate data
in Education's records.

ï¿½ General computer controls. We testified in March 2000,7 that continued
weaknesses in general computer controls, over keyEducation financial
management systems,8 increase the risk of unauthorized access or disruption
of services, and make Education's sensitive grant and loan data vulnerable
to inadvertent or deliberate misuse, fraudulent use, improper disclosure, or
destruction, which could occur without being detected.

ï¿½ Extensive grant reconciliation efforts and funds control. The grantback
account balances between the fiscal year ended September 30, 1993, and
December 31, 1999, ranged from a high of about
$698 million as of September 30, 1996, to a low of about $314 million as of
December 31, 1999. Although the grantback account was established to account
for grantback activities, we found that about 95 percent of the activity in
the account for fiscal years 1993 through 1999 was unrelated to such
activities. Specifically, we found that Education
(1) used the grantback account as a suspense account beginning in 19939 for
hundreds of millions of dollars of activity related to grant reconciliation
efforts and (2) did not maintain adequate detailed records for certain
grantback account activity by the applicable fiscal year and
appropriation.10

In addition, Education used the grantback account to clear unreconciled
differences in various grant appropriation fund balance accounts11and adjust
certain appropriation fund balances to ensure that they did not become
negative. For example, in 1999, Education made a $111 million adjustment
reducing the grantback account balance and increasing the balance of six
appropriations to ensure that projected negative funds balances did not
occur. A negative balance is an indicator of a potential violation of the
Anti-Deficiency Act. For this adjustment activity, Education did not provide
any documentation to show a direct correlation between the reductions to the
grantback account for the adjustments and the initial increases made to the
grantback account.

In October 1997 and January 2000, Education reviewed and analyzed the
canceled grant appropriations accounts which resulted in $293 million being
returned to Treasury. However, Education's review and analysis was
incomplete because it did not always consider adjustment activity that may
have occurred between the time of the adjustment and the date of the review.
Consequently, there is an increased risk that funds control deficiencies,
including returning incorrect amounts to Treasury, could occur and not be
promptly detected.

ï¿½ Inadequate supporting documentation for transactions. We found that
Education could not provide documentation to support the validity of certain
activity in the grantback account.12 For example, we found that for fiscal
year 1996 and prior years, Education could not provide general ledger
printouts supporting the adjustment activity totaling
$685 million recorded as net increases to the grantback account and
documentation supporting the reconciliations of the grantback account's Fund
Balance with Treasury. Also, we found that for 39 of the 92 actual grantback
transactions we tested (with gross totals of about $47 million and $128
million, respectively), Education could not locate or provide any
documentation supporting the validity of the transactions and could only
partially support another 4 transactions (totaling about $22.5 million).
Further, Education could not provide documentation to support that the grant
balances in the Education Payment Management System (EDPMS) at the time of
conversion in May 1998 agreed with the beginning grant balances in its new
Grant Administration and Payment System (GAPS), and that the true grantback
activity in PAS at the time of conversion in October 1997 was properly
transferred to the new general ledger system.13

ï¿½ Lack of adherence to and inadequacy of Education's policies and
procedures. Education did not consistently adhere to certain of its policies
and procedures relating to obtaining (1) independent certifications of
recipients' records in connection with its EDPMS grant recipient
reconciliations and (2) supervisory approval of manually prepared journal
entries. Also, in our review of Education's policies and procedures relating
to GAPS recipient reconciliation adjustments, we found that such policies
were not adequate to ensure the validity and accuracy of transactions.14
Specifically we found that, there are no requirements for (1) supervisory
review and approval of requested recipient reconciliation adjustments, (2)
staff who are responsible for processing adjustments requested by grant
recipients to obtain and review applicable Single Audit Act reports, and (3)
obtaining documentation from the recipients supporting the requested GAPS
reconciliation adjustments, other than a letter signed by the recipient's
Chief Financial Officer.

Education has taken or plans to take various actions to address the
grantback account issues. For example, in part to eliminate problems caused
by Education's pooling method, Education implemented GAPS to track grant
disbursements by award instead of on a pooled basis. In addition, Education
analyzed the portion of the grantback account balance at September 30, 1999,
(approximately $16.5 million) that represented actual grantback activity
and, in March 2000, returned to Treasury about $10 million.

Further, Education has developed a plan and taken several key steps to
eliminate the adjustment activity portion of the grantback account, such as
returning additional funds to Treasury, contracting with Treasury for
assistance in determining the appropriate accounting for the remaining funds
in the grantback account, and transferring the adjustment activity balance
to another account. The plan also stipulates that Education will reconcile
GAPS and Education's general ledger by June 2000, and return to Treasury the
remaining balance in the grantback account. However, the plan does not
contain sufficient details and does not address when or how Education will
complete these two actions. To assist Education management in addressing the
matters we identified, this report contains four detailed recommendations.
In commenting on a draft of this letter, Education indicated that it agreed
with our recommendations and is implementing a detailed plan that addresses
and corrects the matters we identified.

To accomplish the objectives of the request, we performed the following
procedures.

ï¿½ Held numerous interviews and discussions with staff in Education's offices
of the Chief Financial Officer, General Counsel, Inspector General (OIG),
and the Budget Services Group to obtain an understanding of the (1) intended
purpose and actual use of the grantback account, (2) information systems,
and policies and procedures related to the activity recorded in the account,
and
(3) controls in place for the conversion from EDPMS to GAPS.

ï¿½ Reviewed available information related to (1) Education's grant activity
and use of the grantback account, including independent auditor reports
(fiscal years 1995 through 1999), policy and procedure manuals and internal
memorandums, and (2) controls in place for the conversion from EDPMS to GAPS
and the results of the conversion procedures.

ï¿½ Conducted walkthroughs of the various types of transactions that were
recorded in the grantback account including actual grantback collections and
disbursements, reconciliation adjustments, and return of funds to Treasury.

ï¿½ Reviewed the Fund Balance with Treasury reconciliations for the grantback
account for fiscal years 1997, 1998, and 1999.

ï¿½ Tested a nonstatistical sample of 92 actual grantback transactions from a
total of 477 transactions recorded in the account from fiscal years 1991
through 1999, to determine the validity of such transactions. Because there
was an increased risk of invalid transactions related to disbursements and
credit adjustments, and there was a relatively small number of transactions,
we selected all disbursements and credit adjustments. Because there was less
risk of invalid transactions related to collections, we selected all
collections greater than $1 million. The results of this testing are not
projectable to the transactions that were not tested.

ï¿½ Selected a statistical sample of 38 adjustment transactions from a total
of 187 transactions recorded in the account from fiscal years 1997 through
1999. We initially tested a sub-sample of 20 adjustments to determine
whether Education could provide adequate documentation to support the
validity of these transactions. Based on the test results on this sample, we
did not expand our test to include the remaining
18 sample items.

ï¿½ Reviewed GAPS recipient reconciliation files for (1) all adjustments to
decrease drawdowns by more than $1 million and (2) the largest adjustment to
increase drawdowns.

ï¿½ Reviewed EDPMS recipient reconciliation files for six recipients selected
nonstatistically from the available files.

ï¿½ Obtained and reviewed data files that contained the ending grant balances
in EDPMS and the beginning grant balances in GAPS.

ï¿½ Reviewed and discussed with Education's OIG the workpapers related to the
OIG's Action Memorandum FIN-99-01 (GAPS Survey Review) issued in January
1999.

ï¿½ Reviewed relevant laws and regulations, consisting of the Anti-Deficiency
Act (31 U.S.C. 1341, 1342, 1349−1351, 1511−1519 (1994)), the
account closing law (31 U.S.C. 1551-1558 (1994)), OMB Circular A-34 (revised
October 19, 1999), the Treasury Financial Manual, and Section 459 of the
General Education Provisions Act (20 U.S.C. 1234h).

ï¿½ Reviewed the Single Audit Act guidance for recipients of Education grant
program awards and interviewed 10 nonstatistically selected states' auditors
to obtain an understanding of the scope of their audit work under the Single
Audit Act related to Education's grant programs.

We performed our review in Washington, D.C., at the Department of Education
from December 1999 through April 2000 in accordance with generally accepted
government auditing standards. Prior to our May 3, 2000, briefing to the
staff of the Subcommittee on the results of our work, we provided Education
with copies of our detailed briefing slides, which contained recommendations
to the Secretary of Education for review and comment. In a meeting with
Education officials, we obtained their comments and incorporated them as
appropriate. In addition, we requested comments on a draft of this report
from the Secretary of Education. Education's comments are discussed in the
"Agency Comments and Our Evaluation" section of this report and included in
appendix II.

Agencies are required by OMB Circular No. A-127, Financial Management
Systems (revised July 23, 1993) to maintain financial management systems
encompassing automated and manual processes, procedures, and controls that
process and record financial events effectively and efficiently, and provide
complete, timely reliable and consistent information for decisionmakers and
the public. As we testified in May 2000, Education's stewardship over its
annual appropriations and the student loans for which it has collection
responsibility has been under question as it has experienced persistent
financial management weaknesses. Beginning with Education's first agencywide
audit effort of its fiscal year 1995 financial statements, Education's
auditors have each year reported largely the same serious internal control
weaknesses, which have affected the department's ability to provide reliable
financial information to decisionmakers both inside and outside the agency.
One of these internal control weaknesses relates to Education not properly
or promptly reconciling its financial accounting records and not being able
to provide sufficient documentation to support some of its financial
transactions. To prepare Education's fiscal year 1999 financial statements
before the March 1, 2000, deadline, Education's financial staff and its
contractors had to make significant efforts to work around the serious
internal control and financial management systems weaknesses that continued
to plague the agency.

In its report on Education's fiscal year 1998 financial statements, the
auditor reported Education's use of the grantback account as an example of a
reconciliation issue identified during the auditor's testing. In January
1999, Education's Office of Inspector General (OIG) issued a report15 on the
results of its review of Education's process for reconciling the
department's grant disbursement system with recipient records. The OIG
reported weaknesses in management controls surrounding the reconciliation
process and made recommendations for improvement.

Education's pooling method of accounting for grant drawdowns used prior to
May 1998 contributed to out of balance conditions and the need for
significant grant reconciliation efforts. Education used a grant accounting
and disbursement system called the Education Payment Management System that
it modified from the Department of Health, Education and Welfare's system
when Education was established as a separate executive branch department in
1980. EDPMS allowed grant recipients with multiple awards to withdraw funds
from a pool of grant funds without being required to match the drawdowns to
specific awards as the drawdowns occurred. This method of withdrawing funds
is referred to as the pooling method.

In accounting for these transactions, Education first relied on a complex
formula called the algorithm to allocate the drawdowns between awards. This
method was supposed to approximate the actual expenditures for the specific
grant awards. However, according to Education officials, the algorithm did
not work properly after implementation of the 1990 account closing law's
requirement to cancel appropriations generally 5 years after budget
authority expires.16 Specifically, Education officials told us that the
algorithm did not properly calculate the drawdown allocations between awards
and this contributed to differences between Education's records of grant
activity and those of the recipients.

After the original allocation of drawdowns, Education relied on recipient
reporting (monthly or quarterly, depending on the grant type and award
amount) of actual expenditures for individual grant awards as its basis for
adjusting the disbursement transactions to the correct grant awards.
However, in addition to the problems associated with the original
allocation, Education officials told us that untimely reporting by some
recipients also contributed to inaccurate data in Education's records,
resulting in differences between Education's records and those of the
recipients.

Education places significant reliance on its financial management systems to
perform basic functions, such as making grant payments and maintaining
budget controls. We testified in March 2000, that continued weaknesses in
general computer controls increase the risk of unauthorized access or
disruption of services and make Education's sensitive grant and loan data
vulnerable to inadvertent or deliberate misuse, fraudulent use, improper
disclosure, or destruction, which could occur without being detected. In
every year, beginning with the fiscal year 1995 financial statement audit,
Education's independent financial statement auditors have reported
weaknesses in Education's information systems controls, such as ineffective
procedures for monitoring access to sensitive computer resources, and have
made recommendations to Education to address such weaknesses.

Although the grantback account was established to account for grantback
activities, we found that about 95 percent of the activity in the account
for fiscal years 1993 through 1999 was unrelated to such activities. Figure
1 shows the grantback account balances by fiscal year, beginning in 1991.

Source: Data provided by Education's Office of the Chief Financial Officer.

Note: Balance as of December 31, 1999, was the same as of September 30,
1999.

Specifically, we found that, beginning in 1993, Education used the grantback
account as a suspense account for hundreds of millions of dollars of
activity related to grant reconciliation efforts affecting its
appropriations that fund grants. We also found that Education did not
maintain adequate detailed records for certain grantback account activity by
the applicable fiscal year and appropriation that would allow it to promptly
investigate the activity and transfer it to the proper accounts.

Education's grant reconciliation efforts impacting the grantback account
included reconciliations between (1) Education's and recipients' records of
grant disbursements, (2) certain proprietary and budgetary general ledger

accounts maintained by Education for each appropriation,17 and
(3) Treasury's and Education's records of Fund Balance with Treasury
accounts.

Education also used the grantback account to (1) clear unreconciled
differences in various grant appropriation fund balance accounts and
(2) adjust certain appropriation fund balances to ensure that they did not
become negative. For example, in 1999, Education made a $111 million
adjustment, reducing the grantback account balance and increasing the
balance of six appropriations to ensure that projected negative funds
balances did not occur. A negative balance is an indicator of a potential
Anti-Deficiency Act violation. For this adjustment activity, Education did
not provide any documentation to show a direct correlation between the
reductions to the grantback account for the adjustments and the initial
increases made to the grantback account. Such documentation is needed as
part of a funds control system to ensure compliance with the Anti-Deficiency
Act, which requires agencies to investigate possible overobligations or
overexpenditures and to report to the President and the Congress if they
determine an overobligation or overexpenditure occurred.

While Education reviewed the grantback account activity in October 1997 and
January 2000 for amounts related to canceled appropriation accounts, its
analysis was not complete. For example, Education's review focused on three
adjustments totaling approximately $700 million (net) that increased the
grantback account but did not consider whether the adjustments would have
been increased or decreased for activity that occurred between the time of
the adjustment and the date of the review. As a result of these reviews,
Education returned approximately $293 million to Treasury. However, such
deficiencies in Education's analysis increase the risk that funds control
deficiencies, including returning incorrect amounts to Treasury, could occur
and not be detected promptly.

We found that Education could not provide documentation to support the
validity of certain activity in the grantback account, in part because
(1) according to Education officials, about 200 boxes of accounting records
were sent to off-site storage without being properly labeled so as to easily
determine the contents when Education moved in October 1998,
(2) records relating to certain transactions selected for our testing, which
Education stated were stored at another agency's off-site storage facility,
were not provided by the end of our fieldwork despite repeated requests by
Education to obtain the records, and (3) Education did not maintain
complete, detailed records from the discontinued accounting system when it
converted to its new accounting system in October 1997.

Specifically, we found that for fiscal year 1996 and prior years, Education
could not provide (1) general ledger printouts supporting the adjustment
activity totaling $685 million recorded as net increases to the grantback
account and (2) documentation supporting the reconciliations of the
grantback account's Fund Balance with Treasury. Also, we found that for
39 of the 92 actual grantback transactions we nonstatistically selected for
testing (totaling in gross about $47 million and $128 million,
respectively), Education could not locate or provide any documentation
supporting the validity of the transactions and could only partially support
another
4 transactions (totaling about $22.5 million). In addition, for 14 of the
92 selected transactions, Education asserted that the transactions, which
totaled $160,734, were recorded to reverse duplicate postings of grantback
collections. However, Education could not locate evidence to support that a
duplicate posting had in fact occurred.

Education also could not provide adequate documentation for 6 of the
20 adjustment transactions we statistically selected for testing. One of the
20 adjustment transactions was a valid grantback disbursement for
$48,195, which was misclassified as an adjustment. As such, Education's
analysis of the actual grantback activity, which was performed to determine
the amount to be returned to Treasury, was incorrect. Further, Education
could not provide documentation to support that the grant balances in EDPMS
at the time of conversion in May 1998 agreed to the beginning grant balances
in GAPS, and that the true grantback activity in PAS at the time of
conversion in October 1997 was properly transferred to the new general
ledger system.

Procedures

Education did not consistently adhere to certain of its policies and
procedures relating to obtaining (1) independent certifications of
recipients' records in connection with its EDPMS grant recipient
reconciliations and (2) supervisory approval of manually prepared journal
entries. Also, in our review of Education's policies and procedures relating
to GAPS recipient reconciliation adjustments, we found that such policies
were not adequate to ensure the validity and accuracy of transactions. For
example, there is no requirement for supervisory review and approval of
requested recipient reconciliation adjustments. Also, there is no
requirement that staff responsible for processing adjustments requested by
grant recipients obtain applicable Single Audit Act reports and review the
audit results even though Education officials stated in a letter to us that
Education believes the requested adjustments are valid because the
recipients are subject to yearly audits (i.e., Single Audits). Further,
there is no requirement to obtain documentation from the recipients
supporting the requested GAPS reconciliation adjustments, other than a
letter signed by the recipient's Chief Financial Officer.

We also found that Education does not require supervisory review and
approval of monthly reports of outlays (Statements of Transactions −
Standard Form 224) that agencies prepare and send to Treasury. These reports
include information about which appropriations were charged for the outlays.
Such information should be reviewed by a supervisor to identify inadvertent
or intentional errors, such as charging disbursements to the grantback
account instead of to the correct appropriation.

Education has taken or plans to take various actions to address the
grantback account issues. In part to eliminate problems caused by
Education's pooling method, Education implemented a new grant disbursement
system in May 1998 called GAPS. Under GAPS, Education tracks grant
disbursements by award instead of on a pooled basis. However, for fiscal
years 1998 and 1999, as mentioned previously, Education's independent
auditors reported various weaknesses related to GAPS, including unreconciled
differences between GAPS and Education's general ledger, processing of
duplicate payments, and lack of formal policies and procedures to reconcile
expenditure data between GAPS and Education's general ledger. Also,
Education analyzed the portion of the grantback account balance as of
September 30, 1999, (approximately
$16.5 million) that represented actual grantback activity and, in March
2000, returned to Treasury about $10 million.

Further, after recently developing a plan to eliminate the adjustment
activity portion of the grantback account, Education took the following key
steps.

ï¿½ In January 2000, Education decreased the grantback account (i.e., returned
to Treasury) and increased Treasury's general fund account for $146 million;

ï¿½ Education contracted with Treasury in February 2000 for assistance in
determining the appropriate accounting for the remaining funds in the
grantback account; and

ï¿½ Education transferred in March 2000 the adjustment activity balance from
the grantback account to a deposit fund suspense account used for general
purposes.

The plan also stipulates that Education will reconcile GAPS and Education's
general ledger by June 2000 and return to Treasury the remaining balance in
the grantback account. However, for these steps, the plan is not detailed
enough for the individuals carrying it out to know specifically what actions
to take to meet management's objectives. Also, the plan does not address
when or how Education will complete the GAPS reconciliation project and
account for adjustments resulting from such reconciliations. In this regard,
we made recommendations to Education in our briefing slides. Education
officials reviewed a draft of the briefing slides and told us that they
agreed with our recommendations.

The financial management systems deficiencies, inadequate systems of funds
control, and manual internal control weaknesses we and other auditors
identified increase the risk of fraud, waste, and mismanagement of grant
funds, as well as increased risk of noncompliance with the requirements of
the Anti-Deficiency Act. It will take a sustained, high-priority effort by
Education's top management to ensure that these persistent and long-standing
problems are fully resolved and do not continue under its new systems.

In addition to the actions already taken or planned by Education, we
recommend that the Secretary of Education direct the Acting Chief Financial
Officer to develop and implement:

ï¿½ A formal, detailed plan to eliminate the portion of the grantback account
balance that was transferred in March 2000 to a deposit fund suspense
account, including steps describing how Education will

ï¿½ complete the GAPS reconciliation project and account for adjustments
resulting from such reconciliations;

ï¿½ implement adequate controls over its recipient reconciliations and Fund
Balance with Treasury reconciliations, requiring that Education maintain
detailed records by the applicable fiscal year and appropriation for any
unreconciled differences transferred to suspense accounts until such
differences are resolved; and

ï¿½ return to Treasury the remaining funds related to the adjustment activity
that were transferred in March 2000 to a deposit fund suspense account,
including a re-evaluation of the October 1997 and January 2000 reviews.

ï¿½ Detailed policies and procedures to properly manage and maintain
documentation and records (both on-site and in off-site storage facilities)
related to all transactions and other significant events related to grant
activity, including sound funds control practices to ensure compliance with
the Anti-Deficiency Act.

ï¿½ Detailed policies and procedures for performing GAPS recipient
reconciliations, including requirements for

ï¿½ supervisory review and approval of GAPS adjustments,

ï¿½ review of applicable Single Audit results prior to making adjustments, and

ï¿½ obtaining summary level documentation from the recipients supporting the
validity of the requested adjustments.

ï¿½ Detailed policies and procedures requiring supervisory review and approval
of Education's monthly Statements of Transactions − Standard Form 224.

In commenting on a draft of this report, Education agreed with our
recommendations and stated that it is implementing a detailed plan it
developed that addresses and corrects the deficiencies we noted in our
report. Education also stated that our review was helpful in identifying
areas where the department can improve its financial management practices.
In addition, Education stated that it believes that it has sound funds
control practices in place due to the implementation of GAPS, which
maintains detailed transaction history data. We recognize that GAPS provides
Education with improved information capabilities. In terms of funds control,
however, the problems that we and other auditors have identified and the
manner in which the grantback account was used, increase the risk that
Anti-Deficiency Act violations could occur and not be promptly identified
and reported.

We are sending copies of this report and briefing slides to other interested
Congressional parties, the Honorable Richard W. Riley, Secretary of
Education; the Honorable Lorraine Lewis, Inspector General, Department of
Education; and the Honorable Jacob J. Lew, Director of the Office of
Management and Budget. We will make copies available to others upon request.

If you have any questions about this report or the briefing slides, please
contact me at (202) 512-3406. Key contributors to this assignment were
Christine Robertson, Bill Boutboul, James Douglas, and Suzanne Murphy.

Gary T. Engel
Associate Director
Governmentwide Accounting and
Financial Management Issues

Briefing to the Subcommittee on Oversight and Investigations, House
Committee on Education and the Workforce

Comments From the Department of Education

(901818)

  

1. Education, established on May 4, 1980, is responsible for administering
and accounting for various education grant programs and other loan programs
under its charge.

2. The requirements apply to grant recipients who annually expend federal
awards of
$300,000 or more (or received awards of $100,000 or more prior to June
1997).

3. OMB Circular A-133, Audits of States, Local Governments, and Non-Profit
Organizations − Revised June 24, 1997, issued pursuant to the Single
Audit Act of 1984, P.L. 98-502, and the Single Audit Act Amendments of 1996,
P.L. 104-156, sets forth standards for obtaining consistency and uniformity
among federal agencies for the audit of states, local governments, and
nonprofit organizations expending federal awards.

4. A major program is a federal program identified in accordance with
risk-based criteria prescribed by the Office of Management and Budget. 31
U.S.C. 7501(a)(12)(Supp.IV 1998).

5. Financial Management: Education's Financial Management Problems Persist
(GAO/T-AIMD-00-180 , May 24, 2000).

6. Agencies are responsible for implementing a system of funds control to
manage the funds appropriated as required by the Anti-Deficiency Act (31
U.S.C. 1541) and as implemented by OMB Circular A-34 (as revised October 19,
1999). According to GAO's Policy and Procedures Manual for Guidance of
Federal Agencies, the term "funds control" refers to control over use and
management of fund appropriations to help ensure that (1) funds are used
only for authorized purposes, (2) they are economically and efficiently
used, (3) obligations and expenditures do not exceed the amounts authorized
and available, and (4) the obligation or disbursement of funds is not
reserved or otherwise withheld without congressional knowledge and approval.

7. Education Faces Challenges in Achieving Financial Management Reform
(GAO/T-AIMD-00-106 , March 1, 2000).

8. General computer controls are the structure, policies, and procedures
that apply to an entity's overall computer operations and establish the
environment in which application systems and controls operate. General
computer controls include access controls, which are designed to limit or
detect access to computer programs, data, equipment, and facilities to
protect these resources from unauthorized modification, disclosure, loss or
impairment.

9. Suspense accounts are used by entities as temporary holding places for
certain transactions until they can be cleared to the proper accounts. Sound
financial management practices entail entities having appropriate controls
over the suspense accounts including maintaining adequate detailed records
of the transactions in the account, promptly investigating the transactions,
and promptly transferring them to the proper accounts.

10. Education's independent auditors similarly reported in fiscal years 1998
and 1999 that Education was using the account for adjustments related to
reconciling differences of various appropriations that have accumulated
since 1993, but Education could not readily determine to which
appropriations the amounts in the grantback account belong. Detailed records
are needed to have an adequate system of funds control and help protect
against Anti-Deficiency Act violations.

11. Education's auditors, in each year beginning with the fiscal year 1995
financial statement audit, have reported internal control weaknesses related
to Fund Balance with Treasury reconciliations, including unexplained,
unreconciled differences; improper and untimely reconciliations; and
adjusting general ledger balances to agree to Treasury without adequately
determining whether Education's or Treasury's records may have been correct.

12. The Comptroller General's Standards for Internal Control in the Federal
Government (GAO/AIMD-00-21.3.1) issued in November 1999 requires that all
transactions and other significant events be clearly documented, the
documentation be readily available for examination, and all documentation
and records be properly managed and maintained.

13. In accounting for its general ledger activity prior to fiscal year 1998,
Education maintained the Primary Accounting System (PAS). On October 1,
1997, Education converted from PAS to the Financial Management Systems
Software (FMSS).

14. The Comptroller General's Standards for Internal Control in the Federal
Government (GAO/AIMD-00-21.3.1) issued in November 1999 requires that
internal control activities, including policies and procedures, be effective
in helping ensure the validity of recorded transactions.

15. Survey Review of the Grant Administration and Payment System (GAPS)
Reconciliation Process (Action Memorandum FIN-99-01, January 28, 1999).

16. 31 U.S.C. 1552.

17. Education is required, as are all agencies, to maintain proprietary and
budgetary accounts in its general ledger. Proprietary accounts track assets
and liabilities, whereas budgetary accounts track the status of budget
authority. Proprietary accounts are self-balancing, as are budgetary
accounts. In addition, there is a relationship between certain proprietary
and budgetary accounts. For example, the sum of the proprietary accounts
Fund Balance with Treasury, Advances, and Accounts Payable should equal the
sum of the budgetary accounts Undelivered Orders, Funded Liabilities, and
Unobligated Balances.
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