U.S. Coast Guard National Pollution Funds Center: Improvements	 
Are Needed in Internal Control Over Disbursements (13-JAN-04,	 
GAO-04-340R).							 
                                                                 
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.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-340R					        
    ACCNO:   A09112						        
  TITLE:     U.S. Coast Guard National Pollution Funds Center:	      
Improvements Are Needed in Internal Control Over Disbursements	 
     DATE:   01/13/2004 
  SUBJECT:   Erroneous payments 				 
	     Federal funds					 
	     Funds management					 
	     Internal controls					 
	     Noncompliance					 
	     Oil pollution					 
	     Pollution monitoring				 
	     Records management 				 
	     Oil Spill Liability Trust Fund			 

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GAO-04-340R

A

United States General Accounting Office Washington, D.C. 20548

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.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

1These costs are to be paid out of an annual operating expense
appropriation.

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.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

2U.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).

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
mining3 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 $24,5464 in late payment fees and lost discounts, and (3) the
validity of 175 disbursements tested totaling $6,589 was questionable
because adequate supporting documentation was missing. The weaknesses we

3Data 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.

4Of 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.

5As 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.

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 interest6 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

o 	case officers document the reconciliation of removal costs reports to
amounts paid in the accounting system, and

o 	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

o 	reinforce documentation and approval requirements by instituting
training for all relevant employees,

o 	institute monitoring techniques such as periodic spot checks to help
ensure that such requirements are consistently followed, and

6To 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.

o 	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

o 	expedite actions needed to cease using the Fund to pay operating
expenses as advised in our May 2002 legal opinion,

o 	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,

o 	complete the transfer of all operating expenses that were improperly
paid from the Fund in fiscal year 2003 to the new operating expense
account,

o 	ensure proper justification exists for nonfederal travelers to be
reimbursed to attend NRD seminars in advance of any such travel, and

o 	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

o 	reinforce documentation and approval requirements for disbursements
from the Fund by instituting training for all relevant employees, and

o 	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, 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.

7U.S. General Accounting Office, Standards for Internal Control in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

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
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 [email protected] or [email protected]. 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

Enclosure

Enclosure

___________________________________________________________________________________________________________________________________________________________________________

U.S. Coast Guard

National Pollution Funds Center

  __________________________________________
  Improvements Are Needed in Internal Control
  Over Disbursements

Briefing to the Staff of the Committees on Veterans Affairs and
Transportation and Infrastructure, House of Representatives

December 3, 2003

o  Introduction and Objectives

o  Results in Brief

o  Background

o  Overview of Effective Internal Control

o  Internal Control Design

o  Compliance with Policies and Procedures

o  Propriety of Disbursements

o  Conclusions

o  Recommendations

o  Agency Comments

o  Scope and Methodology

o  Appendix I: Payroll Expense and Claim Activity Fluctuations

o 	The Oil Spill Liability Trust Fund (Fund) is a $1 billion fund which
has two major components: the Emergency Fund and the Principal Fund.

o 	The Emergency Fund is used for paying for federal removal actions and
the initiation of natural resource damage assessments (NRDA) 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.

o 	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.

                      Introduction and Objectives ( cont.)

o 	In May 2002, at your request, GAO addressed legal issues related to the
uses and limitations of the Fund. We concluded that the Fund is not
available to pay employee salaries and other operating expenses.1

o 	The U.S. Coast Guard (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.

o 	In light of our conclusion, you asked that we review the control over
disbursements from the Fund and assess the propriety of these
disbursements.

1These costs are to be paid out of an annual operating expense
appropriation.

                      Introduction and Objectives (cont.)

o 	Specifically, we reviewed disbursements for operating expenses paid
from the Principal Fund as well as removal costs paid from the Emergency
Fund to determine whether

o 	the design of existing internal controls provides reasonable assurance
that improper payments will not occur or will be detected in the normal
course of business,

o 	they were made in accordance with established USCG and National
Pollution Funds Center (NPFC) policies and procedures, and

o 	these disbursements were made in accordance with the uses specified in
the Oil Pollution Act of 1990 (OPA)2 and federal laws and regulations, and
represent a proper use of government funds.

o 	Also at your request, we are providing information about NPFC's payroll
expense and claim activity fluctuations for fiscal years 1998 through
2003. This information is included in appendix I.

2Pub. L. No. 101-380, 104 Stat. 484 (1990).

                      Introduction and Objectives (cont.)

o 	This is our second briefing on the Fund. The first briefing covered the
results of our work related to the review of claim payments made from the
Fund. This second briefing covers the results of our review of
disbursements for operating expenses paid from the Principal Fund and
removal costs paid from the Emergency Fund.

o 	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.

o 	Weaknesses in the design of control included a lack of documented
reconciliations of the amounts included in removal cost reports and those
recorded in USCG's accounting system.

o 	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.

                            Results in Brief (cont.)

o 	We obtained a nonstatistical selection of 467 disbursement transactions
through data mining3 for fiscal years 1998 through 2002.We found that

o 	33, or 7 percent of these transactions, totaling $43,425 lackedadequate
supporting documentation

o 	14 lacked both purchase receipts and purchase request forms;

o 	9 additional transactions lacked purchase receipts such as invoices;
and

o  10 additional transactions lacked purchase request forms.

3Data 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.

                            Results in Brief (cont.)

o 	25, or 5 percent of these transactions, totaling $26,182 lacked proper
approvals

o 	4 lacked proof of approval from supervisors and fund certifying
officers before purchases were made;

o 	3 additional transactions lacked proof of approval from supervisors
before purchases were made; and

o 	18 additional transactions lacked proof of approval from the fund
certifying officers before purchases were made.

o 	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; and

o 	equipment purchases totaling $62,700 were not recorded in the property
tracking system.

                            Results in Brief (cont.)

o 	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

o 	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;

o 	USCG Finance Center (FINCEN) incurred a total of $8,868 in late payment
fees and lost discounts;

o 	We extended our tests 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.

                            Results in Brief (cont.)

o 	The validity of 174 disbursements tested totaling $6,589 was
questionable because supporting documentation was missing.

o 	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.

o 	As with the $32.8 million previously returned to the Fund, this
transfer will not compensate for lost interest. We estimate that total
lost interest on the improper use of the Fund could be as much as $1.6
million as of September 30, 2003.5

4As discussed earlier, 23 disbursements lacked adequate supporting
documentation. Of the 23 disbursements, 17 were missing any form of
purchase receipts or invoices and were therefore questionable. Another 6
had partial supporting documentation and were not considered questionable.

5To calculate interest, we multiplied the average 6-month maturity rate
for U.S. Treasury bills (the rate at which the Fund earns interest) times
the average operating expense balance for each fiscal year.

                            Results in Brief (cont.)

o 	We are making several recommendations intended to improve the design of
internal controls over the operating expense and Emergency Fund
disbursement processes and to establish better compliance with policies
and procedures and federal laws and regulations.

o 	USCG/NPFC officials agreed with our recommendations. They 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, GAO concluded in May 2002 that
the Fund is not directly available to pay NPFC operating expenses.

o 	OPA authorized the Fund to pay claims for certain costs resulting from
oil spills or the substantial threat of oil spills. The act also

o 	authorized the President to make up to $50 million available from the
Fund each year without further appropriation to pay for emergency removal
costs and initiation of natural resource damage assessments (NRDA)
resulting from oil spills,

o 	authorized an appropriation from the Fund of not more than $25 million
each year for operating expenses incurred by the USCG to implement the
act, and

o 	provided authorization for the appropriation of funds for other uses
such as research, development, testing, and evaluation (RDT&E);and
acquisition, construction, and improvements (ACI).

o 	Administration of the Fund was delegated to the USCG by Executive Order
and in February 1991, NPFC was commissioned to perform this function as an
independent headquarters unit reporting directly to the Coast Guard Chief
of Staff.

o  NPFC administers and manages uses of the Fund by

o 	making funds available for immediate federal oil removal activities and
the initiation of natural resource damage assessments,

o  paying claims for losses or damages associated with an oil spill, and

o  recovering costs from responsible parties.

o 	During fiscal years 1998 through 2002, about $32.8 million in
disbursements were improperly paid from the Fund for operating

7

expenses. These expenses should have been paid from USCG's annual
operating expense appropriation.

o 	Some of the operating expenses paid from the Fund included employee
salaries, lease payments, travel expenses, training costs, office
supplies, equipment, furniture, health club membership fees, and
reimbursement of travel expenses for jobinterviewees.

o 	After our inquiries about the corrective actions taken to address the
problem discussed in our May 2002 legal opinion, the USCG returned the
$32.8 million to the Fund in April 2003.8

7According to USCG/NPFC officials, at the time they had an opinion from
the USCG Chief Counsel which found that the Fund was available to pay
operating expenses.

8USCG/NPFC officials stated that they will continue to review the accuracy
of this reimbursed amount and may adjust it accordingly.

o 	During fiscal years 1998 through 2002, NPFC reported about 32,523
disbursements totaling $319.7 million. Of this amount, about $41.1 million
in operating expenses were reported.

o 	The following diagram illustrates NPFC's operating expense disbursement
process.

As discussed in GAO's Standards for Internal Control in the Federal 9

Government,

o 	internal control-a major part of managing an organization-is a
continuous, built-in component of operations that provides reasonable, but
not absolute, assurance of meeting agencyobjectives,

o 	internal control consists of the plans, methods, and procedures used to
meet the agency's missions, goals, and objectives, and

o 	internal control should be designed to provide reasonable assurance
regarding prevention or prompt detection of unauthorizedacquisition, use,
or disposition of an agency's assets.

9Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1, which was prepared to fulfill our statutory
requirement under the Federal Managers' Financial Integrity Act, provides
an overall framework for establishing and maintaining internal control and
for identifying and addressing major performance and management challenges
and areas at greatest risk of fraud, waste, abuse, and mismanagement.

We identified weaknesses in the design of internal control over
disbursements from the Emergency Fund that made the Fund more vulnerable
to improper payments.

Control weakness: The case files for Emergency Fund disbursements did not
always include documented reconciliations of the amounts included in
removal cost reports submitted by federal onscene coordinators (FOSC)10
and those recorded in USCG's accounting system. NPFC officials told us
that case officers reconcile cost reports to the disbursements recorded in
the accounting system. However, NPFC's policies and procedures do not
require that these reconciliations be documented.

o 	Standards for Internal Control in the Federal Government states that
internal control activities such as reconciliation and maintenance of
related records provide evidence that these activities were executed and
appropriately documented.

10FOSCs are USCG employees who are responsible for determining removal
costs for an oil spill incident during oil spill response. FOSCs are
physically stationed in USCG field locations.

                        Internal Control Design (cont.)

o 	Without consistently documented reconciliations, information is not
always readily available to support the accuracy of amounts recorded for
oil spill removal costs and proper supervisory review is impeded.

o 	Additional internal control weaknesses existed in that USCG/NPFC did
not always follow established policies and procedures that are intended to
help ensure the validity of disbursements.

o 	Through data mining, we obtained a nonstatistical selection of 467
disbursements totaling $2.5 million and performed tests for

o  adequate documentation,

o  proper approvals, and

o  adequate safeguarding of assets.

o 	Standards for Internal Control in the Federal Government states that
(1) all transactions need to be clearly documented, and the documentation
should be readily available for examination, (2) controls should be
established to ensure that all transactions are authorized, and (3)
physical controls should be established to secure and safeguard vulnerable
assets.

Documentation

o 	Of the 467 transactions tested, at least 3311 (16 for NPFC and 17 for
USCG field offices),or 7 percent of these transactions, totaling$43,425
lacked adequate supporting documentation.12 Specifically,14 lacked
purchase receipts such as invoices and purchase requests, 9 additional
transactions lacked purchase receipts, and 10 additional transactions
lacked supporting purchase request forms.

o 	USCG/NPFC policies and procedures require that supportingdocumentation
such as purchase receipts and purchase request forms be maintained in the
files.

o 	Without proper documentation, USCG/NPFC officials do not have an
adequate basis for determining the validity of transactions they are
approving.

11There were another 91 transactions totaling $222,953 with transaction
dates beyond NPFC's 3-year records retention

policy. Supporting documentation for these transactions had been
destroyed.
12According to USCG/NPFC officials, documentation for field transactions
should have been maintained by USCG field
employees.

Approvals

o 	Of the 467 transactions tested, we found that 25, (19 for NPFC and 6
for USCG field offices) or 5 percent totaling $26,182 lacked proper
approvals before purchases were made as required byUSCG/NPFC policies and
procedures.13Specifically, 4 lacked proofof approval from supervisors and
fund certifying officers, 3 additional transactions lacked proof of
approval from supervisors,and 18 additional transactions lacked proof of
approval from the fund certifying officers.

o 	We also found that 39 NPFC transactions for payments to contractors and
other government agencies, and reimbursements to employees and others
totaling $155,994, lacked documentation of supervisory review and approval
before payments were made as required by NPFC policies and procedures.

o 	The lack of adequate approvals increases the risk of improper or
erroneous purchases and payments.

13According to USCG/NPFC officials, purchases made by USCG field office
personnel should have been approved by USCG supervisors.

Safeguarding Assets

o 	The NPFC property officer did not always record equipment purchases in
the Accountable Item Management System (AIM),14 nor did NPFC management
review the inventory listing to ensure that all property was properly
recorded in AIM. Of the 20 equipment purchases tested, 3 were only
partially recorded in AIM. The components not recorded totaled
approximately $62,700.

o 	Without a complete record of accountable assets, NPFC cannot readily
track the location of its equipment and has increased exposure to loss or
theft of equipment.

14AIM was the USCG automated system used for tracking property during the
timeframe for our review. In May 2003, AIM was incorporated into the USCG
oracle financials fixed assets system.

We also used our nonstatistical selection of 467 transactions to test
whether they were in compliance with certain federal laws and regulations
and represented a proper use of government funds. We found that overall
improper use of the Fund was continuing. In addition, we identified
several instances of improper payments, wasteful spending, and
questionable disbursements.

Improper Use of the Fund: In fiscal year 2003, NPFC continued to
improperly pay operating expenses totaling $645,358 from the Fund and
obligated operating expenses totaling $150,651 against the Fund.

o 	Although NPFC officials understand, based on our May 2002 legal
opinion, that the Fund is not available to pay NPFC operating expenses,
they stated that they have continued to do so because in order to stop the
expenses from being charged to the Fund, modifications to accounting data
on source documents for contracts and leases are needed. These
modifications are in process but have taken longer than anticipated.

o 	NPFC officials explained that they are in the process of transferring
these expenses from the Fund into a newly established account that was
created in March 2003 to be used for recording NPFC operating expenses.
The transfer was delayed due to USCG's conversion to a new accounting
system.

o 	As with the $32.8 million previously returned to the Fund, the transfer
will not compensate for lost interest. We estimate that the total lost
interest on the improper use of the Fund could be as much as $1.6 million
as of

September 30, 2003.

Improper Payment: NPFC did not properly document their justification for
using federal funds to reimburse $14,481 in travel expenses to 11
nonfederal potential claimants who traveled to NPFC to attend NRD
seminars. The documented justification for the seminar stated that the
purpose of the training was to reach out to people who could most benefit
from the opportunities and services provided by the Fund.

o 	Appropriated funds may not be used to pay the costs of nonfederal
individuals to attend training unless they are providinga direct benefit
to the government.15

o 	According to NPFC officials, they view this as a documentation issue
since they believe the individuals did in fact provide a direct benefit to
the government through their participation in the seminars because of
their expertise in the topics beingdiscussed.

15See 31 U.S.C. 1345; see also 5 U.S.C. 5703, which allows an agency to
use invitational travel to pay the costs of nonfederal individuals to
attend meetings if the attendees are providing a direct service to the
government.

Wasteful Spending: The transactions we selected for testing included

$8,868 in late payment fees and lost discounts during fiscal years 1998

through 2002. According to USCG officials, this occurred primarily

because contract officers did not provide payment approval forms to

FINCEN in time for it to make timely payments.

o 	We extended our tests beyond the 467 disbursements to include all late
payment fees and lost discounts incurred during fiscal years 1998 through
2002, and found that the Fund incurred an additional $15,678 for a total
of $24,546.

o 	USCG officials told us that they changed their procedures for contract
payments in fiscal year 2000. Since that time, invoices have been sent
directly to contracting officers with automated online approval available
through FINCEN's Workflow Image Network System (WINS). This procedure
allows payables personnel at FINCEN to expedite payments, take advantage
of discounts, and avoid late payment penalties.

Questionable Disbursements: We identified several transactions that were
missing purchase receipts.16 Because USCG/NPFC could not provide purchase
receipts for 17 of the 467 transactions tested, we could not determine
whether these transactions were valid.

o 	Without key purchase documentation, neither we nor USCG/NPFC officials
could determine what was actually purchased, the number of items
purchased, the cost of the items purchased, or if there was a legitimate
government need for the items.

16As discussed earlier, 23 disbursements lacked adequate supporting
documentation. Of the 23 disbursements, 17 were missing any form of
purchase receipts or invoices and were therefore questionable. Another 6
had partial supporting documentation and were not considered questionable.

The USCG NPFC has established a system of internal control over its

operating expenses and Emergency Fund disbursement processes.

However, weaknesses 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, 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 calculated that the Fund may
have lost as much as $1.6 million in interest during fiscal years 1998
through 2002 as a result.

To improve the design of internal control over disbursements from the
Fund, we recommend that the Commandant of the USCG direct the Director of
NPFC to

o 	establish policies and procedures to require that (1) case officers
document the reconciliation of removal costs reports to amounts paid in
the accounting system and (2) their supervisors document their review of
these reconciliations.

To establish better compliance with USCG/NPFC policies and procedures, we
recommend that the Commandant of the USCG direct the Director of NPFC to

o 	reinforce documentation and approval requirements by instituting
training for all relevant employees;

o 	institute a monitoring system such as periodic spot checks to help
ensure that such requirements are consistently followed; and

o 	establish a mechanism to ensure that accountable assets are properly
recorded in USCG's fixed assets system.

To enforce compliance with OPA and other federal laws and regulations and
reduce the risk of improper payments, we recommend that the Commandant of
the USCG direct the Director of NPFC to

o 	expedite actions needed to cease using the Fund to pay operating
expenses as we advised in our May 2002 legal opinion;

o 	in the interim, for any unreimbursed or future use of the Fund to pay
operating expenses, record obligations against USCG's annual operating
expense appropriation in order to ensure that adequate funds are available
to reimburse the Fund;

o 	complete the transfer of all operating expenses that were improperly
paid from the Fund in fiscal year 2003 to the new operating expense
account;

                            Recommendations (cont.)

o 	ensure proper justification is documented for nonfederal travelers to
be reimbursed to attend NRD seminars; and

o 	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 USCG direct the Chief
Financial Officer of the USCG to

o 	reinforce documentation and approval requirements for disbursements
from the Fund by instituting training for all relevant employees; and

o 	institute a monitoring system such as periodic spot checks to help
ensure that such requirements are consistently followed.

o 	USCG/NPFC officials agreed with our recommendations. They 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, GAO concluded in May 2002 that
the Fund is not available to pay NPFC operating expenses.

o 	USCG/NPFC officials also emphasized that they now have electronic
approvals which they believe provide better supervisory review and
oversight.

o 	USCG/NPFC provided technical and clarifying comments, which we
incorporated as appropriate.

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

o 	reviewed USCG/NPFC's policies and procedures related to operating
expenses and Emergency Fund removal costs disbursements,

o 	considered Standards for Internal Control in the Federal Government,

o  interviewed staff and officials in the USCG and NPFC offices, and

o 	performed walkthroughs of the operating expenses and Emergency Fund
removal costs disbursement processes, and compared the results to 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

o 	performed data mining of operating expenses paid from the Fund during
fiscal years 1998 through 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;

o 	used a nonstatistical selection of 467 disbursements obtained through
data mining and tested for adequate documentation, proper approvals, and
adequate safeguarding of assets.

o 	To test for adequate documentation, we looked for supporting purchase
receipts, purchase request forms, contracts, delivery reports, and
inventory documents, if applicable.

o 	To test for proper approvals, we reviewed transactions for evidence of
proper approvals from supervisors and fund certifying officers prior to
the purchase and for evidence of proper approvals prior to payment.

o 	To test for adequate safeguarding of assets, we reviewed NPFC's
inventory report for equipment purchases and compared it to purchase
receipts to ensure that the equipment was properly recorded in the AIM
system.

We also used the nonstatistical selection of disbursements obtained
through data mining to determine whether disbursements were made in
accordance with OPA and other federal laws and regulations and represent a
proper use of government funds. Specifically, we

o 	reviewed OPA and federal laws and regulations to obtain an
understanding of allowable costs, and

o 	reviewed purchase receipts or invoices to ensure that purchases were
made for official government use and were for allowable 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

o 	obtained data from NPFC and USCG and identified significant
fluctuations in payroll and claims activity for fiscal years 1998 through
2003, and

o  obtained USCG/NPFC's explanations for these fluctuations.

o 	We did not verify the accuracy of the amounts included in USCG/NPFC's
payroll or claims systems.

o 	We requested oral comments on a draft of these briefing slides from
USCG/NPFC officials that were incorporated as appropriate.

o 	We conducted our work from November 2002 through November 2003, in
accordance with generally accepted government auditing standards.

o 	USCG and NPFC also provided the following data on NPFC's payroll
expenses for fiscal years 1998 through 2003.17 The following table depicts
the changes in payroll expenses for these years.

                                                        Change
          Fiscal Year           Amount           Dollars   Percentage   
                                                  -552,482              
         1998 1999 2000     5,451,471 6,003,953  1,062,737 -10.1% 17.7% 
         2001 2002 2003     7,066,690 7,944,824    878,134  12.4% 10.0% 
         Total Increase     8,736,055 9,367,615    791,231   7.2% 71.8%
           since 1998                              631,560 
                                                 3,916,144 

Source: NPFC and USCG data for fiscal years 1998 through 2003.

Note: The annual change amount equals the difference between the current
year and the prior year expenses. The annual change percentage equals the
current year dollar variance divided by the prior year amount.

17Payroll expenses represent pay, benefits, and entitlements.

o 	Payroll expenses increased by more than 70 percent over the 5 year
period ended September 30, 2003.

o 	USCG/NPFC officials told us that NPFC hired 26 new employeesin fiscal
year 1999, a 30 percent increase, and 1 new employeein fiscal year 2000 to
assist with the implementation of the then newly acquired NRD claim
adjudication program and to support substantial workload requirements of
NPFC's existing claimadjudication backlog.

o 	USCG/NPFC officials also told us annual increases in payrollfrom fiscal
years 2000 through 2003 were due primarily toincreases in national pay
raises, housing allowances for militaryemployees, health care and
retirement costs, and within grade increases or promotions.

          NPFC Full-Time Positions for Fiscal Years 1998 through 2003

o 	According to NPFC officials, the number of full-time positions has
remained constant since fiscal year 2000 because current staffing levels
are required to keep pace with the ongoing claims workload and to
adjudicate increasingly complex claims.

                      Claim Activity Fluctuations (cont.)

o 	The following figure depicts the fluctuations in the number of claims
received and processed during fiscal years 1998 through 2003.

Note: Claims processed include those claims that were administratively
closed, pending, withdrawn, denied, and paid and a number of claims that
were received prior to fiscal year 1998 but processed during fiscal years
1998 through 2003. Claims pending in fiscal year 2000 includes claims
received prior to fiscal year 1998.

                                     ((00(

                      Claim Activity Fluctuations (cont.)

o 	NPFC officials provided the following explanations for the fluctuations
in claims received and processed during fiscal years 1998 through 2003.

o 	During fiscal years 1998 through 2001, there was a backlog ofclaims
received because NPFC did not have enough claims adjudicators to process
the claims.

o 	In fiscal year 2000, the total number of pending claims increased
because NPFC reopened about 1,900 NRD claims that had been
administratively closed prior to fiscal year 1998.

o 	In fiscal year 2001, NPFC reviewed a large number of NRD claims that
did not meet OPA's criteria for valid claims resulting in an increase in
denials during this time.

o 	By fiscal year 2001, the number of backlogged claims decreased because
NPFC hired more employees between fiscal years 1999 and 2000 to process
the claims.

                                       48

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