Internal Control: Improvements Needed in the Library of Congress'
Capitol Preservation Fund-Related Internal Controls (25-MAY-07,
GAO-07-732R).
On March 13, 2007, we issued our report on our audit of the
Capitol Preservation Fund's (CPF) fiscal years 2005 and 2004
financial statements, including the results of our tests of
related internal control and selected provisions of laws. In that
report, we noted the need to improve certain CPF-related internal
controls established by the Library of Congress (Library) in
conjunction with financial management services it provides to the
Capitol Preservation Commission (Commission). The purpose of this
report is to discuss further those internal control deficiencies
and to make four recommendations to the Library for improving its
CPF-related internal controls and related procedures.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-732R
ACCNO: A69951
TITLE: Internal Control: Improvements Needed in the Library of
Congress' Capitol Preservation Fund-Related Internal Controls
DATE: 05/25/2007
SUBJECT: Accountability
Accounting procedures
Financial records
Financial statement audits
Financial statements
Fund audits
Internal audits
Internal controls
Policy evaluation
Treasury accounts
Policies and procedures
Capitol Preservation Fund
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GAO-07-732R
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May 25, 2007
The Honorable James H. Billington
Librarian of Congress
United States Library of Congress
Subject: Internal Control: Improvements Needed in the Library of Congress'
Capitol Preservation Fund-Related Internal Controls
Dear Dr. Billington:
On March 13, 2007, we issued our report1 on our audit of the Capitol
Preservation Fund's (CPF) fiscal years 2005 and 2004 financial statements,
including the results of our tests of related internal control and
selected provisions of laws. In that report, we noted the need to improve
certain CPF-related internal controls established by the Library of
Congress (Library) in conjunction with financial management services it
provides to the Capitol Preservation Commission (Commission). The purpose
of this report is to discuss further those internal control deficiencies
and to make four recommendations to the Library for improving its
CPF-related internal controls and related procedures.
Results in Brief
In our audit of the CPF's fiscal years 2005 and 2004 financial statements,
we found that the Library's CPF-related internal controls associated with
CPF payments and financial reporting needed to be improved. Specifically,
we found that Library controls were ineffective in ensuring that the CPF
had sufficient cash in its account with the U.S. Treasury2 to cover
payments from the account. We also found that the Library's internal
controls associated with the preparation and review of the CPF's financial
statements for fiscal years 2005 and 2004 were not operating effectively.
1GAO, Financial Audit: Capitol Preservation Fund's Fiscal Years 2005 and
2004 Financial Statements, GAO-07-335 (Washington, D.C.: Mar. 13, 2007).
2Treasury Fund Symbol 09X8300 United States Standard General Ledger
account 1010 - Fund Balance with Treasury.
While not considered material weaknesses,3 these deficiencies represent
reportable conditions4 with respect to the Library's CPF-related internal
controls.
Our four recommendations follow the sections in which corresponding
internal control issues are discussed. In commenting on a draft of this
report, the Library agreed that its CPF-related internal controls can be
improved and identified actions that will be taken to respond to our
recommendations.
Scope and Methodology
As part of our audit of the CPF's fiscal years 2005 and 2004 financial
statements, we obtained a sufficient understanding of the Library's
CPF-related internal controls over financial reporting and compliance with
laws and regulations to plan our audit. In addition to examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements; assessing the accounting principles used and
significant estimates made in preparing the CPF's financial statements and
notes, and evaluating the overall presentation of the financial statements
and notes; we also tested selected internal controls over financial
reporting (including safeguarding of assets) and compliance and tested
compliance with selected provisions of laws that have a direct and
material effect on the CPF's financial statements. We conducted our audit
in accordance with U.S. generally accepted government auditing standards.
Background
The Commission was established by Public Law 100-696, 102 Stat. 4608
(November 18, 1988) to provide improvements in, preservation of, and
acquisitions for the U.S. Capitol and other locations under the control of
the Congress. To finance the Commission's activities, Public Law 100-696
established the CPF within the U.S. Treasury. The CPF's assets consist of
amounts derived from contributions, surcharge proceeds from the sale of
certain commemorative coins, and interest earned from Treasury securities
purchased with available CPF assets.
The Commission does not have permanent staff or employees. To help
facilitate Commission activities, Public Law 100-696 requires the House of
Representatives Fine Arts Board, the Senate Commission on Art, and the
Architect of the Capitol to provide staff support and assistance, as
requested. The Library is also required to provide financial management
services to the Commission.5 The financial management services provided by
the Library include coordinating with the U.S. Treasury on deposits to and
payments from the CPF; managing, in accordance with an established
investment policy, the purchase and redemption of CPF-related investments
in Treasury securities; maintaining records and related internal controls
associated with the CPF's investment transactions, assets, liabilities,
net assets, revenues, and expenses; and preparing the CPF's financial
statements in conformity with U.S. generally accepted accounting
principles. In providing these services, the Library relies on the
financial information it receives and maintains and other information
provided to the Library by representatives of the Commission, the U.S.
Treasury, and the Architect of the Capitol.
3A material weakness is a reportable condition in which the design or
operation of one or more of the internal control components does not
reduce to a relatively low level the risk that errors, fraud, or
noncompliance in amounts that would be material in relation to the
financial statements may occur and not be detected promptly by employees
in the normal course of performing their duties.
4Reportable conditions are matters coming to the auditor's attention that,
in the auditor's judgment, should be communicated because they represent
significant deficiencies in the design or operation of internal control,
which could adversely affect the ability to meet the financial reporting
and compliance objectives of internal control. The objectives of financial
reporting controls are to provide reasonable assurance that transactions
are properly recorded, processed, and summarized to permit the preparation
of the financial statements in conformity with U.S. generally accepted
accounting principles and assets are safeguarded against loss from
unauthorized acquisition, use, or disposition. The objectives of
compliance controls are to provide reasonable assurance that transactions
are executed in accordance with laws governing the use of budget authority
and other laws and regulations that could have a direct and material
effect on the financial statements.
CPF Payment-Related Internal Control Deficiencies
The Library did not have adequate controls and procedures to ensure that
the CPF has sufficient cash in its account with the U.S. Treasury prior to
approving payments from the account. Over a 4-week period covering late
September and early October 2004, significant deficiencies in the
Library's CPF-related safeguarding controls led to five CPF payments that
exceeded the CPF's available cash balance, resulting in negative balances
in the CPF's cash account with Treasury. Several factors contributed to
these negative cash balances: a mistake in the process of recommending a
vendor invoice for payment, a lack of supervisory review of the invoice
payment recommendation, and reliance on inaccurate spreadsheet data used
to monitor the CPF's available cash balance.
As a matter of practice, the Library invests CPF funds obligated for
contracts until the related obligations are due to be paid. As a result,
it is important that the Library effectively manage the CPF's investments
and cash balance to ensure that there is sufficient cash available when
contract invoices are to be paid.
The CPF's initial negative cash balance occurred when a Library official
recommended an approved vendor invoice for payment under the assumption
that the invoice was related to another fund managed by the Library. When
the invoice was paid, it was correctly charged to the CPF resulting in a
negative cash balance. In reviewing the events surrounding the payment, we
found that there was no supervisory review of the Library official's
recommendation that the invoice should be paid.
An electronic spreadsheet that was used by the Library official, who had
recommended the vendor invoice for payment, to monitor the availability of
funds and manage CPF investment purchases was not updated to reflect the
use of CPF funds to pay the vendor invoice. As a result, the spreadsheet
overstated the amount of CPF funds available for investment. On four
occasions, the inaccurate spreadsheet data were relied upon to support
recommendations for the purchase of new Treasury investments, each of
which exceeded the amount available in the CPF for investment.
5Public Law 101-45 103 Stat. 97, 107 (June 30, 1989).
Following the Library's review and approval of each investment
recommendation, the Bureau of Public Debt (Bureau) executed the investment
purchase resulting in new negative balances in the CPF's cash account with
Treasury. In reviewing the investment purchases, we noted that the Library
did not have procedures for reconciling the spreadsheet data on CPF funds
available for investment to relevant information from the CPF's general
ledger. We also noted that the supervisory review and approval of the
investment recommendations did not effectively determine whether or not
there were sufficient funds available to pay for the investments
purchased. Library officials told us that they learned about the negative
cash balance in mid-October 2004 and addressed this deficiency by
redeeming, prior to maturity, Treasury investments to increase the CPF's
cash balance to a positive balance. During the remainder of fiscal year
2005, the CPF's cash account remained positive.
The five instances of negative cash balance with Treasury constituted
procedural violations of the Department of the Treasury's operating
guidance6 applicable to investments in Treasury securities by government
investment accounts, such as the CPF. The Treasury guidance requires that
sufficient funds be available in the account (CPF) before a payment is
made to vendors or to invest funds. With regard to the negative cash
balances, the Library's internal controls applicable to recommending and
approving CPF payments did not provide adequate assurance that sufficient
CPF funds were available before the payments were made. In discussing the
need to strengthen the CPF-related payment controls, the Library
acknowledged that, going forward, recommendations for CPF payments should
be based on supporting information from the CPF's general ledger and other
reliable sources (i.e., Bureau confirmations of investment redemptions)
and those reviewing and approving payment recommendations should confirm
the availability of funds needed to cover planned payments.
Recommendations
To help strengthen internal controls over CPF-related payments for vendor
invoices and investments in Treasury securities, we recommend that the
Librarian of Congress direct the Library's Chief Financial Officer to
revise applicable processes and procedures to require that
o all CPF-related payment recommendations be based on available
cash balance data that have been reconciled with the CPF general
ledger and other reliable source information to confirm that the
CPF will have sufficient cash to fund the planned payments at the
time they will be made, and
o all CPF-related payment recommendations receive supervisory
review and approval that includes reviewing evidence confirming
that sufficient funds will be available to fund the recommended
payment.
6See the Department of the Treasury, Operating Circular, Responsibilities
Relating to Government Investment Accounts and Investment in Government
Account Series (GAS) Treasury Securities, at www.publicdebt.treas.gov ,
effective November 15, 2002. Chapter 6000, Responsibilities Relating to
Disbursement of Moneys from Government Investment Accounts requires that
investment accounts have a cash balance at least equal to the amount
planned to be disbursed before making the disbursement. In addition,
Section 4060, Policies governing investment of monies in government
investment accounts, requires that funds to be invested in Treasury
securities be available to the Department in the Treasury general fund to
pay for the purchase of Treasury investments.
CPF-Related Financial Reporting Deficiencies
During our audits of the CPF's fiscal years 2005 and 2004 financial
statements, we identified significant errors in the CPF's fiscal year 2005
financial statements that were not detected during the Library's
preparation and review of the financial statements. These errors
represented significant deficiencies in the Library's CPF-related
financial reporting controls. Specifically, we found that the fiscal year
2005 financial statements
o contained significant, though offsetting, errors in amounts
received from and used by investing activities in the Statement of
Cash Flows because Library staff mistakenly assumed that certain
general ledger data represented investment purchase and redemption
activities when the data actually represented corrections of
earlier errors in recording investment transactions;
o did not correctly identify and present the amount of the change
in net assets as part of the reconciliation of the change to the
net cash provided/used by operating activities in the Statement of
Cash Flows as required by U.S. generally accepted accounting
principles; and
o did not correctly identify and present the amount of temporarily
restricted net assets released from restrictions during the year
in the Statement of Activities as required by U.S. generally
accepted accounting principles.
We identified the above errors, as well as other less signficant errors,
during our audit. They were corrected in the CPF's final fiscal years 2005
and 2004 financial statements. However, the Library's internal controls
related to the preparation and review of the CPF's financial statements
for fiscal years 2005 and 2004 did not provide adequate assurance that
errors and omissions in the financial statements were prevented or
detected on a timely basis by Library staff in the normal course of
carrying out their CPF-related responsibilities. In discussing the need to
improve the CPF financial statement preparation and review, the Library
acknowledged that, going forward, the statements will be effectively
reviewed and approved before they are provided to potential users.
Recommendations
To improve the reliability of CPF financial statements provided to
potential users, we recommend that the Librarian of Congress direct the
Library's Chief Financial Officer to strengthen the Library's CPF-related
financial statement preparation and review process by establishing
procedures that
o specify the nature and source of financial information needed to
prepare and support accurate CPF financial statement balances and
classifications and facilitate their review, and
o require review of the CPF's financial statements
and the related supporting financial information used
in their preparation.
Agency Comments
In commenting for the Library on a draft of this report, the Library's
Chief Financial Officer agreed that the Library's CPF-related internal
controls can be improved and identified actions that will be taken to
strengthen applicable payment-related and financial reporting controls.
The Library plans to implement procedures that will require all
recommendations for CPF-related payments to be based on cash balance data
that have been reconciled to the CPF general ledger data and the CPF
financial statements to be reviewed prior to being provided to potential
users. We will evaluate the Library's planned actions during our next
audit of the CPF financial statements.
- - - - -
This report 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 the recommendations to the Senate Committee on Homeland Security
and Governmental Affairs and the House Committee on Oversight and
Government Reform not later than 60 days from the date of this report. A
written statement also must be sent to the House of Representatives and
Senate Committees on Appropriations with the agency's first request for
appropriations made more than 60 days after the date of this report.
This report is intended for the use of the management of the Library of
Congress and representatives of the Capitol Preservation Commission. We
are sending copies to representatives of the Capitol Preservation
Commission, the Chairman and Ranking Minority Member of the Senate
Committee on Homeland Security and Governmental Affairs and the House of
Representatives Committee on Oversight and Government Reform. In addition,
this report will be available to other interested parties at no charge on
GAO's Web site at http://www.gao.gov .
We acknowledge and appreciate the cooperation and assistance provided by
the Library management and staff during our audit of the Capitol
Preservation Fund's fiscal years 2005 and 2004 financial statements. If
you have any questions about this
report or need assistance in addressing these issues, please contact me at
(202) 512-9471 or by e-mail at [email protected] . Contact points for
our Office of Congressional Relations and Office of Public Affairs may be
found on the last page of this report.
Sincerely yours,
Jeanette M. Franzel
Director
Financial Management and Assurance
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