[Audit Report on Internal Controls Over the Accounting System,
Financial Management Branch, Minerals Management Service
(No.00-i-333)]
[From the U.S. Government Printing Office, www.gpo.gov]

Title: Audit Report on Internal Controls Over the Accounting System,
       Financial Management Branch, Minerals Management Service
       (No.00-i-333) 

Date: March 31, 2000



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U.S. Department of the Interior
Office of Inspector General


AUDIT REPORT
INTERNAL CONTROLS OVER THE ACCOUNTING SYSTEM,
FINANCIAL MANAGEMENT BRANCH, MINERALS 
MANAGEMENT SERVICE


REPORT NO. 00-I-333

MARCH 2000



EXECUTIVE SUMMARY

Internal Controls Over the Accounting
System, Financial Management Branch, 
Minerals Management Service (No. 00-i-333)


BACKGROUND

The financial activities of the Minerals Management Service (MMS)
are managed by MMS's Financial Management Branch, located in
Herndon, Virginia.  In fiscal year 1998, the Branch accounted for
appropriated funds of approximately $208 million.  The accounting
system used by MMS is the Advanced Budget/Accounting Control and
Information System (ABACIS), which provides for recording,
processing, and transmitting MMS's financial transactions;
supporting the financial planning and budgeting activities; and
preparing MMS's financial statements.  The ABACIS also provides
the accounting details for the Department of the
Interior-established Interior Franchise Fund.  The Government
Management Reform Act (Title 31, United States Code) established
the Franchise Fund Pilot Program.  Pursuant to the Act and as
part of the pilot program, the Department established the Fund to
offer services such as personnel management, payroll,
procurement, and automated data processing for customers outside
the Department.  Office of Management and Budget guidance
requires Federal agencies to design and implement effective
controls over financial accounting and over program and
administrative operations.

RESULTS IN BRIEF

Overall, MMS's Financial Management Branch did not have financial
data that were accurate, complete, and timely for fiscal year
1998.  Office of Management and Budget Bulletin No. 98-08, "Audit
Requirements for Federal Financial Statements," states that
internal controls are designed to provide reasonable assurance
that transactions are properly recorded, processed, and
summarized to permit the preparation of financial statements in
accordance with Federal accounting standards.  Office of
Management and Budget Circular No. A-123, "Management
Accountability and Control," states that managers are responsible
for the quality and timeliness of program performance and for
ensuring that programs are managed with integrity and in
compliance with applicable laws.  However, control deficiencies
occurred because MMS personnel did not follow established
internal controls, such as performing account reconciliations and
providing management oversight of the financial management
accounting processes, and MMS did not establish adequate internal
controls to ensure that transactions were properly classified
during the conversion to the new standard general ledger required
by the Federal Financial Management Improvement Act of 1996.  In
addition,  MMS did not have sufficient internal control
procedures to ensure proper accounting of the Interior Franchise
Fund.  As a result, MMS's financial statements were adversely
affected; for example, it was necessary for MMS to make adjusting
journal entries totaling $24.5 million to correct the differences
between the general ledger cash balance and the Department  of
the Treasury cash balance.  Also,  funds  in the  Interior
Franchise  Fund were commingled with its Fedsim fund (a
nonappropriated fund) to supplement the  Interior Franchise Fund.

RECOMMENDATIONS

We recommended that the Director of MMS establish an internal
control structure that provides assurance that assets are
safeguarded; transactions are processed in accordance with
applicable laws and regulations and are recorded, reconciled,
processed, and summarized to permit the preparation of reliable
financial statements; and accountability for assets is
maintained.  We also recommended that a cost accounting system be
developed to accumulate separately all expenses and revenues
associated with the Interior Franchise Fund and that the accrual
accounting method of transaction reporting be applied to the Fund
so that it is in accordance with generally accepted accounting
standards.

AUDITEE COMMENTS AND OIG EVALUATION

MMS concurred with the report's three recommendations.  Based on
the response and subsequent information, we considered two
recommendations resolved and implemented and one recommendation
resolved but not implemented.




AUDIT REPORT                                     E-IN-MMS-009-98

Memorandum

     To:  Assistant Secretary for Land and Minerals Management

   From:  Roger La Rouche
          Acting Assistant Inspector General for Audits

Subject:  Audit Report on Internal Controls Over the
          Accounting System, Financial Management Branch,
          Minerals Management Service (No.00-i-333)

INTRODUCTION

This report presents the results of our review of the internal
controls over the financial data managed by the Minerals
Management Service's (MMS) Financial Management Branch. We
performed this review as part of our audit of MMS's financial
statements for fiscal years 1998 and 1997.  During fiscal year
1998, we began a review of MMS's financial data; however, we were
unable to complete the audit because the financial data were not
accurate, were incomplete, and were not timely. 

BACKGROUND

The financial activities of MMS are managed by the Service's
Financial Management Branch, located in Herndon, Virginia.  In
fiscal year 1998, the Branch accounted for appropriated funds of
approximately $208 million.  The accounting system used by MMS is
the Advanced Budget/Accounting Control and Information System
(ABACIS), which provides for recording, processing, and
transmitting MMS's financial transactions; supporting the
financial planning and budgeting activities; and preparing MMS's
financial statements. Office of Management and Budget Circular
No. A-127, "Financial Management Systems," states that
appropriate internal controls "shall be applied to all system
inputs, processing, and outputs" and that the financial
management system "shall include a system of internal controls
that ensure resource use is consistent with laws, regulations,
and policies; resources are safeguarded against waste, loss, and
misuse; and reliable data are obtained, maintained, and disclosed
in reports."   The Chief of Accounting Operations and the Chief
of Accounting systems are responsible for ensuring that reliable
data are obtained, maintained, and disclosed in MMS's reports.

The ABACIS also provides accounting details for the Interior
Franchise Fund.  The Government Management Reform Act (Title 31,
United States Code) established the Franchise Fund Pilot Program.
Pursuant to the Act and as part of the pilot program, the
Department of the Interior established the Interior Franchise
Fund to offer services such as personnel management, payroll,
procurement, and automated data processing for customers outside
the Department.

SCOPE OF AUDIT

During our review of MMS's financial statements for fiscal year
1998, we reviewed the internal controls in place for that fiscal
year.  During fiscal year 1998, MMS instituted internal controls
under the new standard general ledger that were the subject of
this review. MMS is responsible for establishing and maintaining
an internal control structure which provides assurance that
transactions are properly recorded and processed, assets are
safeguarded, and financial transactions are executed in
accordance with applicable laws and regulations.  We evaluated
MMS's internal controls over the ABACIS general ledger and the
ability of the Chief of Accounting Operations and the Chief of
Accounting Systems to provide accurate and reliable financial
data.  We also reviewed the internal controls over accounts
payable, the reconciliation process, and the Interior Franchise
Fund.

Our audit was conducted in accordance with the "Government
Auditing Standards," issued by the Comptroller General of the
United States.  We found that significant internal control
weaknesses existed because procedures were either not followed or
not established.  As a result, MMS's internal controls were not
sufficient to provide reasonable assurance that the amounts
reported in the general ledger were accurate and reliable. 

PRIOR AUDIT COVERAGE

During the past 6 years, the Office of Inspector General has
issued six audit reports on MMS's financial statements as
follows: for fiscal years 1996 and 1997, Report No. 98-I-382,
issued in March 1998; for fiscal years 1995 and 1996, Report No.
97-I-445, issued in February1997; for fiscal years 1994 and 1995,
Report No. 96-I-631, issued in March 1996; for fiscal years 1993
and 1994, Report No. 95-I-405, issued in January 1995; for fiscal
years 1993 and 1992, Report No. 94-I-715, issued in June 1994;
and for fiscal year1991, Report No. 93-I-369 (combined statement
of financial position only), issued in December 1992.  For all
six audits, we issued unqualified opinions that the financial
statements were fairly presented.  The audit reports also stated
that MMS's internal control structure met established internal
control objectives and that it was in compliance in all material
respects with applicable laws and regulations.  Internal controls
were applicable for these fiscal years; however, the internal
control environment during fiscal year 1998, which is the subject
of our review, changed.  Specifically, the new standard general
ledger was implemented, and the accounting activity for the
General Services Administration and for the Interior Franchise
Fund became fully operational.  Management of MMS is responsible
for establishing and maintaining an internal control structure
that provides reasonable assurance that transactions are properly
recorded, processed, and summarized.  Because of inherent
limitations in any internal control structure, errors or fraud
may occur and not be detected.  Also, projections of the internal
controls over financial reporting to future periods are subject
to the risk that the internal controls may become inadequate
because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.

RESULTS OF AUDIT

MMS's Financial Management Branch did not have financial data
that were accurate, complete, and timely for fiscal year 1998.
Office of Management and Budget Bulletin No. 98-08, "Audit
Requirements for Federal Financial Statements," states that
internal controls are designed to provide reasonable assurance
that transactions are properly recorded, processed, and
summarized to permit the preparation of financial statements in
accordance with Federal accounting standards.  Office of
Management and Budget Circular No. A-123, "Management
Accountability and Control," states that managers are responsible
for the quality and timeliness of program performance and for
ensuring that programs are managed with integrity and in
compliance with applicable laws.  However, control deficiencies
occurred because MMS personnel did not follow established
internal controls, such as performing account reconciliations and
providing management oversight of the financial management
accounting processes, and MMS did not establish adequate internal
controls to ensure that transactions were properly classified
during the conversion to the new standard general ledger.  In
addition, MMS did not have sufficient internal control procedures
to ensure proper accounting of the Interior Franchise Fund.  As a
result, MMS's financial statements were adversely affected, and
funds in the Interior Franchise Fund were commingled with MMS
funds.  

Account Reviews and Reconciliations 

MMS did not review or reconcile financial data to ensure that
accounting transactions were recorded and reported accurately
during fiscal year 1998.  In addition, the values in the property
system did not support the general ledger balance.  Office of
Management and Budget Circular A-34, "Instruction on Budget
Execution," states that each agency "shall maintain systems of
accounting and internal controls that provide reasonable
assurance that transactions are properly recorded and accounted
for to permit the preparation of reliable financial reports."
However, the Chief of Financial Management Branch said that they
did not have sufficient time to perform the reviews and
reconciliations. 

General Ledger.  During our interim testing of the accounts
payable line item in the financial statements, we determined that
the amount for each accounts payable transaction was not recorded
in the subsidiary ledger. Therefore, we could not verify the
general ledger account balance with the amounts in the detailed
subsidiary ledger.  The Chief of Accounting Operations stated
that the Financial Management Branch did not review or reconcile
the general and subsidiary ledgers on a monthly basis during
fiscal year 1998 because management did not assign responsibility
for these duties.  According to the Chief of Accounting
Operations and the Chief of Accounting Systems, they were not
aware that the ledgers were not balanced monthly until we
reviewed the accounts payable line item in August 1998.  However,
the accounting system generated a monthly general ledger report,
which indicated that the general ledger and the subsidiary ledger
did not balance.  We found that the Chief of Accounting
Operations disposed of the monthly general ledger reports.  The
Chief, however,  said that he was not aware that he was
responsible for reconciling these reports.  After we found that
the general ledger did not balance, the Chief of Accounting
Systems researched the general ledger accounts and determined
that data were not converted properly during the conversion to
the new standard general ledger in October 1997. The Chief of
Accounting Systems made adjustments to the ABACIS in August 1998
for 595 accounts payable transactions, which totaled
approximately $10.9 million. 

If the general ledger had been reviewed and reconciled monthly,
the Chief of Accounting Operations and the Chief of Accounting
Systems would have found that their accounting information was
recorded improperly in the subsidiary ledger.  The accounting
system indicates whether a line item should have a debit or a
credit balance.  For example, the accounts payable line item is
identified as having a credit balance because it represents the
amount the organization owes others (a liability), while the
accounts receivable line item is identified as having a debit
balance because it represents the amount the organization should
receive from others (an asset).  Thus, if the accounts payable
has a debit balance, it would indicate an unnatural balance.
During our review of the September 30, 1998, preclosing general
ledger, we determined that 25 of the 42 general ledger accounts
had unnatural balances.  Of the 25 unnatural general ledger
account balances, 14 balances pertained to budgetary accounts,[1]
such as reimbursements and other earned income, and to
undelivered orders, and 11 balances were proprietary accounts,[2]
such as fund balance with Treasury, accounts payable, and
unexpended appropriations.  The Chief of the Financial Management
Branch, the Chief of Accounting Operations, and the Chief of
Accounting Systems said that they were unaware of the unnatural
balances until we brought the matter to their attention.  We
noted during our testing that one of the reasons for the
unnatural balances was that accounting activities for fiscal year
1998 were not closed properly, resulting in expenses being
charged to the improper fiscal year and fund in the ABACIS.

Cash.  MMS did not perform monthly cash reconciliations for any
of its 13 funds during fiscal year 1998.  The Treasury Financial
Manual, Part 2, Chapter 3300, Section 3330, requires cash to be
reconciled on a monthly basis and reported to the Department of
the Treasury on Standard Form 224, "Statement of Transactions."
Any differences in the cash balances between MMS's general ledger
and the Department of the Treasury's balances are to be reported
in the Statement of Differences section of Form 224.  The Chief
of the Branch said that the Branch was aware that cash needed to
be reconciled monthly but that it did not have sufficient time to
perform this task during fiscal year 1998.  Instead, an MMS
accountant said that the Branch assumed that the Treasury
balances were correct and adjusted the general ledger to these
amounts.  For example, if the Treasury records reported a cash
balance lower than the cash balance in MMS's general ledger, an
adjusting journal entry was made to reduce MMS's amount by
crediting the cash account and debiting the accounts payable
account.  The Chief of Accounting Operations said that he was not
aware that the adjustments were incorrect, and the Chief of the
Branch stated that he was not aware that the adjustments were
made only to the two accounts instead of all of the differences
reconciled. In October 1998, MMS began to determine, by fiscal
year and fund, the differences between the general ledger cash
balance and the Department of the Treasury cash balance.  In
November 1998, MMS made adjusting journal entries totaling $24.5
million to correct the differences. 

A cash reconciliation should be performed on a transaction basis
so that it provides the information needed to adjust specific
transactions in the subsidiary ledger.  For example, Schedule No.
8H9134, paid in September 1998, was posted to the subsidiary
ledger in the amount of $634.72, while the Department of the
Treasury recorded the schedule in the amount of $1,421.92.  The
differences could have occurred for reasons such as posting
errors and timing differences.  Thus, a transaction-level
analysis had to be performed to determine the correct amount and
the reason for the differences.  A determination then could be
made as to whether MMS's subsidiary ledger or Department of the
Treasury records needed to be adjusted. As a result of not
performing proper cash reconciliations, inaccurate information on
the Form 224 was submitted to the Department of the Treasury, and
the balances for the cash account and the accounts payable
account in the general ledger were incorrect.  In addition, when
cash reconciliations are not performed, the potential exists for
an antideficiency situation or for funds to be misappropriated.

Year-End Closeout. We found that fiscal year 1998 transactions
were included in the fiscal year 1999 subsidiary account balances
in the ABACIS.  We randomly selected 40 fiscal year 1999
transactions that were posted on November 6, 1998, and found that
6 transactions (15 percent) were fiscal year 1998 transactions.
MMS prepared adequate year-end procedures; however, the
accounting staff did not follow these procedures. As a result,
fiscal year 1998 transactions were posted incorrectly to the
fiscal year 1999 accounts. 

We also statistically tested 327 fiscal year 1998 expenses and
determined that the information recorded in the ABACIS contained
either the incorrect appropriation fund code or the incorrect
fiscal year.  For example, on February 3, 1998, expenses for
aircraft services totaling $33,140 were incurred using 1-year
money (98MM fund); however, the purchase order indicated that
no-year money (98MD fund) was to be used.  We also found that a
fiscal year 1996 oil spill research account (96MO fund) had
charges for an environmental test tank totaling $276,782 for
which the purchase order indicated that fiscal year 1992 1-year
money (92MM fund) should have been used.  A projection of the
sample results to the total expense population resulted in the
most likely error of misclassified financial data in the ABACIS
to be $6.6 million.  In addition, while auditing the 327
operating expense transactions, we found the following
discrepancies:   

- One hundred twenty five invoices were not date stamped,
resulting in a projection of $82 million of invoices that could
not be reviewed for compliance with the Prompt Payment Act.  The
Prompt Payment Act requires that a payment be made within at
least a 30-day time frame.  Therefore, if an invoice is not date
stamped when it is received, the payment due date cannot be
tracked, and the invoice may not be paid timely.  

- Fifteen account numbers in the ABACIS did not agree with the
account numbers on the purchase order, resulting in a projection
of as much as $9.9 million that may have been charged to the
incorrect fund.  For example, a state and Indian compliance
review was charged to a no-year fund (98MD fund) in the ABACIS
but should have been charged to the annual appropriation (98MM
fund).

- Nine paid invoices were not approved. Based on our sample
results, we projected unapproved paid invoices of $5.9 million.
When payments are not reviewed, the potential exists for funds to
be misappropriated.

We believe that the existence of these discrepancies increases
the potential for an antideficient situation because available
funds may be depleted before all valid expenses are identified
and paid or because funds may be misappropriated if controls are
not followed. 

Conversion.  During October 1997, MMS converted to the new
standard general ledger, as required by the Federal Financial
Management Improvement Act of 1996.  However, the conversion did
not properly include all of the general ledger account balances.
Consequently, MMS created a balancing account (Account 0000) that
had a $69 million balance as of September 30, 1998, to capture
the remaining activities.  Because MMS did not reconcile the $69
million to identify the adjustments needed in the ABACIS records,
we found, in August 1998, that the fiscal year 1997 ending
balances audited were not equal to the fiscal year 1998 opening
balances.  This occurred because MMS did not compare the ending
balances with the opening balances after the conversion to the
new standard general ledger.  The Chief of the Financial
Management Branch, the Chief of Accounting Operations, and the
Chief of Accounting Systems stated that they were not aware of
the differences until we informed them of the discrepancies.
After fiscal year 1998, MMS made 12 adjustments, totaling $91.3
million, to the fiscal year 1998 beginning balances so that they
were the same as the  audited ending balances for fiscal year
1997. 

Capitalized Equipment.  MMS did not have sufficient internal
control procedures to ensure that the general ledger control
balance for Property, Plant and Equipment was accurately stated
and supported by detailed subsidiary information.  The official
property records are maintained in MMS's Property Management
System, which is not integrated with the ABACIS.  During our
testing of the Property, Plant and Equipment line item in the
financial statements, we found that MMS did not periodically
reconcile the property management records to MMS's general ledger
control account.  Office of Management and Budget Circular A-127
states that each agency should establish and maintain a single
integrated financial management system that requires
reconciliations between subsystems to ensure the accuracy of the
data.  During the audit, we identified 11 capitalized equipment
property items, totaling $182,206, that were in the Property
Management System but that were not in the subsidiary ledger.
Overall, there was a $3.8 million difference between the two
systems for capitalized equipment.  To ensure that the accounting
system balance is the same as the Property Management System
balance for capitalized equipment, the general ledger would have
to be adjusted by $3.8 million and individual property items
updated in the subsidiary ledger.

Inadequate Procedures

MMS did not have adequate procedures to ensure that accounting
transactions were recorded and reported properly during fiscal
year 1998, as described in the paragraphs that follow.

Federal or Public Transactions.  MMS did not have adequate
internal controls to ensure that transactions were properly
classified as Federal (government) or Public (nongovernment) in
the general ledger accounts.  Office of Management and Budget
Bulletin 97-01, "Form and Content of Agency Financial
Statements," requires liabilities to be separated between Federal
and Public.   Because MMS did not develop and implement
procedures which ensured that accounts were properly defined as
either Federal or Public, accounting employees judgementally
selected the designation when posting each transaction.  We
reviewed 327 operating expense transactions and found 22
transactions, totaling approximately $1.2 million, that were
classified as Federal (government) but that should have been
classified as Public (nongovernment).  For example, 15 purchase
orders relating to six states (California, Colorado, Montana,
Oklahoma, Utah, and Wyoming) were entered as Federal; however,
they should have been entered as Public. 

Interior Franchise Fund.  MMS did not have sufficient internal
control procedures to ensure the proper accounting of the
Department of the Interior's Franchise Fund. Specifically, MMS
did not (1) develop a cost accounting system to determine whether
the pricing structure was adequate to recover full costs; (2)
implement accrual accounting procedures to record expenses
incurred or revenues received in accordance with accounting
standards; and (3) provide oversight over the Fund by
establishing written accounting procedures or reviewing
accounting data.  As a result of these deficiencies, MMS used its
Fedsim fund (a nonappropriated fund) to supplement the Interior
Franchise Fund.

MMS did not develop a cost accounting system to facilitate
compliance with the Department of the Interior and Related
Agencies Appropriation Act of 1997 (Public Law 104-208), which
requires that established pricing rates recover all expenses of
operations.  In addition, the Government Management Reform Act
(Public Law 103-356) and the Department of the Interior and
Related Agencies Appropriation Act of 1997 (Public Law 104-208),
require that the Interior Franchise Fund recover the full costs
associated with the products and services provided and an amount
necessary to maintain operating reserves.  The Acts also allow
the Interior Franchise Fund to retain up to 4 percent of gross
revenues for the acquisition of capital equipment and for the
improvement and implementation of Departmental financial
management, automated data processing, and other support systems. 

MMS's Chief of Financial Management Branch stated that MMS did
not establish a cost accounting system because MMS personnel
believed that their ABACIS could accommodate the additional
activities for the Interior Franchise Fund transactions.
However, the Interior Franchise Fund did not account for all the
expenses and revenues such as overhead costs.  Instead, the
overhead costs were allocated to a revolving fund established to
account for procurement activity conducted with the General
Services Administration. For example, overhead costs of
approximately $42,000 for the Cooperative Administrative Support
Unit were charged to the General Services Administration Fund.
We informed MMS that overhead expenses associated with the
Interior Franchise Fund had been commingled with other funds in
the ABACIS.  MMS's Financial System Team Leader stated that the
overhead charges were posted to the revolving fund because the
Interior Franchise Fund account did not have sufficient funds to
cover these expenses.  Until MMS properly accounts for the
overhead charges, revenues from Department of the Interior
activities may be supplementing MMS's appropriation, or
conversely, MMS's appropriation may be supplementing
non-Department of the Interior transactions.

MMS did not implement accrual accounting procedures to record
expenses and revenues for the Interior Franchise Fund.
Accounting standards require expenses to be recognized when goods
and services are received and revenues to be recognized when
earned.  However, MMS recorded revenues before all of the goods
or services were received.  This resulted in MMS's collecting at
least $2.2 million from the Interior Franchise Fund during fiscal
year1998 that had not been earned.

MMS did not provide proper oversight over fiscal year 1998
accounting activities for the Interior Franchise Fund. The Fund
subcontracts with MMS for the billing and collection functions
and for delivering goods and services and with the U.S.
Geological Survey for financial accounting and reporting.  The
Interior Franchise Fund is reported as part of the financial
statements of the Office of the Secretary's Departmental Offices.
We determined that the Fund's subsidiary account balances were
not supported by the accounting records and that the subsidiary
ledger was not reconciled to Interior Franchise Fund accounting
activities.  These deficiencies occurred because accounting
procedures for the Interior Franchise Fund were not documented
and monthly account reconciliations were not performed.
Specifically, MMS did not have written procedures for year-end
closeouts of expenses, and the informal procedures to close the
books as of September 30, 1998, were not followed.  For example,
we found that the fiscal year 1998 Interior Franchise Fund
subsidiary ledger remained open for financial activities through
November 1998. Because the ledger was updated 2 months after the
close of the fiscal year, fiscal year 1999 expenditures of
approximately $1.6 million were recorded in the fiscal year 1998
subsidiary ledger.  In addition, we found that monthly billing
documents were processed by MMS without being reconciled to the
source documents.  MMS officials stated that they did not have
the time to reconcile the billing documents to the source
documents because there was only one staff member assigned to
that function. During our testing, we attempted to reconcile
January billings with source documents; however, MMS was unable
to provide the necessary documentation for us to perform the
reconciliation. 

After the close of fiscal year 1998, MMS began its first
reconciliation of Interior Franchise Fund activities.  The
reconciled data were provided to the Office of the Secretary for
inclusion in the Departmental Offices financial statements for
fiscal year 1998.  We reviewed the subsidiary ledgers and
compared the data with the amounts in the Interior Franchise
Fund's financial statements for fiscal year 1998.  We identified
$2.2 million in Advances From Customers that should have been
included in the Interior Franchise Fund but that was recorded as
Fund Balance with Treasury, which we believe indicates that the
cash was available to MMS.  When we informed MMS and Office of
the Secretary officials of the error, they adjusted the financial
statements to reflect the correct information.  In addition,
year-end expenses of approximately $1.3 million and revenues of
approximately $704,000 were not reported because year-end
accruals[3] were not recorded.  The Chief of Financial Management
Branch agreed that the revenues should have been recognized when
earned and that expenses should have been recognized when the
goods and services were received.  During our review, MMS
officials began to develop accounting procedures to ensure that
the accrual accounting method is used in future accounting
periods.

Recommendations

We recommend that the Director of MMS implement internal control
procedures which ensure that:

1.An adequate internal control structure, including management
oversight, is established to provide reasonable assurance that
assets are safeguarded; transactions are processed in accordance
with applicable laws and regulations; transactions are recorded,
reconciled, processed, and summarized to permit the preparation
of reliable financial statements; and accountability for assets
is maintained.  At a minimum, MMS should ensure the following:

- Responsibilities are assigned to specific individuals and
officials are held accountable for not complying with established
internal controls.

- Year-end closeout procedures are followed for general ledger
activities and are documented and followed for Interior Franchise
Fund activities.

- Accounting transactions are defined properly in the ABACIS as
either Federal or Public.

2.A cost accounting system is developed which will accumulate
separately all expenses and revenues associated with the Interior
Franchise Fund.

3.The accrual accounting method of transaction reporting is
applied to the Interior Franchise Fund to be in accordance with
generally accepted accounting standards.

MMS Response and Office of Inspector General Reply

In the February 29, 2000, response (Appendix 1) to the draft
report from the Director of MMS, MMS "agree[d]" with all three
recommendations.  Based on the response, we consider
Recommendations 2 and 3 resolved and implemented.  MMS also
provided additional comments, which we incorporated into the
report as appropriate.

For Recommendation 1, MMS, in subsequent correspondence, said
that the recommendation would be implemented by December 31,
2001, and that the Chief, Budget and Finance Division, was
responsible for implementation.  Accordingly, the recommendation
will be referred to the Assistant Secretary for Policy,
Management and Budget for tracking of implementation.  

Since the report's recommendations are considered resolved, no
further response to the Office of Inspector General is required
(see Appendix 2).

Section 5(a) of the Inspector General Act (5 U.S.C. app. 3)
requires the Office of Inspector General to list this report in
its semiannual report to the Congress.  In addition, the Office
of Inspector General provides audit reports to the Congress.


**FOOTNOTES**

[1]:Budgetary accounts are used for fund control.  Such accounts
maintain the appropriation, apportionment, allotment, obligation,
and other budget-related accounts and ensure that the agency
complies with the provisions of the Antideficiency Act.

[2]:Proprietary accounts track, record, and state the financial
condition of the entity and provide profit or loss information. 

[3]:Accrual-based accounting ensures that financial activity is
recorded in the proper reporting period.




Page 1 of 13



		United States Department of the Interior	

           	MINERALS MANAGEMENT SERVICE

	        	Washington, DC, 20240

FEB 29 2000

Memorandum

To:       Assistant Inspector General for Audits

Through:  Sylvia V. Baca
  	      Acting Assistant Secretary, Land and Minerals
Management	
          
From:     Walt Rosenbusch 
          Director, Minerals Management Service

Subject:  Office of Inspector General Draft Audit Report, 
          "Internal Controls Over the Accounting System,
           Financial Management Branch, Minerals Management
           Service"

Thank you for the opportunity to respond to the draft audit
report on our accounting system's internal controls. We are
providing to you our general comments on the audit findings,
specific ones on the recommendations, and a detailed table
listing specific findings and our actions taken or planned.

Please contact Bettine Montgomery at (202) 208-3976~ if you have
any further questions.


Attachment



APPENDIX 1

Page 2 of 13

Minerals Management Service Response to Draft Audit Report
"Internal Controls Over the Accounting System, Financial
Management Branch, Minerals Management Service"

Audit Agency: Office of the Inspector General (OIG)

Audit Number: E-IN-MMS-009-98


We welcome the opportunity to comment on this draft report. We
generally concur with the report's findings and recommendations,
and we have already taken corrective actions to resolve many of
the deficiencies noted in the report. We offer the following
comments to document our efforts to date, and also to explain our
plans for additions corrective actions.


General Comments


We~ acknowledge that the Minerals Management Service (MMS) did
not have accurate, complete, and timely financial data in FY
1998. During 1999 and 2000, we have and are implementing new
accounting policies and procedures to improve the quality of our
financial information. We have taken steps to correct FY 1998 and
improve FY 1999 infor~r.ation. However, despite a vearlong focus
on resolving FY 1998 accounting discrepancies, we were unable to
resolve them with existing resources. Accordingly, we assembled a
mult-Bureau Annual Financial Report Team (AFR Team) to resolve
remaining general ledger inconsistencies and to reconcile AIMS
cash balances with Treasury. This NN as the opening phase in a
longer temm plan to ensure that MMS financial data relating to
all fiscal years will once again be accurate and reliable. While
the AFR Team has been successful in satisfying information
requirements for the Department's Consolidated Financial
Statements, we intend to carry our efforts to more detailed
levels.

We acknowledge that the internal control system relating to our
administrative accounting operations was not adequate to ensure
that transactions were properly recorded, processed, and
summarized to permit the preparation of financial statements in
accordance with Federal accounting standards. NIany of the
actions taken during 1999 to chance the quality of our financial
data involved improvements to internal controls. However, we
understand that a thorough review of the entire internal control
environment is in order. Accordingly, we are arranging for a
comprehensive review of the system and procedural controls
relating to all FINIS administrative accounting activities. This
review will be performed by an organization outside of MMS to
ensure complete objectivity of the review.

In conjunction with the review few of the internal control
system, we are in the process of review ing and documenting all
financial management functions performed in MMS. These reviews
are drawing on the resources of the Financial Management Branch
staff, other MMS organizations, other Departmental resources, and
outside consultants.


Page 3 of 13 


Current operating procedures, document flows, and data flows will
be closely analyzed for ways of improving the efficiency and
effectiveness of operations. Desktop guides are being developed
covering all recurring operating procedures. This process is
currently underway with a projected completion date of April
2000. During 1999, workload and accountability responsibilities
were documented (including backup responsibilities) for each
position in the Financial Management Branch. However, this is a
living document which will be updated to account for the recent
addition of new staff and the planned addition of future staff.


Comments on the Findings Presented in the Report


Account Reviews and Reconciliations

We concur with the report's general finding that inadequate
reviews and reconciliations were performed to ensure that
accounting transactions were properly recorded and reported in FY
1998. We also acknoNN ledge that the values in the property
system did not reconcile completely with the general ledger
information in the MMS administrative accounting system (ABACIS).
Following are summaries of MMS~ efforts relating to specific
areas identified in the draft report.

General Ledger

The AFR Team devoted significant resources to resolving
outstanding general ledger issues. Some of the particular areas
addressed included:

Improper journal vouchers,

Errors relating to the Standard General Ledger conversion
performed at the beginning of FY 1998,

Discrepancies between budgetary and proprietary accounts,

Errors resulting from improper posting models, and

Unnatural general ledger balances.


All MMS~ funds were reviewed through FY 1999, and correcting
general ledger entries completed. FY 2000 general ledger
transactions are currently being reviewed on a monthly basis for
any inconsistencies, including unnatural balances and differences
between the summary and subsidiary ledgers, and necessary
corrections are being made.


Cash


The task force performed a reconciliation of cash between ABACIS
and Treasury. The reconciliation compared balances in each of 42
MMS funds. While a complex and difficult task, we recognized that
it was necessary to ensure the integrity of MMS financial
information. As a further recognition of the importancee of this
reconciliation,


Page 4 of 13


MMS will continue to work on cash even though the task force was
successful in reconciling cash to acceptable materiality levels.

Cash reconciliations are now being performed monthly on a
transaction basis. To facilitate the reconciliation process, new
procedures were established during 1999 to better track cash
receipts and OPAC transactions with :\I:\IS trading partners.
However, we plan to review  the entire reconciliation process
again to identify approaches, formats, and procedures that will
make the process more efficient.


Year-end Closeout


For fiscal year-end FY 1999, particular emphasis was placed on
ensuring that transactions were recorded in the correct fiscal
year. Improved year-end procedures were developed and subjected
to discussion and comment by all Financial Management Branch
staff. Accounting technicians also received training to augment
the written closeout instructions.

The planned review and documentation of financial management
operating procedures will specifically address year-end closeout
activities. The review will focus on ensuring that transactions
are recorded in the proper fiscal year, appropriation, and
account code.


Conversion


The AFR Team analyzed the adjustments made after FY l998 to
resolve discrepancies between the closing general ledger balances
in FY 1997 and the beginning balances in FY 1998. Adjustments
have been made to
validate and correct closing FY 1997 and beginning FY 1998
balances.


Capitalized Equipment


We recently hired a new staff member who has been assigned
responsibility for performing monthly reconciliations with the
existing property system. Since MMS has increased the
capitalization threshold to S15,000 beginning in FY 1999, the
number of items to be reconciled has decreased by more than 65%.
Longer term, we are planning to replace the current property
management system with one that will be integrated with ABACIS.


Inadequate Procedures


We generally concur MMS did not have adequate procedures in place
to ensure that accounting transactions were recorded and reported
properly during FY 1998. Following are summaries of our efforts
relating to specific areas identified in the draft report.


Page 5 of 13


Federal or Public Transactions


At the beginning of FY 1999 we provided instructions to
accounting technicians on how to review documents to ensure the
Government/non-Government indicator is correct on ABACIS input
screens. In addition, as part of the FY 1999 year-end closeout,
we closely scrutinized accrual documents prepared by program
staff for appropriate Government/non Government designations.
(Accrual documents were a major source of errors in FY 1998.)


Interior Franchise Fund


The MMS Interior Franchise Fund business line operations grew
quickly during FY 1998. During that time, the Interior Franchise
Fund was still developing as an entity with numerous accounting
policy issues needing to be resolved. Some of these issues
included the level of cost tracking detail required for the MMS
lines of business, and the allocation of funds to operating and
improvement reserves.

Recognizing that our existing accounting approaches were
inadequate, in November 1998, we contracted with the accounting
firm KPMG to review and make recommendations for improving the
accounting practices relating to the Interior Franchise Fund
lines of business operated by MMS. We implemented, or are working
on their recommendations for accounting procedure improvements,
cost accounting methods, cost accounting systems, and management
report form~ats.

Based in part upon the implementation of the KPMG
recommendations, the MMS~ Interior Franchise Fund cost accounting
system, while operated within ABACIS, is able to track Interior
Franchise Fund transactions separately from other MMS activities.
The system records transactions, including overhead, in
sufficient detail for MMS to determine whether the pricing
structures for MMS business lines are adequate to recover full
costs.

We worked closely with the Interior Franchise Fund staff during
FY  1999 to address appropriate methods for accruing revenues and
expenses. Revenues and expenses are now accrued on a monthly
basis for all MMS Interior Franchise Fund business lines. This
information is provided to the Interior Franchise Fund each month
to be incorporated into monthly financial statements.

To improve oversight of MMS Interior Franchise Fund activities,
We established a new position in early FY 1999 whose duties
include reconciling MMS records with Interior Franchise Fund
records. These reconciliations are now performed monthly. One of
the steps remaining for us is the written documentation of the
policies, procedures and staff responsibilities relating to MMS~
franchise operations. This effort is underway.

We take exception to the statement "the Service's appropriation
used its revolving fund to supplement the cost of the Interior
Franchise Fund." First, MMS does not have a revolving fund.
Second, we did not use appropriated funds to supplement the cost
of the


Page 6 of 13


Interior Franchise Fund. At worst, we shared overhead costs for
Interior Franchise Fund activities with overhead costs for
similar lines of business not included in the Interior Franchise
Fund. To avoid old the appearance that MMS supplemented the cost
of the Interior Franchise Fund lines of business from other
funding, we have segregated Franchise Fund related activities
from other lines of business not included in the Interior
Franchise Fund.


Comments on the Recommendations Presented in the Report


~We concur with all of the recommended internal control
procedures presented in the draft report and, as detailed in our
comments on the report's findings, we have taken numerous actions
to implement these procedures. Following is a summary of our
corrective actions (completed or plann~ed) relating to each
recommendation. The Chief, Budget and Finance Division, is the
responsible official for implementing the recommendations. We
plan to submi~t targets dates by the fall of 2000 after reviewing
KPMG's report.


Recommendation 1. Implement an Adequate Internal Control
Structure in MMS that:

Assigns responsibilities to specific Individuals and holds
officials accountable for noncompliance with internal
controls

Establishes ~ year-end closeout procedures for general ledger
and franchise fund activities

Ensures that Federal v. Public transactions are properly
identified


AGREE. An assigned responsibilities listing was developed and
discussed with all staff during 1999. The purpose of this list
was to identify and assign primary responsibilities in the
Financial Management Branch to specific individuals and to
identify and assign backups for these responsibilities. This
listing also supports the identification of individuals
accountable for internal controls. This listing is not a static
document. It will be updated for the addition of new staff and
will be revised as the Financial Management Branch's functions
and workload are reviewed.

Improved year-end procedures were prepared for the FY 1999
closeout. All staff members were asked to comment on the revised
procedures and each step was discussed in a series of meetings
called to prepare for year-end.

Instructions were provided to staff early in FY 1999 on the
correct classification of government vs. non-government
transactions. Since that time, new procedures have been developed
for verifying government vs. non-government data recorded in
ABACIS.


Page 7 of 13


Written desktop procedures are being~ developed for all staff to
assure consistency of actions and to support more readily the
ability of other individuals to perform backup functions.

The accounting firm of KPMG will perform a comprehensive review
of our internal controls, and make recommendations on
improvements to existing controls and the addition of new
controls where appropriate. This review will strengthen our
assigned responsibilities listing and the accountability of
specific individuals for maintaining compliance with these
controls.


Recommendation 2. Develop a cost accounting system that
accumulates separately all revenues and expenses associated with
the Interior Franchise Fund.


AGREE. In November 1998, we contracted with KPMG to review our
operations and to make recommendations to improve our accounting
practices for the Interior Franchise Fund lines of business
operated by MMS. KPMG provided recommendations to improve our
cost accounting procedures. As a result of these recommendations,
spreadsheets have been set up to track the revenues and expenses
of the MMS franchising activities by business line. This
information is provided to the Interior Franchise Fund each month
to be incorporated into its monthly financial statements.

We have implemented a cost accounting system, operated within
ABACIS, that tracks MMS Interior Franchise Fund activities
separately from other MMS~ activities. The system records
transactions in sufficecnt detail to allow an assessment of
whether the pricing structures for MMS business lines are
adequate to recover full cost of operations.


Recommendation 3. Apply~ the accrual method of transaction
reporting to MMS Interior Franchise Fund activities in accordance
with generally accepted accounting standards.


AGREE. Again, in part as a result of the KPMG review of our
operations and accounting practices for the MMS Interior
Franchise Fund activities, we have implemented new procedures for
tracking Interior Franchise Fund related transactions.
Spreadsheets have been developed to track accruals and overhead
fees earned for each business line. This information is now
reported to the Interior Franchise Fund on a monthly basis. We
will document these procedures as part of the planned
documentation of all MMS financial management functions.


Conclusions


In summary, we concur with the majority of the OIG's findings. It
is also important to note that although we did not receive this
report on FY 1998 internal control issues until


Page 8 of 13


October 1999, we had already recognized many of these problems
and had taken steps to address them, e.g., bringing in KPMG to
review our Interior Franchise Fund operations and make
recommendations on improvements. Some improvement steps are
ongoing, e.g., the written documentation of all procedures. Other
improvement steps will be initiated in the next few months, e.g.,
having KPMG perform a comprehensive review of our accounting
operations.

A more detailed listing of the OIG's findings follows. This list
also identifies our concurrence or non-concurrence with each of
these findings, and comments on the steps we have taken or plan
to take to address the findings.


Page 9 of 13


Detailed Listing of OIG and
Actions Taken or Planned by the Minerals Management Service


OIG Comment   Where Found    Concur-      Action Taken/Planned
                            Non-Concur

the financial data were not accurate,	Page 1,	Concur
Contracted for accounting were incomplete, and were not
timely."Paragraph 1
support from National Business Center (ARC). Assembled
multibureau Annual Financial Report Team (AFR Team) to assist in
resolving outstanding issues.

"control deficiencies occurred because Page 3, Concur a number of
actions have SerNice personnel did not follow paragraph 2	been
taken to improve internal established internal controls, such as
Results of	controls, we also plan to utilize performing account
reconciliations and Audit the services of KPMG to management
oversight of the conduct a comprehensive review financial
management accounting of our controls and our processes, and the
Service did not operations	establish adequate internal controls
to sure that transactions are properly classified during the
conversion to the new standard general ledger."


Page 10 of 13


OIG Comment    Where Found    Concur/    Action Taken/Planned
                            Non-Concur 

"did not have sufficient internal control 3, Concur In November
1998, procedures to ensure proper accounting paragraph 2 with one
contracted with KPLIG to review of the Interior Franchise
Fund.funds in Results of exception our operations and to make the
Interior Franchise Fund No Audit recommendations to improve our
commingled with Service funds."accounting practices for the
Interior Franchise Fund lines of business operated by SIMS. The
IMS did not commingle appropriated funds with Interior Franchise
Fund funded activities.

At worst, overhead costs forInterior Franchise Fund funded
activities were commingled with overhead costs for similar lines
of business not funded by the Interior Franchise Fund. To
more clearly delineate the	separate funding of these
overhead costs, MMS has segregated its Franchise Fund related
activities from these other lines of business.

"did not review or reconcile financial  3,	Concur	new
procedures had been put data to ensure that accounting paragraph
3 into place to reconcile cash and	transactions were recorded
and reported Account being put into place to accurately during
fiscal year 1998."Reviews and reconcile other financial data on a
regular basis.

"Values in the property system did not 3, Concur We have hired a
new staff support the general ledger balance."	paragraph 3
member whose responsibilities amount for each accounts payable
Page 3,	Concur	New procedures are being transaction was not
recorded in the paragraph 4	developed to require monthly
subsidiary ledger."  General review and reconciliations of Ledger
general and subsidiary ledgers. Responsibility for these reviews
and reconciliations has been assigned to the Chief of Accounting
Operations.


Page 11 of 13


OIG Comment   Where Found   Concur/   Action Taken/Planned
                          Non-Concur

"did not perform monthly Page 4,	Concur A new staff member was
hired reconciliations for any of its 13 funds paragraph 3 late in
FY 1998 and trained during fiscal year 1998."	                 

Cash during FY 1999 whose primary responsibility is the monthly
reconciliation of cash. Written procedures are being developed
to ensure that all steps necessary	to reconcile cash fully are
completed each month.

"fiscal year 1998 transactions were Page 5, Concur year-end
procedures were included in the fiscal year 1999 paragraph 3
improved for FY 1999. All staff subsidiary account balances in
the Year-end were asked to comment on the ABACIS accounting
system the Closeout procedures and each step Service prepared
adequate year-end was discussed in a series of	procedures;
however, the accounting staff meetings called to prepare for did
not follow these procedures." the year-end closeout.

One hundred twenty five invoices were, Page 6, Concur Both a new
scanning system and not date stamped" new procedures have been
set up to ensure that information is proper]y recorded.

Fifteen account numbers in the ABACIS Page 6, Concur New desk
procedures are being accounting system did not agree with the
bullet 2 developed for all positions to account numbers on the
purchase order"ensure that all primary staff and all backup staff
are aware of the responsibilities of their jobs.

Nine paid invoices were not approved.Page 6, Concur New desk
procedures are being bullet 3 developed for all positions to
ensure that all primary staff and all backup staff are aware of
the responsibilities of their jobs"the conversion did not
properly include	Page 6, Concur This was one of the issues
all of the general ledger account balances. Paragraph 6,
addressed by the N7BC staff and Consequently, the Minerals
Management Conversion the AFR Team. They have Service created a
balancing successfully reconciled the account Because the Service
did not balancing account and corrected reconcile the $69 million
to identify the  ending and opening balances adjustments needed
in the ABACIS accounting system records, we found, in August
1998, that the fiscal year 1997 ending balances audited were not
equal to the fiscal year 1998 opening balances."


Page 12 of 13


OIG Comment   Where Found   Concur/   Action Taken/Planned
                           Non-Concur

"The Service did not have sufficient Page 6, We have hired a new
staff internal control procedures to ensure that paragraph 7
member whose responsibilities the general ledger control balance
for & page 7, include performing a monthly Property, Plant and
Equipment was	paragraph 1 reconciliation of the property
accurately stated and supported by Capitalized and ABACIS.
detailed subsidiary information the Equipment Service did not
periodically reconcile the property management records to the
Service's general ledger"

"did not have adequate procedures to Page 7, Concur While a
number of actions have ensure that accounting transactions were
paragraph 2 been taken to improve internal recorded and reported
properly during Inadequate controls, we alive plan to utilize
fiscal year 1998"	Procedures	the services of KPMG to conduct a
comprehensive review of our controls and our operations.

"did not have adequate internal controls Page 7, Concur
Instructions were provided to ensure that transactions were
properly paragraph 3 staff early in FY 1999 on how to classified
as Federal (government) or Federal or	classify government vs.
non Public (non-government) in the general Public ledger
accounts."	Transactions procedures have been developed to verify
data in the system.


Page 13 of 13


OIG Comment   Where Found   Concur/   Action Taken/ Planned
                           Non-Concur

did not have sufficient internal control Page 7, Concur	In
November 1998, we procedures to ensure the proper paragraph 4
contracted with KPMG to review accounting of the Department of
the	 Interior our operations and to make Interior's Franchise
Fund did not (1) Franchise recommendations to improve our develop
a cost accounting system to Fund accounting practices for the
determine whether the pricing structure Interior Franchise Fund
lines of was adequate to recover full costs; (2) business
operated by MMS. implement accrual accounting procedures
Spreadsheets have been to record expenses incurred or revenues
developed to track accruals and received in accordance with
accounting	overhead fees earned. This standards; and (3) provide
oversight over information is submitted the Fund by establishing
written to the Interior Franchise accounting procedures or
reviewing Fund. Revenues and expenses of accounting data" the MMS
franchising activities are tracked in another
spreadsheet for each business line and provided to the Interior
Franchise Fund to be incorporated into monthly financial
statements. Procedures have been developed to improve the
processing of documents.

the Service's appropriation used its Page 7, Non-(1) the Service
does not have a revolving fund to supplement the cost of
paragraph 4 Concur	revolving fund, (2) the Service the Interior
Franchise Fund." Interior did not use appropriated funds to
Franchise supplement the cost of the Fund Interior Franchise
Fund, (3) at worst, the Service shared its Franchise Fund
activities with overhead costs for similar lines of business not
included in the Interior Franchise Fund. To ensure that improper
supplementing of costs cannot happen in the future, the Service
has segregated its Franchise Fund related activities from other
lines of business not included in the Interior Franchise Fund.


APPENDIX 2

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
Reference             Status             Action Required

    1               Resolved;
                 not implemented.

                                     No further response to the
                                     Office of Inspector General
                                     is required. The
                                     recommendation will be
                                     referred to the Assistant
                                     Secretary for Policy,
                                     Management and Budget for
                                     tracking of the
                                     implementation.
   2 and 3          Implemented.     No further action is
                                     required.  





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