[Audit Report on Office of Surface Mining Reclamation and Enforcement Financial Controls Over the Technical Assistance Agreement With the Republic of Indonesia]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 97-I-165

Title: Audit Report on Office of Surface Mining Reclamation and
       Enforcement Financial Controls Over the Technical Assistance
       Agreement With the Republic of Indonesia

Date: December 3, 1996

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This file contains an ASCII representation of an OIG report.  No attempt has been made to display
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printed version.

A printed copy of this report may be obtained by referring to the PDF file or by calling the Office
of Inspector General, Division of Acquisition and Management Operations at (202) 208-4599.
                  ******************************

United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240

TO:                 The Secretary

FROM:               Wilma A. Lewis
                    Inspector General

SUBJECT SUMMARY:    Final Audit Report for Your Information - "Office of Surface Mining
                              Reclamation and Enforcement Financial Controls Over the Technical
                              Assistance Agreement With the Republic of Indonesia" (No. 97-I-165)

Attached for your information is a copy of the subject final audit report. The objective of the audit
was to determine whether the Office of Surface Mining Reclamation and Enforcement had
established and implemented adequate controls to ensure compliance with the financial management,
accounting, and reporting requirements of the grant agreement with the Bureau of Environment and
Technology of the Ministry of Mines and Energy, Republic of Indonesia.

We found that, overall, Surface Mining's internal controls were adequate to ensure that the
accounting records on direct costs were accurate, properly supported, and in accordance with the
terms of the technical assistance agreement with the Republic of Indonesia. However, we concluded
that Surface Mining needed to strengthen its internal controls over the preparation of the quarterly
financial reports and the computation of overhead costs. We recommended that Surface Mining
establish and implement procedures to ensure that: (1) administrative overhead amounts are recorded
and computed accurately; (2) direct and overhead costs included in the quarterly reports are
reconciled to accounting system data; and (3) program staff comply with provisions for the
calculation of overhead costs and the preparation of the quarterly reports.

Surface Mining concurred with the report's three recommendations, which will be referred to the
Assistant Secretary for Policy, Management and Budget for tracking of implementation.

If you have any questions concerning this matter, please contact meat (202) 208-5745 or
Mr. Robert J. Williams, Acting Assistant Inspector General for Audits, at (202) 208-4252.

Attachment

E-IN-OSM-011-96

United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240

AUDIT REPORT

Memorandum

To:  Director, Office of Surface Mining Reclamation and Enforcement

From:     Robert J. Williams
     Acting Assistant Inspector General for Audits

Subject:  Audit Report on Office of Surface Mining Reclamation and Enforcement
Financial Controls Over the Technical Assistance Agreement With the Republic
of Indonesia (No. 97-I-165)   

        INTRODUCTION

This report presents the results of our limited review of the Office of Surface Mining
Reclamation and Enforcement's financial management, accounting, and reporting controls
for funds received under its technical assistance agreement with the Bureau of Environment
and Technology of the Ministry of Mines and Energy, Republic of Indonesia. The objective
of the review, which was initiated in response to a February 6, 1996, request from Surface
Mining's Deputy Director, was to determine whether Surface Mining had established and
implemented adequate controls to ensure compliance with the financial management,
accounting, and reporting requirements of the agreement.
BACKGROUND

In February 1995, the Office of Surface Mining Reclamation and Enforcement entered into
a $3.2 million reimbursable agreement with the Bureau of Environment and Technology of
the Ministry of Mines and Energy, Republic of Indonesia, for a project to provide technical
assistance to the Republic to develop, establish, and implement policy, regulations, and
guidelines to control environmental effects caused by mining activities in Indonesia. The
project is being funded by a portion of a $260.5 million loan to the Republic from the
International Bank for Reconstruction and Development.

The agreement stipulates that the Republic provide periodic advance payments to Surface
Mining to cover necessary and agreed-to project expenditures. Specifically, Surface Mining
is to be reimbursed for all direct costs of the services provided and for administrative costs

 


based on a fixed rate of 22.5 percent of the direct costs, excluding certain equipment items
identified in the agreement. In addition, the agreement states that the Assisting Agency is
to "keep accurate and systematic accounts and records . . . in such form and detail as will
clearly identify all relevant time charges and cost, and the bases thereof. " Further, the
agreement requires Surface Mining to submit to the Republic and the Bank quarterly reports
that include itemized project expenditures for the previous quarter and an itemized estimate
of additional funds requested.

Surface Mining's responsibility for the project is specified as follows: (1) its resident Project
Director in Indonesia has overall field administrative responsibility; (2) its Finance Center
staff in Denver, Colorado, accounts for project costs and funds received; and (3) the program
staff in the headquarters office in Washington, D. C., provides overall project coordination.

SCOPE OF AUDIT

Our audit addressed Surface Mining's internal controls established and implemented to
ensure compliance with the agreement's financial management, accounting, and reporting
requirements from inception of the agreement (February 1995) through December 31, 1995.
To determine the adequacy of the internal controls, we reviewed accounting and billing
reports, quarterly reports, supporting documentation for the receipt and disbursement of
funds, calculations and composition of overheard charges, documentation flow, and the
system for preparing selected accounting and financial reports. Since Surface Mining
requested that our audit focus on a review of controls over project costs, we did not verify:
(1) the accuracy of Surface Mining's overhead rate of 22.5 percent because it was established
as a fixed rate by the agreement and (2) estimates of its additional funding requirements that
were included in the quarterly reports. The review was performed at Surface Mining's
headquarters office in Washington, D.C. In addition, we contacted Surface Mining's Finance
Center in Denver and the Project Director in the Republic of Indonesia regarding specific
accounting and reporting issues.

Although we evaluated the effectiveness of Surface Mining's financial management,
accounting, and reporting internal control structure over the agreement and tested Surface
Mining's compliance with certain provisions of the agreement, it should be noted that
because of inherent limitations in any system of internal controls, losses, noncompliance, or
misstatements may occur and not be detected.

PRIOR AUDIT COVERAGE

Neither the Office of Inspector General nor the General Accounting Office has issued any
reports within the past 5 years concerning Surface Mining's financial management,
accounting, and reporting internal controls related to its agreement with the Bureau of
Environment and Technology of the Ministry of Mines and Energy. However, the Office of

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Inspector General has issued five reports during this period on Surface Mining's financial
statements, as required by the Chief Financial Officers Act of 1990. The most recent report,
"Office of Surface Mining Reclamation and Enforcement Financial Statements for Fiscal
Years 1994 and 1995" (No. 96-1-400)3 issued in February 1996, stated:

Surface Mining's internal control structure in effect on September 30, 1995, was
sufficient to safeguard assets against loss from unauthorized use or disposition;
ensure that transactions were executed in accordance with laws and regulations;
ensure that transactions were properly recorded, processed, and summarized; and
provide reasonable assurance that any losses, noncompliance, or misstatements that
are material to the financial statements would be detected.

The four prior reports contained similar conclusions regarding Surface Mining's internal
control structure.

RESULTS OF AUDIT

We found that, overall, the Office of Surface Mining Reclamation and Enforcement's
internal controls were adequate to ensure that the direct project costs recorded in the
accounting records were accurate, properly supported, and in accordance with the terms of
the technical assistance agreement with the Republic of Indonesia. However, we concluded
that Surface Mining needs to strengthen its internal controls over preparation of the quarterly
financial reports and the computation of overhead costs to ensure that: (1) costs reported in
the quarterly reports submitted to the Republic and the International Bank for Reconstruction
and Development agree with the costs recorded in the accounting records and (2)
administrative overhead costs are properly computed and accurately recorded. In addition,
we concluded that Surface Mining needs to improve coordination between the Project
Director and other program staff in the Denver Finance Center and the Washington
headquarters office to ensure timely identification and resolution of issues related to the
agreement's financial management, accounting, and reporting requirements.

The agreement (Appendix B and part 6.5(c)) requires Surface Mining to submit, to the
Republic and the Bank, quarterly reports that include itemized project expenditures for the
previous quarter. In addition, the agreement (part 3 .5) states that the Assisting Agency is
to "keep accurate and systematic accounts and records . . . in such form and detail as will
clearly identify all relevant time charges and cost, and the bases thereof. " We found,
however, that Surface Mining did not have adequate controls to ensure that costs recorded
in the billing statements agreed with costs in the quarterly reports. As a result, the
expenditures and unexpended obligations included in the quarterly reports prepared by the
Project Director and provided to the Republic and the Bank for the periods ending September
30 (the first report submitted) and December 31, 1995, did not fully agree with the

3

 
corresponding amounts included in the project billing statements prepared by the Finance
Center for the respective time periods. This information is summarized as follows:

Expenditures    $354,160  $448,575 ($94,415)  Not Reported $942,328  N/A

Obligations    $791,207  $669,757  $121,450   $1,082,949  $1,125,273 ($42,324)

The Project Director could not provide a complete reconciliation of the variances between
the quarterly reports and the billing statements. The Project Director said that these
variances occurred, in part, because he had used the information available at the Indonesia
Project Office in preparing the quarterly reports "because of the long delay [in] getting
accounting data from Denver at the beginning of the project. "

We also found that Surface Mining could not support its calculation of administrative
overhead costs. The technical assistance agreement provides for Surface Mining to be
reimbursed for its administrative overhead costs based on a fixed rate of 22.5 percent of
direct costs, excluding certain equipment items. We found, however, that Surface Mining
did not have adequate controls to ensure that the fixed rate was properly applied to the
appropriate direct cost base. According to the program staff in the headquarters office that
is responsible for overseeing the receipt and disbursement of funds and billing statement
information, the overhead costs included in the billing statements were computed by the
Project Director in Indonesia. However, neither the Project Director nor the Washington
headquarters and Denver Finance Center program staff were able to provide adequate
information in support of Surface Mining's overhead calculation. For example, Surface
Mining was unable to specifically explain how the overhead amounts included in the billing
statements for the periods ending September 30 and December 31, 1995, were calculated,
including what equipment items and costs were excluded from the direct cost base before
applying the 22.5 percent overhead rate. Furthermore, the amount included in the billing
statement at September 30, 1995 ($104,127), did not agree with the amount reported by the
Project Director ($67, 143) in his quarterly report to the Republic for the same period. We
could not analyze the difference between the quarterly report and the accounting billing
statement at December 31, 1995, because the quarterly report did not include amounts
expended during the quarter.

We concluded that these conditions existed because Surface Mining had not required the
Project Director to submit the quarterly reports, including documentation supporting
adjustments to recorded costs and overhead calculations, to Surface Mining's Washington
headquarters office or to the Denver Finance Center for review to ensure that the reported
costs were accurate and adequately supported and to ensure that administrative overhead was

4

 
properly computed and recorded. We also believe that a contributing factor to this situation
was that Surface Mining program officials did not fully understand the agreement's overhead
calculation process. Consequently, there was minimal assurance that direct and overhead
costs reported in the quarterly reports were accurate and supported.

Recommendations

We recommend that the Director, Office of Surface Mining Reclamation and Enforcement,
establish and implement procedures to ensure that:

1. Administrative overhead amounts recorded in the accounting billing statements are
computed accurately.

2. Direct and overhead costs included in the quarterly reports are reconciled to
information in the accounting billing statement and the official accounting system and
reviewed by either headquarters or Finance Center staff before the quarterly reports are
provided to the Republic of Indonesia and the International Bank for Reconstruction and
Development.

  3. All program staff comply with the terms and conditions of the technical assistance
agreement pertaining to the calculation of administrative overhead costs and preparation of
the quarterly reports.

Office of Surface Mining Reclamation and Enforcement Response and
Office of Inspector General Reply

The October 21, 1996, response (Appendix 1) to our draft report from the Acting Director,
Office of Surface Mining Reclamation and Enforcement, concurred with all three
recommendations and identified controls and procedures that are sufficient to ensure
compliance with the financial management, accounting, and reporting requirements of the
agreements. Based on the response, we consider the three recommendations resolved but not
implemented. Accordingly, the unimplemented recommendations will be referred to the
Assistant Secretary for Policy, Management and Budget for tracking of implementation, and
no further response to the Office of Inspector General is required (see Appendix 2).

The legislation, as amended, creating the Office of Inspector General requires semiannual
reporting to the Congress on all audit reports issued, the monetary impact of audit findings,
actions taken to implement audit recommendations, and identification of each significant
recommendation on which corrective action has not been taken.

We appreciate the cooperation of Surface Mining personnel in the conduct of our audit.

 
IN REPLY REFER TO:

APPENDIX 1
Page 1 of 4

United States Department of the Interior

Memorandum

To:     Acting Assistant Inspector General for Audits

From:    Acting Director

Subject:   Response to Draft Audit Report on Office of Surface Mining
     Reclamation and Enforcement Financial Controls Over the Technical

Assistance Agreement with the Republic of Indonesia (Assignment
No. E-IN-OSM-011-96)

This is in response to your September 19, 1996 memorandum and draft audit
report entitled "Office of Surface Mining Reclamation and Enforcement Financial
Controls Over the Technical Assistance Agreement with the Republic of Indonesia"
(Assignment No. E-IN-OSM-011-96). We appreciate the opportunity to review the
draft audit report and to provide our comments.

We have completed our review and concur with the report's findings and
recommendations. Our specific plans for implementing your recommendations are
explained in the attachment. The Assistant Director for Program Support and the
Assistant Director for Finance and Administration will be the responsible officials
for carrying out the implementation plan.

I would like to point out that OSM has recently realized the benefits of the audit
exercise. Our end-of-year budget review for Fiscal Year 1996 indicated a potential
source of confusion regarding reimbursable accounts and highlighted a need to
clearly distinguish reimbursable funds from appropriated funds for purposes of
budgetary decision making. In order to eliminate possible confusion, a separate
configuration for displaying funding for the Indonesia project has been developed
by our Office of Strategic Planning and Budget. This will allow the funds to be
clearly separated for budget planning purposes.

On a related follow up matter, because of the need to ensure that OSM spends no
more than the funds allocated under the technical assistance agreement, we would
request your assistance in undertaking another review prior to the conclusion of
the program.

 
APPENDIX 1
Page 2 of 4

 

This review should rescheduled so that sufficient time is available to OSM to
make any necessary changes in controls or procedures. The project is currently
scheduled to end on May 1, 1998.

The Indonesian Ministry of Finance, which will have lead responsibility for any final
review, must supply a final accounting to the World Bank within six months of the
end of the Indonesian Fiscal Year in which the project ends. The Indonesian fiscal
year begins in April, so the Ministry of Finance must complete its review within six
months of the close of the Fiscal Year which begins in April 1998 and ends in
April 1999. Any additional Inspector General Review should comport with this
time frame.

Please contact George Stone, Audit Coordinator, Office of Strategic Planning and
Budget, at (202) 208-7840 if you have any questions concerning our response and
to coordinate the scheduling of subsequent audits of the technical assistance
agreements.

Attachment

cc:  Assistant Secretary - Land and Minerals Management

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Planned Action on

Recommendations

           APPENDIX 1
           Page 3 of 4


in OIG Draft Audit Report on

Office of Surface Mining Reclamation and Enforcement Financial Controls

        Over the Technical Assistance Agreement
           With the Republic of Indonesia
          (Assignment No. E-IN-OSM-011-96)

The table below reflects the actions planned to implement the recommendations
and a projected target date for completion of those actions. The officials
responsible for plan implementation are the Assistant Director for Program Support
(PS), and the Assistant Director for Finance and Administration (FA).

                         Projected   Action
  Recommendation      Planned Action    Completion  Official
                          Date
Administrative overhead   Apply controls to ensure   12/31 /96   AD/PS
amounts recorded in the   that the fixed rate is
accounting billing      properly applied to the
statements are computed   appropriate direct cost
accurately.         basis and is supported by
            the official accounting
            records.

Direct and overhead costs  Institute procedures to    12/31/96   AD/PS
included in the quarterly   ensure that all future
reports are reconciled to   financial information used
information in the      in the Quarterly Report is
accounting billing statement  reviewed by appropriate
and the official accounting  Headquarters and Finance
system and reviewed by   Center officials.
either headquarters or
Finance Center staff before
the quarterly reports are
provided to the Republic of
Indonesia and the
International Bank for
Reconstruction and
Development.

 
APPENDIX 1
Page 4 of 4

All program staff comply   Develop a joint internal   12/31/96   AD/PS
with the terms and     memorandum which: (1)         AD/FA
conditions of the technical  establishes written
assistance agreement    guidance for calculation of
pertaining to the calculation  administrative overhead
of administrative overhead  and; (2) provides a process
costs and preparation of the  that ensures that program
quarterly reports.      staff are informed of the
            terms and conditions of
            administrative overhead
            calculation and preparation
            of Quarterly Reports.

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APPENDIX 2

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
  Reference

1, 2, and 3

Status        Action Required

Resolved;       No further response to the
not implemented    Office of Inspector General
         is required. The
         recommendations will be
         referred to the Assistant
         Secretary for Policy,
         Management and Budget for
         tracking of implementation.

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Sending written documents to:             Calling:

Within the Continental United States

Outside the Continental United States

Caribbean Region

U.S. Department of the Interior         (703) 235-9221
Office of Inspector General
Eastern Division- Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

North Pacific Region

U.S. Department of the Interior         (700) 550-7428 or
Office of Inspector General           COMM 9-011-671-472-7279
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910