[Survey Report on Legal Services Costs Incurred by the Cherokee Nation of Oklahoma]
[From the U.S. Government Printing Office, www.gpo.gov]
Report No. 99-E-70
Title: Survey Report on Legal Services Costs Incurred by the Cherokee Nation
of Oklahoma
Date: October 29, 1998
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U.S. Department of the Interior
Office of Inspector General
SURVEY REPORT
LEGAL SERVICES COSTS
INCURRED BY THE
CHEROKEE NATION OF OKLAHOMA
REPORT NO. 99-E-70
OCTOBER 1998
C-SP-BIA-003-98-R
October 29, 1998
SURVEY REPORT
Memorandum
To: Assistant Secretary for Indian Affairs
From: Robert J. Williams
Assistant Inspector General for Audits
Subject: Survey Report on Legal Services Costs
Incurred by the Cherokee
Nation of Oklahoma (No. 99-E-70)
INTRODUCTION
This report presents the results of our survey of
legal services costs incurred by the Cherokee Nation
of Oklahoma. The objectives of the survey were to
(1) determine whether the Cherokee Nation acquired
and paid for legal services in accordance with
applicable laws, regulations, and policies and
(2) identify the source of funds used to pay for the
legal services. We conducted the survey in response
to a Congressional request.
BACKGROUND
In fiscal year 1996, the Cherokee Nation received
revenues of approximately $131 million, consisting of
$88 million primarily from Federal, state, and
private grant and contract sources and about
$43 million from the Nation's business operations.
Within the $88 million, the Nation received
approximately $64.5 million from the Federal
Government, including $8.6 million awarded by the
Department of the Interior under a self-governance
compact, of which the Nation expended approximately
$6.4 million. At the time of our audit, the Nation
had not prepared financial statements for fiscal
years 1997 and 1998; therefore, we were unable to
determine the funding sources and total dollar
amounts of receipts and expenditures for those years.
However, according to records provided by the Office
of Self Governance, Department of the Interior, the
Nation was awarded approximately $15 million under
its fiscal year 1997 annual funding agreement and has
received about $8.9 million under its fiscal year
1998 annual funding agreement as of September 3,
1998. The agreements were executed pursuant to the
Nation's Self-Governance Compact with the Department.
The 1994 amendments (Public Law 100-413) to the
Indian Self-Determination and Education Assistance
Act (Public Law 93-638) permanently established the
self-governance program for Indian tribes. Under
self-governance funding agreements, tribes are
authorized to plan, conduct, redesign, and administer
programs, services, functions, and activities that
meet the needs of the individual tribal communities,
including control over funding and decision making
for Federal programs. On October 1, 1990, the
Cherokee Nation entered into a compact agreement with
the Secretary of the Interior to participate in
self-governance and agreed to abide by all existing
Federal standards in carrying out the programs,
services, and functions under the self-governance
compact. Also, the Bureau of Indian Affairs, on
February 12, 1998, published draft rules and
regulations for tribal self-governance programs that
require the tribes to maintain management systems and
practices at least comparable to those in existence
when the tribe entered the self-governance program.
SCOPE OF SURVEY
Our survey was conducted in accordance with the
"Government Auditing Standards," issued by the
Comptroller General of the United States.
Accordingly, we included such tests of records and
other auditing procedures that were considered
necessary under the circumstances. To accomplish our
objectives, we obtained and reviewed applicable
criteria related to the procurement and payment of
legal services, reviewed and discussed financial
controls over these functions with Nation officials,
and selected and reviewed samples of legal services
payments and Federal program funds transfers.
Of 335 legal services transactions, totaling $1.3
million, recorded in the Nation's general ledger
system during the period of October 1995 through
February 1998, we judgmentally selected a sample of
89 (27 percent) transactions, totaling $1 million
(77 percent). We sampled legal services transactions
equal to or greater than $1,000 and all expenditures
identified for three legal services vendors. We also
judgmentally selected from159 Bureau program
interfund transfers, totaling $35.5 million, a sample
of 21 (13 percent) transfers, totaling $11.5 million
(32 percent), which varied in amounts from $63,000 to
$800,000. The interfund transfers were from special
revenue accounts (used to account for restricted
funds such as Bureau grants) to the Nation's general
operating fund and motor fuel tax accounts (used to
account for Nation revenues) and occurred during the
period of October 1996 through February 1998.
As part of our review, we evaluated the Nation's
system of internal controls over the (1) procurement
of and payment for legal services and (2) transfer of
Federal program funds from special revenue accounts
to the general fund and motor fuel tax accounts to
the extent we considered necessary. The internal
control weaknesses identified are discussed in the
Results of Survey section of this report. If
implemented, the recommendations should improve the
internal controls.
Our survey was performed from March 31 to September
3, 1998, and included visits to the Headquarters of
the Cherokee Nation, in Tahlequah, Oklahoma, and the
office of the Nation's independent accountant, in
Oklahoma City, Oklahoma, in April and May 1998.
PRIOR AUDIT COVERAGE
During the past 5 years, neither the Office of
Inspector General nor the General Accounting Office
has performed any audits that specifically addressed
the Cherokee Nation's procurement of and payment for
legal services.
However, on June 27, 1997, an independent accounting
firm issued the report entitled "Cherokee Nation
Single Audit Reports and Supplementary Schedules for
the Year Ended September 30, 1996." The report
stated that the Nation's financial management
information system was considered a material weakness
and was not capable of producing timely interim
and/or year-end financial information, which
significantly impacted Tribal management's ability to
prepare reliable financial reports and make informed
financial decisions. In addition, the report stated
that the Nation processed Self-Governance-related
procurement actions greater than $1,000 in a
noncompetitive manner and did not have current
general and cash management accounting policies and
procedures. Further, the report stated that
"significant uncertainty and disagreement exists
regarding interpretation and application of the
Nation's tribal budget approval and implementation
process, with the primary issue involving whether or
not budgeted expenditures are approved by the Tribal
Council at a global level, or at a more detailed
level such as by fund type, department, or specific
line item." The independent accounting firm
recommended that the Nation determine whether its new
accounting software[1] was appropriate for the
Nation, assess the proposed plan to complete the
implementation of the accounting software, designate
an internal full-time project manager to manage the
implementation project, and utilize an external
resource to monitor project implementation. In
addition, the independent accounting firm recommended
that the Nation (1) consistently follow policies
regarding competitive bidding and any grant or other
funding source requirements and (2) update and
maintain current accounting policies and procedures
to assist Nation personnel in the day-to-day use of
the new accounting system. Further, the independent
accounting firm recommended that the Nation develop
and embark on a specific strategy to address and
resolve the uncertainties and disagreements,
including approving amendments to existing laws that
would clarify the Nation's budgetary laws.
In addition, at the request of the Tribal Council, an
independent accounting firm issued, on September 30,
1997, the report entitled "Report on Applying
Agreed-Upon Procedures." The report stated that the
Nation (1) entered into contracts without any
requirement for prior or subsequent notification of
the Tribal Council; (2) had made payments for legal
services without having appropriate supporting
invoices, without staying within the terms of the
contract, and sometimes when no written contract had
been executed; (3) was unable to produce a
year-to-date trial balance report (a listing of
assets, liabilities, equity, revenues, and expenses
for financial statement preparation) for fiscal years
1996 or 1997; (4) recorded expenditures to Federal
programs that were not in compliance with Office of
Management and Budget Circular A-87, "Cost Principles
for State, Local, and Indian Tribal Governments";
(5) recorded expenditures without having an
established appropriation/budget code; (6) had not
established Federal program funds transfer
procedures; and (7) had not updated the Nation's
general accounting policies and procedures since
1985. The independent accounting firm recommended
that the Nation (1) develop a policy to require the
Executive Branch to present to the Tribal Council all
proposed contracts for concurrence prior to their
execution, (2) develop a policy to ensure that all
invoices are read before they are paid to determine
whether a contract has been put in place and that the
payment due was for agreed-to services and within
dollar limitations in accordance with the terms of
the contract, (3) determine the actions needed to
enable timely production of a current trial balance,
(4) develop policies and procedures to ensure
compliance with Federal and state requirements,
(5) clarify the role of the Tribal Council in
approving budgets, (6) establish a consistent means
of measuring compliance with established budgets and
perform regular budget versus actual expenditure
analyses for each program, and (7) develop an updated
policies and procedures manual and ensure that
internal controls are adequately developed and
implemented as soon as possible.
Based on the two prior audit reports, the Nation
instituted a number of actions to improve its
financial management. In an August 13, 1998,
memorandum to our office, the Nation's Executive
Director of Finance and Administration stated:
The Cherokee Nation Executive Branch and
the Cherokee Nation Legislative Branch are
strongly committed to strengthening and
maintaining an efficient, effective
financial system. Evidence of this
commitment is the development and
implementation of a Financial Improvement
Plan . . . and the appropriation of
$2,000,000 for the project. The Nation's
financial department and the contractor for
the project . . . have the project well
underway and expect successful completion.
The Financial Improvement Plan, not only
includes the complete and correct
installation of the American Fundware
Accounting system, correct organization of
97 data for audit and organization of 98
data (to date) and proper staffing of the
Accounting Department. Proper staffing and
a fully functioning Accounting System will
provide for efficient control, maintenance,
reconciliation and reporting of bank
accounts.
RESULTS OF SURVEY
We found that the Cherokee Nation of Oklahoma did not
acquire and pay for legal services in accordance with
applicable laws, regulations, and policies.
Specifically, the Nation incurred costs for legal
services without formal contracts, without adequate
support for costs billed, outside the purview of
contract terms and conditions (when contracts had
been prepared), and in excess of Tribal
Council-approved appropriations. We also found that
the Nation incorrectly used Federal funds from the
Department of the Interior to pay for litigation
against the Federal Government, transferred Federal
funds to the Nation's general operating fund and
motor fuel tax accounts without ensuring that the
Federal funds were needed to pay for expenditures
under the Federal programs, and inaccurately prepared
a Financial Status Report[2] before it was submitted
to the Bureau of Indian Affairs. However, we could
not determine the source of funds used to pay for all
legal services because when Federal funds were
transferred to the general operating fund, they were
commingled with the Nation's general funds and lost
their identity as Federal funds. The requirements
for the use of and the accounting for Nation and
Federal funds are contained in the Nation's Code and
implementing regulations and procedures, the Indian
Self-Determination Act Amendments of 1994, the annual
funding agreements, and Office of Management and
Budget circulars.[3] However, the Nation's Executive
officials had not developed and implemented an
adequate financial management information system to
ensure compliance with established regulations
regarding legal services, adequate identification of
Federal program expenditures and amounts owed, and
accuracy and completeness of Federal program
financial reports. As a result, the Nation (1) did
not have assurance that legal services incurred were
reasonable and necessary, (2) improperly charged
$88,000 to the Department of the Interior for legal
services, (3) transferred Federal funds of at least
$16.1 million to the general operating fund without
assurance that Federal program expenditures had
previously been incurred and were owed, and (4)
included inaccurate financial data in the Financial
Status Report submitted to the Bureau.
Legal Services Payments
We found that the Cherokee Nation incurred and paid
for legal services without contracts, without
adequate supporting documentation, outside of
contract terms and conditions, and in excess of
Tribal Council-approved appropriations. This
occurred because the Nation's Executive officials did
not have effective internal controls to ensure
compliance with established regulations for incurring
and paying legal services, as described in the
examples that follow.
Payments Without Contracts. The Nation paid 35 legal
services invoices, totaling $791,000, without having
contracts. The Nation's Employment Policy Manual
(Chapter II, Subsection H) requires that (1) a draft
(legal services) contract accompanied by a written
justification be prepared before contractor
(attorney) services are acquired and (2) all
contractor agreements be approved in advance by the
appropriate Executive Director and Contract Manager.
For Federal funds, the Code of Federal Regulations
(43 CFR 12.60(b)(6)) requires that accounting records
(including payment transactions) be supported by
source documentation, such as contract award
documents. However, in one instance noted, the
Nation paid 14 invoices, totaling $622,000, for
various legal services provided by one legal firm
from September 4, 1996 through July 31, 1997, for
which there was no contract. According to the
invoices, the legal services related to (1) the
Nation's Delaware and Arkansas Riverbed
litigations;[4] (2) navigational servitude;
(3) compound interest recovery from the Government;
(4) meetings with Congressional, Department of the
Interior, and Department of Labor officials; and
(5) review of the Cherokee Nation Marshal's search
warrant.
For these 14 invoices, the Nation did provide us with
a September 5, 1996, letter from the firm which
stated "The District of Columbia Code of Professional
Responsibility requires us to put in writing our
billing practices regarding the work we will be doing
for the Cherokee Nation." In that regard, the letter
stated that the firm would issue bills monthly,
listed the billing rates for three representatives of
the firm, and specified that the firm would also bill
for expenses. However, we found that the letter did
not identify the scope of work, the period of
performance, or the cost of services and was not
signed by a representative of the Nation. Regarding
payments of six of these invoices, the Nation's
former Controller, in a September 26, 1997, letter to
the former Secretary/Treasurer, stated:
I need your written authorization to
release the checks since the
documentation is inadequate. In
addition, the request for production of
documents from KPMG [an independent
public accounting firm] covered this law
firm. The Cherokee Nation has indicated
to the Tribal Council that no contract
was available for this firm.
On September 15, 1997, the Nation's Principal Chief
signed a contract which stated, in part, "This
contract, which memorializes the arrangement under
which [the firm] previously has performed services
for the Cherokee Nation, may be terminated at will by
either party." The independent public accounting
firm issued its "Report on Applying Agree-Upon
Procedures" on September 30, 1997, which reported
that the Nation did not provide a contract for
payments to this firm.
We believe that the Nation should not have paid
invoices without having a contract that specified the
services contracted for.
Payments Without Adequate Supporting Documentation.
The Nation paid 26 invoices for legal services
totaling $269,000 that did not have adequate
information to verify the specific nature of the
legal services received, the hours billed, and the
hourly rates charged. For example:
The Nation made a $27,000 payment on a legal services
invoice that did not provide the number of hours
worked by the legal firm in relation to the services
provided.
-The Nation made a $2,800 payment on a legal services
invoice that did not provide the number of hours
worked or the hourly billing rate charged by the
legal firm in relation to the services provided.
The Nation's "Operational Policies," No. 86-180,
states that documentation for check requests are to
consist of original invoices, including an itemized
description and price of goods or services invoiced
and a total invoice amount. In addition, the
"Policies" states that "non-itemized statements do
not constitute proper invoices." Further, sound
business practices dictate that vendor invoices be
sufficiently detailed to allow for a review for
appropriateness, accuracy, and completeness to ensure
that they are in compliance with the underlying
agreement authorizing the expenditure or disbursement
of funds. A Nation's accounts payable official
stated, "It is not the Nation's normal procedure to
pay invoices which lack adequate documentation and/or
detail; however, invoices that are signed [approved]
by Executive Office officials are automatically
processed for payment [by accounts payable], without
any further questions."
Payments Outside Contract Terms and Conditions. The
Nation paid 15 invoices for legal services totaling
$43,932 that were in excess of the agreed-to billing
rates. The Code of Federal Regulations (43 CFR 12.76
(b)(2)) requires recipients of Federal assistance to
ensure that their vendors perform in accordance with
the terms, conditions, and specifications of their
agreements. However, we found the following:
For 14 invoices, the Nation incurred costs of $14,775
that were in excess of billing rates for legal
services. In this instance, the billed hourly rate
of $325 was $25 per hour more than the contract rate
of $300. A Nation official stated that the payments
were made "because the billing documents had been
approved by various Executive officials." In its
October 2, 1998, response to the draft audit report,
the Nation included a November 26, 1997, letter from
the firm which stated:
On September 15, 1997, at the Nation's
request, we entered into a formal
contract with the Nation as to our
representation. This contract, which was
intended to memorialize the billing
arrangement established by the retainer
letter . . . listed the rates we would
charge. By inadvertence, my rate was
listed as $300 instead of $325. . . . The
only bills for services rendered after
signing the contract were bills sent you
on October 27, 1997, for September 1997.
These bills have not yet been paid. The
last bills paid were for services
rendered through July 1997. Although
listing my rate as $300 in the September
15 contract was a mistake, we will honor
that rate at least until the end of the
year because it was our error. Thus the
September bills will be revised
accordingly.
We believe that the Nation should have ensured that
the rate billed was in accordance with the rate
specified in the contract.
For one invoice, the Nation incurred costs of $29,158
that were in excess of legal services costs billed by
the Nation's Office of General Counsel. We found
that the payment should not have been made because
the attorney/payee had not fulfilled the retainer
agreement's minimum days worked clause. A Nation
accounts payable official stated that the payment was
made "because the billing document had been approved
by the former Chief of Staff." This example was also
addressed in the independent accounting firm's
"Report on Applying Agreed-Upon Procedures" (see
Prior Audit Coverage).
Legal Services in Excess of Appropriations. The Nation
incurred legal services costs of $491,000 in excess
of Tribal Council-approved appropriations. The
Cherokee Nation Code Annotated (Title 62, Chapter 4,
"Appropriations") requires that the (1) Executive and
Finance Committee, upon direction of the
Secretary-Treasurer and with advice from the
Controller, propose amendments to the annual
appropriations law based on material changes in real
or estimated expenditures that affect the total
amount budgeted and (2) amendments be presented to
the full Tribal Council for consideration and
passage. For example:
The Tribal Council appropriated a total of $300,000
for the Nation's Delaware Separation litigation.
However, we found that costs of $539,000 had been
charged against the appropriation and that the excess
legal services costs of $239,000 had been incurred
without Tribal Council approval. In addition, we
determined that $272,000 of the $539,000 was incurred
for legal services unrelated to the Delaware
Separation litigation, such as issues related to
Department of Labor hearings, the Arkansas Riverbed
litigation, the establishment of the Arkansas River
Port as a means to create Cherokee Nation business
income, and the Marshal's search warrant.
The Tribal Council appropriated a total of $67,000
for the Law and Justice Department's general
($33,500) and indirect ($33,500) legal services costs
categories. However, we found that general costs of
$146,135 and indirect costs of $84,412 had been
charged to the Department's costs categories. As a
result, the general costs exceeded the Tribal
Council's appropriation by $112,635, and indirect
costs exceeded appropriations by $50,912. In
addition, we determined that the Law and Justice
Department exceeded its overall appropriation for all
costs categories by $117,000.
Because Nation Executive officials did not comply
with the tribal appropriation requirements, cost
appropriations were exceeded. For example, in a
memorandum dated November 7, 1996, a Nation's Law and
Justice Department attorney stated, "I cannot sign
this check request (for payment), nor can I recommend
approval of the check request by anyone else,
because, in my opinion it is not covered by the
Continuing Resolution authorizing funding at 100% of
the fiscal year 1996 budget (funding) level." The
memorandum was in response to the Chief Financial
Officer's directive to process a check request for
payment of Delaware separation litigation legal
services. In addition, the attorney stated, "Perhaps
we should propose a legislative act to appropriate
funds for the Delaware litigation and then present it
to the full Council." However, the Chief Financial
Officer and the Principal Chief approved the check
request without the attorney's approval, and the
check request was processed for payment on
December 20, 1996. Further, we found that
differences existed between the Executive office and
the Tribal Council as to whether budgeted
expenditures are approved at the program or the line
item level. For example, Executive officials stated,
"It has never been the practice for the Tribal
Council to approve budgets at the line item level."
However, a Tribal Council official stated, "When the
Tribal Council approves the budget, the Council is
approving each budgeted line item and program
managers/personnel are responsible for managing the
programs within the approved line item amount." This
issue was also addressed in the June 1997 report
issued by an independent accounting firm (see Prior
Audit Coverage).
Program Funds Used for Litigation Against the Federal
Government. The Cherokee Nation improperly charged
the Department of the Interior for legal services of
$88,000 related to the Nation's Arkansas Riverbed
litigation against the Federal Government. The legal
services had not been provided for in the Annual
Funding Agreement (No. OSGT905) for Self-Governance,
dated July 14, 1995, or included in the Nation's
Tribal Council-approved budget for expenditure from
Self-Governance Oversight Program funds provided by
the Bureau of Indian Affairs. In addition, we found
that the Nation incurred the legal services without a
contract. Office of Management and Budget Circular
A-87 states that Federal program funds cannot be used
for prosecution of claims against the Federal
Government. The Nation's Chief Financial Officer
stated that even though the Arkansas Riverbed
litigation legal services "had not been previously
included in the Nation's Self-Governance Oversight
program budget and had been incurred" prior to her
tenure, she "decided to charge the costs to the
self-governance program because it was necessary to
find funds to pay for the legal services."
Transfers of Federal Program Funds
The Code of Federal Regulations (43 CFR 12.60(a)(2)
and (b)(3)) requires that the fiscal control and
accounting procedures of a tribal organization be
sufficient to (1) permit the tracing of Federal
program funds to a level of expenditure adequate to
establish that they have not been used in violation
of any restrictions or prohibitions contained in any
statute that applies to the Federal assistance and
(2) ensure that funds are used solely for authorized
purposes. In addition, a February 4, 1998,
memorandum from the Associate Solicitor, Division of
Indian Affairs, to the Acting Inspector General
stated, "Federal funds provided under Tribal
Self-governance compacts and annual funding
agreements are only available for programs previously
administered by the Department of the Interior or for
programs specifically authorized by Federal statute
(not tribal programs)." However, we found that the
Nation processed all payments through its general
operating fund, including payments for Federal
program fund expenditures. We also determined that
the Nation's accounting data resided on two
accounting systems because accounting data needed for
the creation of a receivable, or due from operations,
was on the old system and the data for a payable, or
due to operations, was on the new system. We also
found that Federal program funds were transferred to
the Nation's general operating fund and motor fuel
tax accounts without assurance that Federal program
expenditures had been incurred and were owed.
Transfers of Federal funds to the general operating
fund should be made to reimburse the general fund for
expenditures for Federal programs. These
deficiencies occurred because the Nation (1) had not
developed and implemented an adequate financial
management information system to ensure that
transfers occurred only when expenditures were
incurred and owed by Federal programs and (2) used
Federal program funds to cover the Nation's general
operating fund cash deficit position. As a result,
we identified 10 transfers of Departmental program
funds, totaling $5.6 million, and 7 transfers of
other Federal program funds, totaling $10.5 million,
that were not fully supported by Federal program
expenditures. The 10 transfers of Departmental
program funds occurred at a time when the Nation's
general operating fund was in a deficit cash
position. For example:
On March 17, 1997, the Nation's general operating
fund showed a $1.2 million cash deficit. A Nation
accounting official stated, "The former Accounting
Director directed that Department of the Interior
program funds totaling $500,000 and Department of
Health and Human Services program funds totaling
$500,000 be transferred to offset the general
operating fund account's deficit cash position."
On October 9, 1997, the Nation's Chief Financial
Officer notified the Chairman, Tribal Council
Executive and Finance, that the Nation had a
$2.3 million general operating fund cash deficit and
said that it occurred because of late reimbursement
of project costs by the Bureau of Indian Affairs.
The Nation received the $2.3 million from the Bureau
on October 6, 1997, and on October 9, 1997,
transferred that amount to the general operating fund
account. However, at the time of the transfer, the
Nation's financial management information system
showed that program expenditures of only
$1.45 million had been incurred and were owed, which
resulted in the transfer of Federal program funds of
$850,000 in excess of supported expenditures.
On November 19, 1997, the Nation received program
funds of $1,064,837 from the Bureau of Indian
Affairs. On November 21, 1997, the Nation's former
Controller directed that this amount be transferred
to the Nation's motor fuel tax account. However, at
the time of the transfer, the Nation's financial
management information system showed that program
expenditures of only $256,351 had been incurred and
were owed, which resulted in the transfer of Federal
program funds of $808,485 in excess of supported
expenditures.
During our review of the Nation's reconciliations of
the Federal program's expenditures and amounts owed,
we found that in a May 12, 1997, reconciliation,
Indian Health Services program funds of $841,000 had
been transferred in excess of expenditures incurred
and owed and that in an August 8, 1997,
reconciliation, Indian Health Services funds of
$9 million and Bureau of Indian Affairs funds of
$937,000 had been transferred in excess of
expenditures incurred and owed.
Federal Status and Cash Report
The Code of Federal Regulations (43 CFR 12.60(b)(1))
requires recipients of Federal assistance to maintain
accounting systems sufficient to permit the
preparation of accurate, current, and complete
financial reports. According to a Nation official,
the Nation annually submits to the Bureau of Indian
Affairs a financial status report for its Tribal
transportation planning contract. Transportation
funds are provided to the Nation as part of the
self-governance compact. The report provides data on
receipts and expenditures and on cash, receivable,
and payable balances. However, we found that the
Nation did not correctly prepare and adequately
review the report it submitted to the Bureau on
March 6, 1998. Specifically, the Nation reported (1)
a deficit cash balance of $1.1 million that was not
accurate and (2) an accounts receivable of $987,289
as an accounts payable. According to a Nation
official, the errors occurred because accounting
transactions were inaccurately recorded in the
financial management information system, financial
information that was 3 1/2 months old (November 1997)
was reported for March 1998, and personnel who
prepared the report were not familiar with the
reporting process.
Financial Management Actions
We recognize that the Nation is taking actions to
resolve its previously identified accounting
deficiencies and are aware that it has contracted
with an independent public accounting firm to
reconstruct the Nation's financial accounting records
for fiscal year 1997 to allow the preparation of
required auditable financial statements. However, we
found that many of the conditions identified in
audits conducted by the two independent accounting
firms (see Prior Audit Coverage section) still
existed. Specifically, the Nation had not fully
implemented a financial management information system
that (1) provides accurate, current, and complete
reporting and disclosure of financial activities;
(2) maintains records which adequately identify the
source and application of funds provided for
activities; (3) maintains effective control and
accountability for all Federal program funds; and
(4) compares actual expenditures with budgeted
amounts for each program. (The August 13 memorandum
to our office stated that the Financial Management
Improvement Plan is "approximately 80% complete.")
In addition, we determined that certain Nation
officials did not comply with established budget,
procurement, and payment procedures.
The independent public accounting firm has been
contracted to perform various procedures outlined in
a Financial Management Improvement Plan (which
includes measurable performance dates and responsible
officials) dated January 15, 1998, to allow the
implementation of a single accounting system that
will produce timely and accurate financial accounting
and management reports. We believe that until the
plan is fully implemented and a new accounting system
which meets all applicable requirements is operating
as designed, the Office of Self-Governance should
take appropriate actions to ensure that Department of
the Interior funds are used only for authorized
purposes. In addition, we believe that the Nation's
Executive officials need to foster an environment
that stresses the importance of following internal
controls to help ensure that controls are operating
as designed and should hold individuals accountable
who do not comply with established controls.
Recommendations
We recommend that the Assistant Secretary
for Indian Affairs ensure that the Director
of the Office of Self-Governance:
1. Requires the Cherokee Nation to provide assurance
that policies and procedures have been implemented to
ensure that legal services expenditures are not
incurred or paid without having an approved contract,
are not paid without adequate supporting
documentation, are paid within the terms of
established contracts, and do not exceed Tribal
Council-approved appropriations and that Federal
program funds are used only for supported
expenditures incurred in accordance with approved
funding agreements or as otherwise authorized by
legislation.
2. Requires the Nation to submit audited financial
statements for fiscal year 1997 which accurately
present the source and use of all Federal funds
received by the Nation during that year.
3. Requires the Nation to submit interim financial
reports which account for the use (including amounts
held in qualifying deposits or investments) of all
Self-Governance funds received from the Department of
the Interior in fiscal year 1998.
4. Requires the Nation to repay to the Department of
the Interior any Departmental funds spent for
purposes other than those authorized by the terms of
the applicable funding agreements.
5. Requires the Nation to present a report from its
auditing firm stating that a new accounting system,
meeting all applicable requirements for control of
Federal funds, has been installed, is functioning
properly, and produces accurate and timely financial
status reports and that the Nation has implemented an
adequate system of internal controls.
6. Considers deferring action on the fiscal year 1999
annual funding agreement with the Nation or taking
other actions to ensure that Departmental funds are
used only for authorized purposes until the Nation
complies with Recommendations 1 through 5.
Assistant Secretary for Indian Affairs Response and
Office of Inspector General Reply
The September 30, 1998, response (Appendix 2) to the
draft report from the Assistant Secretary for Indian
Affairs described actions taken by the Office of
Self-Governance and by the Nation to address the
report's six recommendations. Based on the response,
we consider Recommendation 1 resolved and implemented
and Recommendations 2 through 6 resolved but not
implemented. Accordingly, the unimplemented
recommendations will be referred to the Assistant
Secretary for Policy Management and Budget for
tracking of implementation (see Appendix 4).
Cherokee Nation Response and Office of
Inspector General Reply
On October 2, 1998, the Principal Chief of the
Cherokee Nation submitted a response (Appendix 3) to
the draft audit report that described actions taken
by the Nation to address the report's findings and
recommendations, commented on the conditions
described in the report, and included separate
remarks from three members of the Tribal Council of
the Cherokee Nation.
Because five of the report's six recommendations will
be resolved through terms included in the Nation's
self-governance funding agreement for fiscal year
1999, we included only the response from the
Principal Chief of the Cherokee Nation in this report
because the Principal Chief is "authorized to apply
for any grant to facilitate a self-governance funding
agreement" by the Tribal Council (Resolution No. 21-
90). As such, we did not include the individual
comments from three Tribal Council members that were
provided with the Principal Chief's response or the
separate comments from two other Tribal Council
members that were sent directly to our office. The
Nation's comments and our replies are presented in
the paragraphs that follow.
Legal Services Payments
Nation Response. The Nation stated that it "developed
and implemented an Interim Policy and Procedure for
Attorney Contracts on June 5, 1998." According to
the Nation, the Policy and Procedures provide for
documenting requests for attorney services,
establishing budgets, obtaining required approvals,
justifying attorney selection, and managing contract
performance and payments and state:
Minimum items to be addressed in the
contract - Parties' names/addresses;
billable rates; length of duration for
the contract; total amount of contract
not to exceed; Contact Person for the
Nation; scope of work and duties to be
performed; reports to be submitted to the
Nation; detailed invoices required for
payment; Assurances of Good Professional
Standing; Professional Liability
Insurance; amendment clause; termination
or cancellation provision; any other
standard clauses the Law & Justice
Department may recommend; and signature
of both parties.
Office of Inspector General Reply. We believe that
implementation of the Policy and Procedures by the
Nation should help ensure that attorney contracts are
adequately justified, properly approved and awarded,
and adequately administered.
Nation Response. Regarding the 14 legal services
invoices of $622,000 which our report (page 6) states
were paid without a contract, the Nation stated that
it "did have a letter of engagement . . . under which
the firm was paid for their services until a contract
was executed." Regarding our finding (page 7) that
the Nation paid $14,775 in excess of agreed- to
hourly rates for these same 14 invoices, the Nation
stated:
A letter from the subject legal firm . .
. clarifies that the rate appearing in
the contract should have been $325 per
hour, not $300 per hour, and that it was
billed at $325 per hour by the firm. The
letter goes further to state that the
$300 per hour rate was included in the
contract by mistake. The firm agreed in
this letter that the rate of $300 would
be honored by their firm, since it was a
mistake, and that future billing would be
adjusted as a result. The letter also
describes significant reductions in fees
made by the firm over the term of the
contract.
Office of Inspector General Reply. During our audit,
we reviewed a copy of the September 5, 1996, letter
of engagement. The letter presents the billing rates
for three representatives of the firm and states that
the representatives also will bill for their
expenses. However, the letter does not identify the
services to be performed or the deliverables, the
period of performance, or the total amount to be paid
by the Nation. In addition, the letter was not
signed by a representative of the Nation. Lacking
this information, the letter of engagement does not
meet the Nation's requirements (Chapter II,
Subsection H, of the Employment Policy Manual) for
contracting for attorney services. The Nation
established a formal contract for these services on
September 15, 1997, after the independent accounting
firm conducting the agreed-upon procedures review
(see Prior Audit Coverage) requested a copy of the
contract. The contract was made retroactive to
September 1996.
Regarding the payments in excess of billing rates, we
compared the billing rate in the invoices with the
billing rate in the contract and noted that the rate
in the invoices was $25 per hour higher than the rate
in the contract. Based on the hours billed, we
identified payments of $14,775 in excess of contract
billing rates. According to a November 26, 1997,
letter from the legal firm cited in the Nation's
response, bills "will be revised" on the basis of the
$300 rate.
We used these and other examples in the report to
demonstrate that the Nation did not comply with its
requirements for the award and payment of attorney
contracts. By not complying with its requirements,
the Nation did not have assurance that its purchases
were economical and efficient and adequately
justified and approved. However, based on the
Nation's response, we have modified our report to
include further information about the contracting for
and payment of these 14 invoices.
Nation Response. The Nation stated that for the
questioned costs of $88,000, it "agrees to set aside
the funding from the General Fund , adjust the
expenditure to the General Fund and refund the amount
to the Cherokee DOI [Department of the Interior]
Self-Governance fund." The Nation also stated that a
representative from its Law & Justice Department
would contact the Office of Inspector General to
"conduct the requisite research to enable the Nation
to ascertain whether there is concurrence with that
determination."
Office of Inspector General Reply. On September 25,
1998, we provided copies of Cherokee Nation Request
for Checks and related documents pertaining to the
$88,000 to an attorney with the Nation's Law &
Justice Department.
Transfers of Federal Program Funds
Nation Response. Regarding the transfers of Federal
Program Funds, the Nation stated that it "concurs
with the transfers and the amounts listed for each of
the transactions on page 9." The Nation further
stated:
However, the OIG [Office of Inspector
General] Draft Survey Report is not
reflective of supplemental information
provided by the Nation on July 24, 1998
addressing each of these transactions.
While we acknowledge that in some cases
the amount transferred did not exactly
match the amount of expenditures
attributable to the DOI [Department of
the Interior] self-governance compact, in
all cases the amounts were reconciled and
subsequent transfers to the General Fund
were adjusted as necessary so that the
total reimbursement for the year equal
the amount of DOI-eligible expenditures.
The Nation also stated that it was "not an unusual
situation" for each of the transfers to occur when
the Nation's general fund was in a deficit cash
situation. In that regard, the Nation said that its
Director of Accounting explained that "program draw
downs, because they are a reimbursement to the
general fund, were constantly deposited into an
account that is void of cash." The Nation also stated
that it "no longer incurs a deficit in the general
fund."
Office of Inspector General Reply. As noted by the
Nation, our report accurately represents the
transfers of Federal program funds to the general
fund at the time of our review in March 1998. In
addition, because the Nation stated in its
supplemental information that "poor integrity of
financial information" will exist within its
financial system until its financial management
improvement project is completed, which includes the
production of financial statements for fiscal year
1997 and completion of the 1997 single audit, we did
not make any adjustments to our report based on the
supplemental information. However, we did review the
supplemental information. While we did not include
all of this supplemental information in this report,
we have excerpted pertinent information, which we
have responded to as follows:
- Regarding a transfer that resulted in a $539,821
overpayment to the general fund (not used as an
example in the report), the Nation stated, "There
were other programs in the compact that were
overpaid, but they were disregarded, because the
report used to calculate the transfer did not include
program fringe expenditures of $82,596.75." The
Nation also stated that during fiscal year 1997,
fringe benefits were not recorded as a receivable to
the general fund. Therefore, according to the
response, the accounting records did not reflect at
the time of the transfer that an additional $82,596
had been incurred under the compact. However, we
noted that even if the $82,596 had been properly
recorded, the general fund would have been overpaid
$457,225 ($539,821 minus $82,596).
- The Nation stated, "To date, some $1.8 million in
fringe expense has not been reimbursed to the General
fund from DOI [Department of the Interior] sponsored
programs." Based on our review of the documentation,
we concluded that only $600,000 is applicable to the
Department of the Interior and that the remaining
$1.2 million is applicable to programs funded by the
Department of Health and Human Services.
- Regarding other overpayments to the general fund, the
Nation stated:
Our research shows no apparent reason for
the amount of the transfers listed above
[six transfers totaling approximately
$3.2 million]. We prepared a graphic
representation of all transfers for the
period. This graph shows that subsequent
transfers, after each of those listed,
were adjusted for the overpayments.
As identified in the response, the unsupported
transfers indicate that Federal funds were used to
supplement general fund operations.
- Regarding a transfer to the general fund of
$2,309,240 which we reported resulted in an
overpayment to the general fund of $850,000, the
Nation stated, "The entitlement was the payment for
an invoice to BIA [Bureau of Indian Affairs] for the
Sequoyah High School Construction activity."
However, we noted that the Nation did not
substantiate that project costs of more that $1.45
million had been incurred at the time the $2.3
million was transferred, which resulted in the
reported $850,000 overpayment.
- Regarding a transfer to the general fund of
$1,064,837 which we reported resulted in an
overpayment to the general fund of $809,485, the
Nation stated:
The transfer was payment for an invoice
to BIA [Bureau of Indian Affairs] for
the Roads activity. Again the transfer
was the result of a decision made with no
apparent knowledge of the interfund
payables/receivables balance. In was
determined, incorrectly, that the
transaction was made without affecting
those balances. Further review shows
that the transaction was done in
accordance with established procedure.
We provide in Attachment E that the
balance was properly affected but on the
wrong cost center. A copy of the
correcting entry . . . corrects this
discrepancy.
Notwithstanding the adjustment to record the proper
cost center, we believe that the statement "the
transaction was done in accordance with established
procedures" but resulted in a charge to the wrong
cost center indicates a weakness in the Nation's
accounting system during fiscal year 1997.
Regarding the general fund deficit, the Nation
stated:
Throughout the history of the Cherokee
Nation, the General Operating Fund has
sustained enterprise fund losses, program
cost overruns, unreimbursed costs and
unbudgeted expenditures with inadequate
cash resources. The result is that no
matter what the policy, program drawdowns
are constantly deposited into an account
that is void of cash.
We do not dispute the statements on the condition of
the general fund. However, we believe that the
deficits in the general fund resulted in the transfer
and use of Federal funds for general fund/non-
Federal activities. Regarding the proper use of
Federal funds advanced to tribal organizations under
the provisions of the Indian Self-Determination and
Education Assistance Act, the Associate Solicitors
for the Division of General Law and for the Division
of Indian Law, U.S. Department of the Interior, on
February 4, 1998, stated:
The "ISDEAA" [Indian Self-Determination
and Education Assistance Act] authorizes
the expenditure of Federal funds
transferred under ISDEAA contracts and
annual funding agreements only for the
Federal programs covered by those
contracts and annual funding agreements,
and not for other tribal programs that
are not authorized by the ISDEAA. . . .
Accordingly, such Federal funds should
not be transferred to tribal accounts,
lent to such tribal accounts, or expended
for programs not authorized by the above
mentioned laws.
Financial Management System
Nation Response. The Nation stated that it is
"currently engaged in or has recently completed
several initiatives to strengthen its financial
management system." According to the response, these
initiatives consist of implementing the following: a
financial improvement plan, a comprehensive staffing
plan, its internal accounting systems and cash flow
procedures, and a business planning process.
Office of Inspector General Reply. Our report (page
10) recognizes the financial improvement plan and we
believe that completion of all planned activities
will improve the Nation's financial management.
Recommendations
Nation Response. The Nation stated that it had
addressed Recommendation 1 by issuing an interim
policy and procedure on the procurement of attorney
contracts and Recommendations 2 through 6 through
"the Self-Governance Annual Funding Agreement (AFA)
negotiated between the Cherokee Nation and the
Department of the Interior for Fiscal Year 1999.
Office of Inspector General Reply. The status of the
recommendations is in Appendix 4.
Since the report's recommendations are considered
resolved, no further response to the Office of
Inspector General is required (see Appendix 4).
The legislation, as amended, creating the Office of
Inspector General requires semiannual reporting to
the Congress on all audit reports issued, actions
taken to implement audit recommendations, and
identification of each significant recommendation on
which corrective action has not been taken.
We appreciate the assistance of Office of Self-
Governance and Cherokee Nation personnel in the
conduct of our audit.
FOOT NOTES**
[1]:In 1994, the Cherokee Nation acquired a new
financial accounting software package to update its
accounting system and related processes to ensure
the timely and accurate preparation of financial
statements and management reports.
However, as of January 15, 1998, the Nation's
independent accounting firm stated that the new software
package was "still not functional" and that "there may even be
concerns as to the fitness" of the new software package to
meet the Nation's financial and accounting needs.
[2]:The Code of Federal Regulations (43 CFR 12.952)
specifies the forms that are authorized for obtaining financial
information from recipients, including the Financial Status Report.
[3]:The Nation's Manual "Administrative Policies
of the Executive Branch" (Chapter 7, Section B) states that when
using Federal funds, the Nation is to follow Office of Management and
Budget Circular A-102, "Uniform Administrative Requirements for
Grants-in-Aid to State and Local Governments" (codified in the Code of Federal
Regulations (43 CFR 12)), Office of Management and Budget Circular
A-87, and any subsequent revisions to these circulars.
[4]: The Cherokee Nation is involved in at least two lawsuits (Arkansas
Riverbed and Delaware Tribe) against the Federal Government. The
Arkansas Riverbed suit involves disputed ownership of the Riverbed, and
the Delaware Tribe suit involves the Cherokee Nation's opposition to
Bureau of Indian Affairs approval of the Delaware Tribe's separation
from the Cherokee Nation.
APPEND
IX 1
CLASSIFICATION OF MONETARY AMOUNTS
---------------------------------------------
Finding Questioned
Costs
---------------------------------------------
Program Funds Used for $88,000
Litigation
---------------------------------------------
APPEND
IX 4
STATUS OF AUDIT REPORT RECOMMENDATIONS
----------------------------------------------------
----
Finding/
Recommendation
Reference Status Action Required
----------------------------------------------------
----
1 Implemented. No further action is
required.
----------------------------------------------------
----
2, 3, 4, Resolved; No further response to the
5, and 6 not Office of Inspector
General is
implemented. required. The
recommendations
will be referred to the
Assistant Secretary for
Policy, Management and
Budget
for tracking of
implementation.
----------------------------------------------------
----
ILLEGAL OR WASTEFUL ACTIVITIES SHOULD BE REPORTED TO THE OFFICE
OF
INSPECTOR GENERAL BY:
Sending written documents to:
Within the Continental United States
U.S. Department of the Interior
Office of Inspector General
1849 C Street,N.W.
Mail Stop 5341
Washington, D.C. 20240
Calling:
Our 24 hour
Telephone HOTLINE
1-800-424-5081 or
(202) 208-5300
TDD for hearing impaired
(202) 208-2420 or
1-800-354-0996
Outside the Continental United States
Caribbean Region
U.S. Department of the Interior
Office of Inspector General
Eastern Division- Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209
Calling:
(703) 235-9221
North Pacific Region
U.S. Department of the Interior
Office of Inspector General
North Pacific Region
238 Archbishop F.C. F'lores Street
Suite 807, PDN Building
Agana, Guam 96910
Calling:
(700) 550-7428 or
COMM 9-011-671-472-7279