[Audit Report on the Acquisition and Control of Computers, Bureau of Internal Revenue, Government of the Virgin Islands]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 99-i-400

Title: Audit Report on the Acquisition and Control of Computers,
       Bureau of Internal Revenue, Government of the Virgin Islands

Date:  March 31, 1999



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





AUDIT REPORT


ACQUISITION AND CONTROL OF COMPUTERS,
BUREAU OF INTERNAL REVENUE,
GOVERNMENT OF THE VIRGIN ISLANDS

REPORT NO. 99-I-400

MARCH 1999






MEMORANDUM

             TO:  The Secretary

           FROM:  Robert J. Williams
                  Acting Inspector General

SUBJECT SUMMARY: Final Audit Report - "Acquisition and Control
                 of Computers, Bureau of Internal Revenue,
                 Government of the Virgin Islands" (No. 99-i-400)

Attached for your information is a copy of the subject final
audit report.  The objective of the review was to determine
whether (1) funds provided for the purchase of computers were
expended in accordance with grant requirements and (2) computers
were properly controlled and accounted for.

We found that the Bureau of Internal Revenue did not have
adequate control over the use of grant funds and the computers
purchased with such funds.  Specifically, the Bureau included
regular operating expenses, such as purchases for bulk airline
tickets for interisland travel and computer printer and copy
paper, as expenditures claimed against the Federal grants awarded
by the Department of the Interior.  In addition, the Bureau's St.
Thomas branch did not update its October 1996 property inventory
records to include computer equipment purchased with the Federal
grant funds in April and May 1997.  These deficiencies occurred
because (1) Bureau officials did not verify that operating
expenses certified for payment were allowable in accordance with
the terms and conditions of the grants and (2) the Bureau had not
assigned the responsibility for maintaining property control
records or performing periodic physical inventories of computer
equipment to specific employees.  As a result, we questioned
costs of $51,005 claimed against the Federal grants, and we were
unable to locate four computer processors and six monitors valued
at about $7,900.

Based on the response to the report's six recommendations from
the Governor of the Virgin Islands, we considered all of the
recommendations resolved but not implemented.

If you have any questions concerning this matter, please contact
me at (202) 208-4252.


Attachment






March, 1999                                     V-IN-VIS-005-97-R


AUDIT REPORT

          Honorable Charles W. Turnbull
          Governor of the Virgin Islands
          No. 21 Kongens Gade
          Charlotte Amalie, Virgin Islands 00802

Subject:  Audit Report on the Acquisition and
          Control of Computers, Bureau of Internal Revenue,
          Government of the Virgin Islands (No. 99-i-400)


Dear Governor Turnbull:

This report presents the results of our audit of the acquisition
and control of computers at the Bureau of Internal Revenue,
Government of the Virgin Islands.  The objective of the review
was to determine whether (1) funds provided for the purchase of
computers were expended in accordance with grant requirements and
(2) computers were properly controlled and accounted for.

BACKGROUND

During the period of August 1995 to August 1996, the Bureau of
Internal Revenue received two grant awards, totaling about $1.4
million, from the U.S. Department of the Interior's Office of
Insular Affairs to improve revenue collections at the Bureau and
increase data storage capacity and computer processing
capabilities.  To accomplish these purposes, the Bureau purchased
and installed a new mainframe computer, 95 computer processors
and monitors, and associated hardware and software to develop a
local area network.  As of December 1998, the Bureau had spent
all but $38,000 of the Federal grant funds.

In September 1998, a representative from the company that
provided a maintenance service agreement for some of the computer
equipment[1] conducted a physical inventory of the equipment to
verify that items selected by the Bureau for inclusion in the
maintenance service agreement were in acceptable working
condition.  However, the company representative was only able to
locate about one-half of the computer items that were to be
included in the maintenance service agreement.  Because of the
deficiencies identified by this physical inventory and the lack
of a timely resolution by the Bureau's Chief of Computer
Operations to locate the missing computer equipment, the Bureau's
Director requested that the Office of Inspector General conduct a
limited scope audit of computer equipment purchases.

SCOPE OF AUDIT

The scope of our audit included a review of the two Notifications
of Grant Award and supporting documents for expenditures claimed
against the two grant awards, with particular emphasis on
purchases from two vendors that supplied the 95 computer
processors and monitors to the Bureau in April and May 1997.  We
expanded the scope of our review to include two additional
purchase orders, initiated in June 1995, for 19 computer
processors and monitors because these computers were of the model
and type that the maintenance service representative was unable
to locate.  In addition, we conducted a physical inventory of the
computer equipment at all Bureau offices.  The review was
conducted during December 1998 at the Bureau's St. Thomas and St.
Croix branches.

Our review 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 audit objective.

Our review also included an evaluation of internal controls to
the extent we considered necessary to accomplish the audit
objective.  The internal control weaknesses identified were
related to the expenditure of grant funds, the establishment of
property control records, and the performance of periodic
physical inventories of computer equipment.  These internal
control weaknesses are discussed in the Results of Audit section
of this report.  Our recommendations, if implemented, should
improve the internal controls in these areas.

PRIOR AUDIT COVERAGE

In December 1997, the Office of Inspector General issued the
report "Internal Revenue Taxes, Bureau of Internal Revenue,
Government of the Virgin Islands" (No. 98-I-188).  Regarding the
Bureau's mainframe computer and the integration of all tax
modules onto the computer, the report stated that, as of December
1996, the Tax Information Processing System on the mainframe
computer included only the income and gross receipts tax modules,
a wage information module, and a database query module.  The
report further stated that the withholding, hotel occupancy, and
excise tax modules were expected to be integrated onto the
mainframe computer by September 30, 1998.  However, our current
review showed that as of December 1998, the withholding, hotel
occupancy, and excise tax modules had not been integrated onto
the computer.

**FOOTNOTES**

[1]:Because of budget constraints, the Bureau was unable to pay
for a maintenance service agreement that covered 100 percent of
its computer equipment.  Therefore, computer equipment was
prioritized by the Bureau's Chief of Computer Operations, and
only certain high priority items were placed under the
maintenance service agreement.

RESULTS OF AUDIT

The Bureau of Internal Revenue did not have adequate control over
the use of grant funds and the computers purchased with such
funds.  Specifically, the Bureau included regular operating
expenses, such as the purchase of bulk airline tickets for
inter-island travel and computer printer and copy paper, as
expenditures claimed against the Federal grants awarded by the
Department of the Interior.  In addition, the Bureau's St. Thomas
branch did not update its October 1996 property inventory records
to include computer equipment purchased with the Federal grant
funds in April and May 1997.  The requirements for the
administration and use of Department of the Interior grant funds
are contained in the Code of Federal Regulations  (43 CFR 12) and
in an Attachment to the Notifications of Grant Award entitled
"Terms and Conditions of Grant Award."  The deficiencies occurred
because (1) Bureau officials did not verify that operating
expenses certified for payment were allowable in accordance with
the terms and conditions of the grants and (2) the Bureau had not
assigned the responsibility for maintaining property control
records or performing periodic physical inventories of computer
equipment to specific employees.  As a result, we questioned
costs of $51,005 claimed against the Federal grants, and we were
unable to locate four computer processors and six monitors valued
at about $7,900.

Grant Criteria

The Department of the Interior's Notifications of Grant Award
stated, "Grant funds are not to be used for any purpose other
than that for which they are offered."  With regard to the two
grant awards, as amended, grant funds were provided to purchase a
new mainframe computer, provide computer terminals to all Revenue
Officers and Revenue Agents in the Bureau, and develop a local
area network.  In addition, the grant awards required that
Financial Status Reports be prepared on a quarterly basis and be
submitted to the Office of Insular Affairs within 30 days after
the end of the quarter to which they apply.

The Code of Federal Regulations (43 CFR 12.72(d)), with regard to
equipment purchased with Federal funds, states:

(1) Property records must be maintained that include a
description of the property, a serial number or other
identification number, the source of property, who holds title,
the acquisition date, and cost of the property, percentage of
Federal participation in the cost of the property, the location,
use and condition of the property, and any ultimate disposition
data including the date of disposal and sale price of the
property.

(2) A physical inventory of the property must be taken and the
results reconciled with the property records at least once every
two years.

(3) A control system must be developed to ensure adequate
safeguards to prevent loss, damage, or theft of the property.
Any loss, damage, or theft shall be investigated.

(4) Adequate maintenance procedures must be developed to keep the
property in good condition.

Grant Expenditures

Grant funds totaling $1,392,000 were allocated by the Bureau to
the following cost categories related to the establishment of a
computer network: $945,000 for equipment; $223,000 for supplies;
and $224,000 for professional services, training, and travel.
Based on information maintained by the Department of the
Interior's Office of Insular Affairs, we determined that about
$1,354,000 had been drawn down as of December 1998, with the last
drawdown occurring in September 1997.  However, an official of
the Office of Insular Affairs told us that the remaining $38,000
would not be approved for drawdown because Financial Status
Reports were not up to date, as required under the terms and
conditions of the grants.  Information maintained by the Virgin
Islands Office of Management and Budget indicated that the most
recent Financial Status Report, which includes information on
expenditures charged against grant funds, was submitted to the
Office of Insular Affairs for the quarter ending March 31, 1997.
The Bureau's Budget Control Officer said that she was aware that
quarterly Financial Status Reports were not up to date.

We performed a limited review of the invoices maintained by the
Bureau's Budget Control Officer in support of expenditures
claimed against the grants.  Based on our review, we questioned
costs of  $51,005 claimed because we considered the costs to be
either (1) outside the scope of the grant awards or (2) regular
operating expenses of the Bureau.  The questioned costs are as
follows:

-  Costs claimed under the category "equipment" included $6,398
for the purchase of two paper shredders, costs claimed under the
category "supplies" included $26,242 for the purchase of computer
printer and copy paper, and costs claimed under the category
"other services" included $11,600 for the purchase of bulk
airline tickets for inter-island travel.  Although we allowed
purchases of supplies and airline tickets that were for purposes
directly related to the grant awards, in each of the cases
questioned, we did not consider the purchases to be within the
scope of the grant awards, which were for the purchase of a
mainframe computer and computer terminals to establish a
Bureauwide computer network. Rather, these purchases appear to
have been regular operating expenses that the Bureau would have
incurred regardless of whether a computer network was being
installed.  Regarding these costs, the Bureau's Budget Control
Officer told us that once the certifying officer (either the
Bureau's Director or the Director's Special Assistant) approved
an invoice for payment, it was considered a valid expenditure
against the grant.

-  Costs claimed under the category "equipment" also included
$1,868 for a "re-stock fee."  These costs represented 10 percent
of the purchase price of software packages that were purchased
and later returned by the Bureau.  A Bureau official told us that
an incorrect version of the software was ordered and subsequently
had to be returned.  In addition, although 40 copies of the
software package were ordered, the Bureau official stated that
only one copy (with a multiuser license) was needed for
installation on the Bureau's computer network.  We believe that
the "re-stock fee" was a form of penalty and that the Bureau
should have obtained the prior approval of the Office of Insular
Affairs before incurring this expense.

-  Costs claimed under the category "other services" also
included $4,897 for the purchase and installation of an alarm
system at the Bureau's storage facility on St. Thomas.  The
Bureau's Budget Control Officer told us that the alarm system was
necessary because the Department of Finance used the Bureau's
facility to store computer equipment that was also purchased with
Department of the Interior grant funds.  However, we did not
consider the purchase and installation of an alarm system to
safeguard the Department of Finance's computers to be within the
scope of the grants awarded to the Bureau of Internal Revenue.
We believe that such costs should have been charged against the
grants to the Department of Finance.

Final determination as to the allowability of the questioned
costs of $51,005 should be made by the grantor agency, the
Department of the Interior's Office of Insular Affairs.

Property Management

The Code of Federal Regulations (43 CFR 12.72) contains specific
requirements with respect to maintaining property control
records, conducting periodic physical inventories, and developing
a control system to safeguard the equipment and to provide
adequate maintenance procedures.  However, we found that the
Bureau did not comply with these requirements.  As a result,
there was little assurance that 95 computer monitors and
processors and other computer equipment, valued at about
$200,000, purchased with Federal funds were properly safeguarded
from loss, damage, and theft.  For example, during our review, we
were unable to locate four computer processors and six monitors
at the Bureau's offices.  In addition, we found that the Bureau
did not have adequate equipment maintenance procedures.

Property Records.  The Bureau did not maintain adequate property
control records.  The St. Thomas branch had a property inventory
listing dated October 1996 that included a description of each
item; the serial, model, and Government identification numbers;
the location of the equipment; and the assigned Bureau user.
However, this listing was not updated to include about 57
computer processors and monitors and other related computer
equipment totaling about $100,000 that was purchased with the
Federal grant funds in April and May 1997.  The St. Croix
branch's Systems Monitor maintained a property inventory listing
dated June 1997 that included a description of each item, the
serial and Government identification numbers, the location of the
item, and the assigned Bureau user.  Although the St. Croix
listing was more accurate in terms of the property items listed,
neither property inventory listing included, as required by the
Code of Federal Regulations (43 CFR 12.72(d)(1)), the source of
the property, the acquisition date, the cost of the property, the
percentage of Federal participation in the cost of the property,
and the condition of the property.

Physical Inventory.   The Code of Federal Regulations (43 CFR
12.72(d)(2)) requires that a "physical inventory of the property
. . . be taken and the results reconciled with the property
records at least once every two years."  In addition, the Code
requires that "a control system . . . be developed to ensure
adequate safeguards to prevent loss, damage, or theft of the
property."  However, we found that specific individuals within
the Bureau were not assigned responsibility for maintaining
property control records and conducting periodic physical
inventories.  As a result, the Bureau did not maintain accurate,
current, and complete property control records against which to
properly reconcile the results of physical inventories.

Maintenance.  The Code of Federal Regulations (43 CFR12.72(d)(4))
requires that "adequate maintenance procedures . . . be developed
to keep the property in good condition." The Bureau's Chief of
Computer Operations told us that all 95 computer processors,
valued at about $105,000, purchased with Federal grant funds
should have been included in the Bureau's maintenance service
agreement.  However, our review of the maintenance service
agreement dated November 1998 showed that 18 of the 95 computer
processors were not included in the maintenance service
agreement.  During our review on St. Croix, the branch's Systems
Monitor showed us a computer processor that did not work.  The
Systems Monitor stated that the maintenance service company told
him that the processor was not included in the maintenance
service agreement.  In addition, we found that the maintenance
service agreement listed incorrect serial numbers for 17 of the
77 processors which were included in the maintenance service
agreement.

"Walk-Through" Inspection.  As part our review, we performed a
"walk-through" inspection of the computer equipment at both the
St. Thomas and the St. Croix branches.  We documented the serial
number of each computer processor and computer monitor that we
observed on each desk and in designated repair areas of the
Bureau.  In addition, we visited the three ports of entry on St.
Croix where Bureau employees are stationed.  With respect to the
95 computer processors and monitors purchased with the Federal
grant funds, we were able to locate 94 of the 95 processors and
92 of the 95 monitors.

We expanded our review to also include two purchase orders,
initiated in June 1995 and totaling about $42,000, for the
purchase of 19 personal computers (each consisting of a
processor unit and a monitor).  Although these computers were
purchased on the open market with local funds, we included them
in our review because they were among those computers not located
by the maintenance service company during its September 1998
walk-through inspection of the Bureau's offices.  The maintenance
service company listed 21 personal computers[2] on its proposed
maintenance service agreement checklist.  However, during the
walk-though, the company representative was able to locate only
nine computers.  During our walk-through, we located 18 of the 21
computers included in the maintenance service agreement and 1
additional computer that was not included in the agreement, but
we were not able to locate 3 of the computers (3 processors and 3
monitors).

**FOOTNOTES**

[2]:Bureau officials provided us with the two purchase orders for
the 19 personal computers.  However, documentation was not
provided for three additional computers, including two computers
that were on the maintenance service company's checklist.

Recommendations

We recommend that the Governor of the Virgin Islands:

1. Require the Bureau of Internal Revenue to prepare and submit
to the U.S. Department of the Interior's Office of Insular
Affairs an updated Financial Status Report for the quarter ending
December 31, 1998, and to continue to prepare and submit such
reports on a quarterly basis, as required by the terms and
conditions of the grant awards.

2. Ensure that the Bureau of Internal Revenue provides the U.S.
Department of the Interior's Office of Insular Affairs with
supporting documentation for the questioned costs of $51,005 so
that the grantor agency can make a final determination as to the
allowability of those costs.

3. Require the Bureau of Internal Revenue to maintain property
control records for equipment purchased with Federal funds in
accordance with the requirements contained in the Code of Federal
Regulations (43 CFR 12.72).  At a minimum, the property control
records should include a description of the property; a serial
number or other identification number; the source of the
property; the titleholder of the property; the acquisition date;
the cost of the property, including the percentage of Federal
participation in the cost of the property; the location, use, and
condition of the property; and any ultimate disposition data,
including the date of disposal and sales price of the property.

4. Require the Bureau of Internal Revenue to assign
responsibility for maintaining property control records and
conducting periodic physical inventories of equipment to specific
Bureau employees.  Also, assurance should be provided that the
Bureau of Internal Revenue conducts a physical inventory of the
property and reconciles the results with the property control
records at least once every 2 years, as required by the Code of
Federal Regulations (43 CFR 12.72).

5. Ensure that the Bureau of Internal Revenue's maintenance
service agreement contains all of the computer equipment
identified as priority items by the Bureau's Chief of Computer
Operations.  In addition, assurance should be provided that the
maintenance service agreement contains the correct serial numbers
for the computer equipment included.

6. Require the Bureau of Internal Revenue to take appropriate
action to locate and/or determine the status of the four computer
processors and six monitors which we were unable to locate during
our walk-through inspection at the Bureau's offices.

Governor of the Virgin Islands Response and Office of Inspector
General Reply

The Governor's March 26, 1999, response (Appendix 2) to the draft
report expressed concurrence with all of the recommendations and
provided information on the corrective actions that had been or
would be taken.  Based on the response, we consider all six
recommendations resolved but not implemented.  Accordingly, the
recommendations 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 3).

The Inspector General Act, Public Law 95-452, Section 5(a)(3), as
amended, requires semiannual reporting to the U.S. Congress on
all audit reports issued, the monetary impact of audit findings
(Appendix 1), 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 Bureau of Internal Revenue
personnel during the conduct of our audit.

Sincerely,


Robert J. Williams
Acting Inspector General


                                                       APPENDIX 1


CLASSIFICATION OF MONETARY AMOUNTS


Questioned

Finding  Area  Costs*  Grant  Expenditures  $51,005
__________
* The amount represents Federal funds.


                                                       APPENDIX 2


Page 1 of 4


GOVERNOR OF THE VIRGIN ISLANDS RESPONSE

                                                       APPENDIX 3

STATUS OF AUDIT REPORT RECOMMENDATIONS


Finding/Recommendation
Reference 1, 2, 3, 4, 5, and 6

Status

Resolved; not implemented.

Action Required

No further response to the 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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