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entitled 'United States Merchant Marine Academy: Internal Control
Weaknesses Resulted in Improper Sources and Uses of Funds; Some
Corrective Actions Are Under Way' which was released on September
9, 2009.
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
August 2009:
United States Merchant Marine Academy:
Internal Control Weaknesses Resulted in Improper Sources and Uses of
Funds; Some Corrective Actions Are Under Way:
GAO-09-635:
GAO Highlights:
Highlights of GAO-09-635, a report to congressional committees.
Why GAO Did This Study:
The U.S. Merchant Marine Academy (Academy), a component of the
Department of Transportation’s Maritime Administration (MARAD), is one
of five U.S. service academies. The Academy is affiliated with 14 non-
appropriated fund instrumentalities (NAFI) and two foundations.
GAO was asked to determine whether there (1) were any potentially
improper or questionable sources and uses of funds by the Academy,
including transactions with its affiliated organizations; (2) was an
effective control environment with key controls in place over the
Academy’s sources and uses of funds; and (3) were any actions taken,
under way, or planned to improve controls and accountability. GAO
analyzed selected transactions from fiscal years 2006, 2007, and 2008
to identify improper or questionable sources and uses of funds and
reviewed documents and interviewed cognizant officials to assess the
Academy’s internal controls, and identify corrective actions to improve
controls.
What GAO Found:
GAO identified numerous instances of improper and questionable sources
and uses of funds by the Academy and its affiliated organizations.
These improprieties and questionable payments GAO identified
demonstrate that, while MARAD and the Academy have been taking action
to improve the Academy’s internal controls, the Academy did not have
assurance that it complied with applicable fund control requirements,
including the Antideficiency Act (ADA). Further, the Academy had
numerous breakdowns in its important stewardship responsibilities with
respect to maintaining accountability over the receipt and use of
funds. For example, GAO identified improper and questionable midshipmen
fee transactions related to: (1) fee collections and uses of fees
unrelated to goods and services provided to all midshipmen, (2) fee
collections that exceeded the actual expense to the Academy for the
goods or services, and (3) the use of accumulated excess midshipmen
fees for improper and questionable purposes.
GAO found that a weak overall control environment and the flawed design
and implementation of internal controls were the root causes of the
Academy’s inability to prevent or effectively detect numerous instances
of improper and questionable sources and uses of funds. Specifically,
GAO found that there was a lack of awareness or support for strong
internal control and accountability across the Academy at all levels
and risks, such as those that flow from a lack of clear organizational
roles and responsibilities and from significant activities with
affiliated organizations. The internal control weaknesses GAO
identified were systemic and could have been identified in a timely
manner had Academy and MARAD management had a more effective oversight
and monitoring regimen. For example, GAO found that the Academy did not
routinely prepare financial reports and information for use by internal
and external users.
GAO found that various actions were taken and in process that were
intended to improve the Academy’s internal controls, including actions
to address issues of accountability with its affiliated organizations.
For example, a permanent position of Assistant Chief Financial Officer
(CFO) for the Academy was established in March 2009 with direct
reporting responsibility to the MARAD CFO. This action provides a
senior financial official at the Academy with authority to conduct
needed oversight and monitoring of financial activities on a real time
basis. Further, following discussions GAO had with Department and MARAD
officials, the MARAD CFO took steps to secure and protect accumulated
reserves held in commercial bank accounts of an affiliated
organization. However, even though MARAD and the Academy have taken
actions, much more needs to be done, including determining the amount
of midshipmen fees that were used to cover official Academy expenses,
performing a comprehensive analysis of the risks posed by the Academy’s
organizational structure and its relationships with its affiliated
organizations, and establishing and implementing policies, procedures,
and internal controls over many Academy activities.
What GAO Recommends:
GAO makes a series of recommendations directed at improving internal
controls and accountability at the Academy and to address issues
surrounding the improper and questionable sources and uses of funds.
The Department commented that MARAD will produce a comprehensive
strategy and corrective action plan to address our recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-09-635] or key
components. For more information, contact Jeanette Franzel at (202) 512-
2600 or franzelj@gao.gov.
[End of section]
Contents:
Letter:
Background:
Improper and Questionable Sources and Uses of Funds:
Weak Control Environment and Flawed Academy Internal Controls:
Actions by the Department, MARAD, and the Academy to Address Certain
Accountability and Internal Control Challenges:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Department of Transportation, MARAD, Academy, and
Affiliated Organization Relationships:
Appendix III: Academy Expenses by Category, Fiscal Years 2006 and 2007:
Appendix IV: The Antideficiency Act:
Appendix V: Comments from the Department of Transportation:
Appendix VI: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Listing of Merchant Marine Academy Non-Appropriated Fund
Instrumentalities (NAFI) and Foundations and Their Purposes:
Table 2: Academy Sources and Amounts of Funding, Fiscal Years 2006 and
2007:
Table 3: Payments Made by the Academy to Affiliated NAFIs, Fiscal Years
2006 and 2007:
Table 4: Categories of Midshipmen Fees, Fiscal Years 2006 and 2007
Collections, Total for the 2 Fiscal Years:
Table 5: Examples of Questionable Payments from the Prior Years'
Midshipmen Fee Reserves by the FCO NAFI on Behalf of the Academy:
Table 6: Questionable Payment Transactions Related to the GMATS's Use
of the Kings Pointer, Fiscal Years 2006 and 2007:
Table 7: Revenue and Expense Recognized by the Academy from Agreements
between GMATS and Other Federal Agencies, Fiscal Years 2006 and 2007:
Figure:
Figure 1: Overview of Key Components Involved in Carrying out Academy
and Academy-Related Activities:
Abbreviations:
ADA: Antideficiency Act:
DRM: Department of Resource Management:
FCO: Fiscal Control Office:
GMATS: Global Maritime and Transportation School:
NAFI: Non-appropriated fund instrumentality:
MARAD: Maritime Administration:
MWR: Morale, welfare, and recreation:
SP&C: Sail, Power and Crew Association:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
August 10, 2009:
The Honorable Patty Murray:
Chairman:
The Honorable Christopher S. Bond:
Ranking Member:
Subcommittee on Transportation, Housing and Urban Development, and
Related Agencies:
Committee on Appropriations:
United States Senate:
The Honorable John W. Olver:
Chairman:
The Honorable Tom Latham:
Ranking Member:
Subcommittee on Transportation, Housing and Urban Development, and
Related Agencies:
Committee on Appropriations:
House of Representatives:
The U.S. Merchant Marine Academy (Academy), one of five United States
service academies, is located in Kings Point, New York, and provides 4-
year undergraduate educational programs for men and women (midshipmen)
to become shipboard officers and leaders in the transportation field.
Graduates from the Academy receive Bachelor of Science degrees and U.S.
Coast Guard licenses as deck or engineering officers, or both, and a
commission in the U.S. Naval Reserve or another uniformed service. For
the most recent academic year ending June 2009, there were about 940
Academy midshipmen. The Academy is a component within the Department of
Transportation's Maritime Administration (MARAD). The Academy also is
affiliated with 14 non-appropriated fund instrumentalities (NAFI) and
two private foundations.
A February 2008 MARAD report on the Academy's fiscal years 2006 and
2007 activity concluded that the Academy lacked adequate controls to
comply with laws and regulations governing the obligation and
expenditure of federal resources, and identified possible
Antideficiency Act (ADA) violations.[Footnote 1] An ADA violation
occurs when a federal officer or employee incurs obligations or makes
expenditures in excess or in advance of appropriations or employs
personal services, among other things.[Footnote 2] Appendix IV provides
more detail on the requirements of the ADA.
In light of these issues, you requested that we determine whether there
(1) were any potentially improper or questionable[Footnote 3] sources
and uses of funds by the Academy, including transactions with its
affiliated organizations; (2) was an effective control environment with
key controls in place over the Academy's sources and uses of funds,
including transactions with its affiliated organizations; and (3) were
any actions taken, under way, or planned to improve internal controls
and accountability over the Academy's funds and other resources.
To address the first two objectives, we reviewed the 2008 MARAD report
and selected laws, regulations, policies, and procedures related to the
Academy and its affiliated organizations' operations and related
financial activities. We obtained an understanding of the sources and
uses of funds for the Academy and its NAFIs, including the Academy's
appropriated funds. We assessed the Academy's internal controls against
our Standards for Internal Control in the Federal Government and
related guidance.[Footnote 4] We also interviewed staff and officials
from the Department of Transportation (the Department), Office of
Inspector General for the Department, MARAD, the Academy, and its
affiliated organizations to obtain an understanding of their roles and
responsibilities, the internal control environment at the Academy, and
controls over the Academy's sources and uses of funds with its
affiliated organizations. We obtained a database of Academy expenses at
the transaction level covering fiscal years 2006 and 2007, the time
period covered by MARAD's February 2008 internal control review, and
analyzed the transactions to identify indications of improper or
questionable sources and uses of funds. We also analyzed midshipmen
fees collected by one of the Academy's NAFIs and the use of those
midshipmen fees for calendar years 2006 and 2007, and other sources and
uses of funds for fiscal years 2006 to 2008. On the basis of this
information and analytical procedures, we selected transactions that
appeared to have a higher risk of being improper. We reviewed available
documentation supporting selected transactions and also obtained
explanations from Academy and NAFI officials for these transactions.
The results of our work are not generalizable to the population of
transactions as a whole because we selected transactions on a
nonstatistical basis. Consequently, there may be other improper or
questionable sources and uses of funds that our work did not identify.
To address our third objective, we obtained relevant documentation on
actions taken, under way, or planned, including an October 2007 MARAD
order establishing the Academy's Fiscal Oversight and Administrative
Review Board.[Footnote 5] We also interviewed officials from the
Department, the Office of Inspector General for the Department, MARAD,
and the Academy to obtain information on actions taken, under way, or
planned. Additional details on our scope and methodology are in
appendix I.
We conducted this performance audit from June 2008 to August 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Background:
Academy and NAFI Relationships:
The Academy is headed by a Superintendent. The Superintendent reports
directly to the head of MARAD, the Maritime Administrator. MARAD, an
agency of the Department, is responsible for overseeing and monitoring
the Academy. A Deputy Superintendent and four Assistant
Superintendents--Administration, Regimental Affairs, Academic Affairs,
and Plans, Assessment, and Public Affairs--report directly to the
Superintendent and are the principal officials responsible for carrying
out the Academy's operations. Academy components with respect to the
issues discussed in this report include the following.
* The Department of Resource Management (DRM) provides bookkeeping,
payroll, and other administrative support services for the Academy.
Further, for most of fiscal years 2006 and 2007, the director of DRM
was also the head of the Fiscal Control Office (FCO) NAFI. During
fiscal years 2006 and 2007, the Director of DRM reported to the
Academy's Deputy Superintendent. When the position of Deputy
Superintendent was not occupied, the Director of DRM reported directly
to the Superintendent.
* The Department of Waterfront Activities operates the waterfront area
of the Academy's property, maintains the Kings Pointer and other
training vessels, and provides training to midshipmen. Further, the
Department of Waterfront Activities collaborates with two NAFIs on
waterfront related activities (the Sail, Power and Crew Association,
and the Global Maritime and Transportation School (GMATS)), and the
Sailing Foundation, a private non-profit foundation. The Director of
Waterfront Activities reported to the Deputy Superintendent, or when
that position was not occupied, the Director reported directly to the
Superintendent.
* The Department of Information Technology provides information
technology services for all Academy operations and midshipmen. The
Director of Information Technology reported to the Deputy
Superintendent or when that position was not occupied, the Director
reported directly to the Superintendent.
* The Department of Health Services provides medical and dental
services to midshipmen. The Director reported to the Assistant
Superintendent for Administration as well as the Deputy Superintendent
or the Superintendent.
An overview of the organizational relationships of the Department of
Transportation, MARAD, selected components within the Academy, as well
as the Academy's affiliated NAFIs and foundations is provided in figure
1.
Figure 1: Overview of Key Components Involved in Carrying out Academy
and Academy-Related Activities:
[Refer to PDF for image: illustration]
Department of Transportation: Secretary.
MARAD: Administrator.
Academy:
Superintendent;
Deputy Superintendent;
4 Assistant Superintendents;
Department of Resource Management;
Department of Waterfront Activities;
Department of Information Technology;
Department of Health Services;
Other component units.
14 Non-Appropriated Fund Instrumentalities (NAFI): Including:
Fiscal Control Office;
Global Maritime and Transportation School;
Athletic Association;
Sail, Power and Crew Association.
2 private foundations:
Sailing Foundation;
Alumni Foundation.
Source: GAO.
[End of figure]
The Academy carries out its mission and operations primarily using
appropriated funds. The Academy's 14 affiliated NAFIs operate using the
proceeds from their own operations, rather than with appropriated
funds. NAFIs are organizations that typically provide for the morale,
welfare, and recreation (MWR) of government officers and employees.
These are items and services that support the efforts of government
employees and officers to carry out the government's business by
fulfilling their MWR needs. For example, tailoring, hair cuts, and
laundry services provided by the Academy's NAFIs are examples of MWR
services that generally should not be paid from appropriated funds. In
addition to the 12 MWR type NAFIs, the Academy has two other affiliated
NAFIs. The Fiscal Control Office (FCO) provides bookkeeping, payroll,
and other administrative support services and the Global Maritime and
Transportation School (GMATS) provides training to other federal
agencies and to the maritime industry. The activities of the FCO with
respect to the issues discussed in this report include the following.
* The FCO was responsible for bookkeeping, payroll, and administrative
support services for 12 of the other 13 NAFIs and also handled payroll
for the Athletic Association. The Athletic Association handled its own
bookkeeping, and the GMATS handled all of its own bookkeeping and
payroll functions. The FCO was also responsible for the collection of
all midshipmen fees for the Academy and the payment of amounts to other
NAFIs, vendors and others from the fees collected. The FCO also
collected funds from GMATS that were provided for the use and benefit
of the Academy. Further, the FCO was responsible for maintaining books
and records for "prior years' reserves" from the excess of midshipmen
fees collected over payments made as discussed in this report. The FCO
maintained various commercial checking accounts for activities related
to its collection and payment responsibilities for Academy funds. The
functions of the FCO and DRM staff and managers were interchangeable.
The manager of the FCO (the same individual as the head of DRM)
reported on FCO matters to the Deputy Superintendent or when that
position was not occupied, the FCO manager reported directly to the
Superintendent.
The Academy's 14 affiliated NAFIs and 2 affiliated foundations are
listed in table 1.
Table 1: Listing of Merchant Marine Academy Non-Appropriated Fund
Instrumentalities (NAFI) and Foundations and Their Purposes:
14 affiliated NAFIs:
* American Merchant Marine Museum;
Purpose: Maintain maritime museum.
* Athletic Association;
Purpose: Enhance midshipmen educational experience through
participation in athletic activities.
* Chapel Fund;
Purpose: Provide funding to chaplains for conducting religious
functions and services for midshipmen.
* Cultural Events;
Purpose: Promote midshipmen participation in cultural activities.
* Employees Association;
Purpose: Promote and support the interests of Academy employees.
* Faculty and Staff Housing;
Purpose: Administers faculty and staff housing.
* Fiscal Control Office (FCO);
Purpose: Provide bookkeeping, payroll and other administrative support
services for NAFIs.
* Global Maritime and Transportation School (GMATS);
Purpose: Provide education and training to other federal agencies and
to the maritime industry.
* Melville Hall;
Purpose: Provide dining, lodging, and meeting facilities.
* Midships Publications;
Purpose: Publish the official Academy yearbook.
* Music Program;
Purpose: Support Academy Choir, Glee Club, and Chapel Choir.
* Regimental Morale Fund Association;
Purpose: Support provision of morale, welfare, and recreation
activities for midshipmen.
* Sail, Power and Crew Association (SP&C);
Purpose: Promote boating, recreational, and sports activities.
* Ship's Service Store;
Purpose: Provides books, uniforms, tailoring, barbering, and other
services to midshipmen.
2 affiliated foundations:
* USMMA Alumni Foundation;
Purpose: Provides financial support for charitable, scientific, and
educational purposes by raising and distributing funds from alumni.
* USMMA Sailing Foundation;
Purpose: Receives and administers charitable gifts from the general
public in support of the Academy.
Source: GAO analysis.
[End of table]
Appendix II provides more detail on the relationships and financial
activity between the Academy and its affiliated organizations.
Academy Funding and Expenses:
Table 2 shows the amount and sources of the Academy's funding for
fiscal years 2006 and 2007. Amounts received by the Academy for capital
improvement, totaling $15.9 million and $13.8 million for fiscal years
2006 and 2007, respectively, were to be used for capital assets,
including certain related expenses.
Table 2: Academy Sources and Amounts of Funding, Fiscal Years 2006 and
2007:
Annual funding: Appropriated funds allotted from MARAD for: Salaries
and benefits;
FY 2006: $23,512,000;
FY 2007: $25,800,000.
Annual funding: Appropriated funds allotted from MARAD for: Other
expenses;
FY 2006: $23,379,665;
FY 2007: $22,967,930.
Annual funding: Reimbursable agreements[A];
FY 2006: $1,650,473;
FY 2007: $4,759,769.
Annual funding: Gifts and bequests[B];
FY 2006: $2,151,046;
FY 2007: $2,615,871.
Annual funding: Other;
FY 2006: $597,806;
FY 2007: $861,233.
Total annual funding;
FY 2006: $51,290,990;
FY 2007: $57,004,803.
No-Year funding: Capital improvement funds[C];
FY 2006: $15,932,920;
FY 2007: $13,848,894.
Total annual and no-year funding;
FY 2006: $67,223,910;
FY 2007: $70,853,697.
Source: GAO analysis of MARAD's unaudited Academy data.
[A] Reimbursable agreements are typically arrangements with another
federal agency that contain the terms for providing goods or services
on a reimbursable basis.
[B] Gifts and bequests represent donations from affiliated foundations.
[C] Capital improvement funds are provided under appropriations that
remain available for an indefinite period.
[End of table]
The Academy's payments to NAFIs and total expenses for fiscal years
2006 and 2007 are shown in Appendix III. The Academy's payment activity
with its 14 NAFIs was significant in relation to the Academy's total
expenses. For fiscal year 2006 Academy expenses of $55.7 million
included $9.6 million to its affiliated NAFIs, representing over 17
percent of total Academy expenses. Similarly, for fiscal year 2007,
Academy expenses of $62.0 million included $13.4 million to its NAFIs,
representing over 21 percent of total Academy expenses. Payments to
NAFIs were generally classified in the Academy's financial records as
contractual services; operations and maintenance; and gifts and
bequests. The total amount of payments that the Academy made to its
NAFIs in fiscal years 2006 and 2007 are shown in table 3.
Table 3: Payments Made by the Academy to Affiliated NAFIs, Fiscal Years
2006 and 2007 (Dollars in thousands):
NAFI: Fiscal Control Office;
FY 2006: $5,528.7;
FY 2007: $5,398.0.
NAFI: Global Maritime and Transportation School;
FY 2006: $1,428.9;
FY 2007: $4,609.1.
NAFI: Ship's Service Store;
FY 2006: $1,454.7;
FY 2007: $1,542.7.
NAFI: Athletic Association;
FY 2006: $534.9;
FY 2007: $1,201.4.
NAFI: Sail, Power and Crew Association;
FY 2006: $580.8;
FY 2007: $414.9.
NAFI: Music Program;
FY 2006: $45.6;
FY 2007: $139.2.
NAFI: Melville Hall;
FY 2006: $15.9;
FY 2007: $48.4.
NAFI: Regimental Morale Fund Association;
FY 2006: $15.0;
FY 2007: $45.0.
NAFI: Chapel Fund;
FY 2006: $10.9;
FY 2007: $5.6.
NAFI: American Merchant Marine Museum;
FY 2006: [Empty];
FY 2007: $1.0.
NAFI: Cultural Events;
FY 2006: [Empty];
FY 2007: [Empty].
NAFI: Employee Association;
FY 2006: [Empty];
FY 2007: [Empty].
NAFI: Faculty and Staff Housing;
FY 2006: [Empty];
FY 2007: [Empty].
NAFI: Midships Publications;
FY 2006: [Empty];
FY 2007: [Empty].
NAFI: Total;
FY 2006: $9,615.4;
FY 2007: $13,405.3.
Source: GAO analysis of NAFI data.
[End of table]
Midshipmen Fees:
The Academy is to provide each midshipman with free tuition, room and
board[Footnote 6] as well as limited medical and dental care.[Footnote
7] However, under MARAD regulations,[Footnote 8] the Academy requires
each midshipman to pay fees for items or services generally of a
personal nature (hereafter "goods or services" or "personal items")
each academic year. The Academy treats all fees collected as non-
appropriated funds when the good or service is provided by a NAFI, such
as services for laundry and haircuts that are provided by the Ship's
Services Store, or by a department of the Academy, such as Information
Technology that provides internet services and personal computers to
the midshipmen. The FCO collects all midshipmen fees on behalf of the
Academy and also makes payments to vendors and others from the fees
collected. For fiscal years 2006 and 2007, the FCO collected about $7
million in total midshipmen fees.[Footnote 9] In the 2007-2008 academic
year, fees collected represented $15,560 per midshipmen over the course
of a 4-year education and ranged in amount from $2,410 to $7,020,
depending on class year. Details on midshipmen fee collections for
fiscal years 2006 and 2007 are shown in table 4.
Table 4: Categories of Midshipmen Fees, Fiscal Years 2006 and 2007
Collections, Total for the 2 Fiscal Years:
Categories of midshipmen fees: Activity fees;
FY 2006 Collections: $874,222;
FY 2007 Collections: $864,370;
Total: $1,738,592.
Categories of midshipmen fees: Information technology;
FY 2006 Collections: $423,253;
FY 2007 Collections: $416,056;
Total: $839,309.
Categories of midshipmen fees: Computers;
FY 2006 Collections: $649,637;
FY 2007 Collections: $628,630;
Total: $1,278,267.
Categories of midshipmen fees: Medical;
FY 2006 Collections: $460,503;
FY 2007 Collections: $460,901;
Total: $921,404.
Categories of midshipmen fees: Laundry and tailoring;
FY 2006 Collections: $489,704;
FY 2007 Collections: $491,758;
Total: 981,462.
Categories of midshipmen fees: All other;
FY 2006 Collections: 593,940;
FY 2007 Collections: 631,677;
Total: $1,225,617.
Categories of midshipmen fees: Total;
FY 2006 Collections: $3,491,259;
FY 2007 Collections: $3,493,392;
Total: $6,984,651.
Source: GAO analysis of unaudited FCO data.
[End of table]
Improper and Questionable Sources and Uses of Funds:
Our review identified instances of improper and questionable sources
and uses of funds by the Academy and its affiliated NAFIs, some of
which violated laws, including the ADA. Specifically, we identified
improper and questionable sources and uses of midshipmen fees and
questionable financial activity associated with GMATS and other NAFIs.
The improper and questionable activities and transactions that we
identified demonstrate the Academy did not have assurance that it
complied with applicable fund control requirements, including those in
the ADA. Further, the Academy could not effectively carry out its
important stewardship responsibilities with respect to maintaining
accountability over the collection and use of funds, including assuring
that funds were collected and used only for authorized purposes. As
discussed in this report, the primary causes of these improper and
questionable sources and uses of funds can be attributed to a weak
control environment and the flawed design and implementation of
internal controls at the Academy, including inadequate oversight and
monitoring by the Academy and MARAD.
Improper and Questionable Collection and Use of Midshipmen Fees:
MARAD regulations provide that the Academy can collect fees from all
midshipmen to pay for "personal" goods and services. However, we found
a number of improper and questionable activities concerning the
Academy's and its affiliated NAFIs' collection and use of midshipmen
fees. Specifically, we identified improper and questionable midshipmen
fee-related transactions with respect to: (1) collections for goods and
services that were not the midshipmen's responsibility, (2) collected
amounts that exceeded the actual expense to the Academy for the goods
or services provided to the midshipmen, and (3) the use of accumulated
fee reserves for questionable purposes. We also identified improper and
questionable uses of the fees collected.
Fee Collections and Uses of Fees not Related to Goods and Services
Provided to All Midshipmen:
For fiscal years 2006 and 2007, the Academy collected fees of
approximately $7 million from midshipmen. We nonstatistically selected
four midshipmen fee categories for review. We found that the total fees
collected for these four midshipmen fee categories of about $1.5
million were questionable because they did not appear to be items of a
personal nature to each midshipman, but rather, expenses that would
normally be paid by the Academy from appropriated funds. Specifically,
over the 2006 and 2007 fiscal years, we found that the Academy
collected questionable midshipmen fees for waterfront activities,
processing services, information technology services, and medical
services. We also identified potentially improper payments from these
questionable fee collections totaling approximately $1.2 million that
were paid to NAFIs and vendors, including the Sail, Power and Crew
Association (SP&C) for waterfront activities, the FCO for processing
services, and vendors for information technology services. There may be
other improper and questionable collections and uses of midshipmen fees
that our review did not identify. To the extent these collections and
the uses of these funds improperly covered Academy expenses that are
chargeable to Academy appropriations, the Academy improperly augmented
its appropriated funds, which may have resulted in violations of the
ADA, 31 U.S.C. §1341(a), by incurring obligations or expenditures in
excess of available appropriations.[Footnote 10] We did not
independently assess the amount of such improper augmentations.
[Footnote 11]
* Waterfront activities: We found that for the 2006 and 2007 fiscal
years, a total of $318,187 was collected from all midshipmen for these
activities. All fees collected for waterfront activities do not
represent personal midshipmen services that qualify as chargeable to
all midshipmen because not all midshipmen used the Academy's waterfront
facilities. For example, such waterfront activities as sailing
competitions, varsity water sport teams, and power vessel training are
elective activities in the Academy's curriculum for midshipmen.
* Processing services: We found that for the 2006 and 2007 fiscal
years, the FCO collected $65,712 from the midshipmen for FCO's
processing services. The FCO retained all processing fees without
adequate supporting documentation for how the amount collected was
determined, why a processing fee was due, or why the amount should be
funded by collections from all midshipmen. Processing expenses incurred
by FCO represent administrative expenses. The administrative expenses
may be attributable to services provided by FCO to midshipmen. However,
without adequate supporting documentation, we could not make such a
determination.
* Information technology services: We found that for the 2006 and 2007
fiscal years, the Academy collected $839,309 from the midshipmen for
information technology services. Such services are not all "personal"
to the Academy's midshipmen. However, the Academy used these fees to
support operations of the Department of Information Technology that are
otherwise funded by Academy appropriations.
* Medical services: We found that for the 2006 and 2007 fiscal years
the Academy used $2,293,884 in appropriated funds to pay for medical
and dental services for midshipmen under a contractual agreement with a
local hospital. However, it also collected $288,813 in midshipmen fees
for the same services. Academy officials did not provide us with any
support for how the annual amounts assessed midshipmen for contracted
hospital services were determined. The midshipmen fees collected were,
according to Academy officials, held by the FCO in a reserve for "rainy-
day" purposes. We were told by the same officials that the fees
collected from the midshipmen represented the amount the Academy
believed to be necessary to cover possible rate adjustments under the
contract with the hospital. We reviewed the payments by the Academy to
the hospital for the years 2006 and 2007 and found that the amounts
paid based on actual usage were less than the estimated expense per the
contract.
Midshipmen Fee Collections Exceeded Actual Expenses:
In addition to assessing and collecting fees unrelated to goods or
services that are personal to all midshipmen, we found that the Academy
collected fees from midshipmen that exceeded its actual expenses for
providing goods or services to its midshipmen. For example, the Academy
collected $2,400 from each plebe midshipman during fiscal years 2006
and 2007 for computers, including a printer and peripheral equipment.
For the 2006 and 2007 fiscal years, available records show the Academy
collected a total of $1,278,266 from the midshipmen in fees for these
personal computers and related equipment. Over the same period, the
Academy paid a total of $863,859 to vendors for computers and related
equipment--leaving an excess of $414,407 in collections over the
related expenses. Thus, the amount collected from the midshipmen for
computers represented 148 percent of the actual expense to the Academy
for these items over a 2-year period. Academy officials told us they
were aware of these excessive collections, but did not take action to
refund excess collections or reduce fees charged the midshipmen for
this equipment, but instead chose to utilize the excess collections to
support its operations.
Questionable Use of Excess Midshipmen Fee Collections:
The Academy, using the FCO, had inappropriately used "off-book"
reserves accumulated from the excess of midshipmen fees collected over
payments made to vendors and others for goods and services.[Footnote
12] For example, a "Superintendent's Reserve" was created and used to
make discretionary payments authorized by the Academy
Superintendent.[Footnote 13] Our review of available records determined
that for the 3 years ended September 30, 2008, deposits to the "off-
book" reserves totaled $1,325,669 and payments and transfers from the
account totaled $605,347, with a balance of $999,315 at September 30,
2008. We found no evidence that the $605,347 in payments from these
"off-book" reserves were for purposes consistent with the fee
collections.
Consequently, we consider the entire $605,347 in payments from these
reserves as questionable and, to the extent used to cover Academy
expenses, constitute an improper augmentation of the Academy's
appropriations, which result in violations of the ADA, 31 U.S.C.
§1341(a) if the obligations incurred exceed available appropriations.
For example, use of the excess fee amounts to support the Academy's
Department of Information Technology constitutes an improper
augmentation of the Academy's appropriation for its operations. We did
not independently assess the amount of such improper augmentations.
As summarized in table 5, and briefly discussed in the text that
follows the table, our analysis of FCO's records of 10 payments
selected on a nonstatistical basis illustrates the types of
questionable payments made from FCO's accumulation of excess midshipmen
fees from prior years' midshipmen fee reserves during the 3-year period
ending September 30, 2008, on behalf of the Academy.
Table 5: Examples of Questionable Payments from the Prior Years'
Midshipmen Fee Reserves by the FCO NAFI on Behalf of the Academy:
Payment no.: 1;
Amount: $4,965;
Payee: Blackbaud;
Description: Accounting system for FCO;
Date: July 23, 2008.
Payment no.: 2;
Amount: $59,464;
Payee: FCO;
Description: Payroll cost for an Academy employee;
Date: October 25, 2007.
Payment no.: 3;
Amount: $3,000;
Payee: [name of individual redacted];
Description: Settlement of complaint;
Date: September 27, 2007.
Payment no.: 4;
Amount: $42,000;
Payee: American Merchant Marine Museum;
Description: Start up Museum NAFI;
Date: September 26, 2007.
Payment no.: 5;
Amount: $68,708;
Payee: FCO;
Description: Adjustment to payroll expense of the Regimental Morale
Fund Association NAFI;
Date: June 27, 2007.
Payment no.: 6;
Amount: $4,000;
Payee: Campus Speak;
Description: Education program on alcohol for midshipmen;
Date: February 5, 2007.
Payment no.: 7;
Amount: $7,245;
Payee: Weight Watchers International;
Description: Weight control program;
Date: January 11, 2007.
Payment no.: 8;
Amount: $53,093;
Payee: FCO--Academy Midshipmen Fees Account;
Description: To transfer prior years' midshipmen reserve money to
current year's midshipmen fees account;
Date: September 21, 2006.
Payment no.: 9;
Amount: $2,700;
Payee: Hendrickson Truck Center;
Description: Automatic tire chain system for Academy ambulance;
Date: August 18, 2006.
Payment no.: 10;
Amount: $71,833;
Payee: GTSI Corporation;
Description: Portion of payment for computer equipment lease;
Date: December 15, 2005.
Total Amount: $317,008.
[End of table]
Source: GAO analysis.
1. Blackbaud accounting system for the FCO: This system is used by FCO
to provide bookkeeping services for the 12 NAFIs for which the FCO
provides such service. The total consulting fee and installation cost
for the system, per a February 2008 contract, between the vendor and
the FCO was $75,000. As a NAFI system, the entire cost of the new
system should have been funded using non-appropriated funds. Through
January 2009, we found that payments of $51,173, including the $4,965
payment we reviewed, were made to the vendor using midshipmen fees. An
additional $10,581 was paid using Academy appropriated funds, $5,963
was paid using FCO funds, and $5,963 was paid using GMATS funds.
Academy officials said that midshipmen fees as well as Academy
appropriated funds were used to partially fund the system because other
funding was not available at the time to pay the Blackbaud invoices.
2. Payroll costs for Academy employee: An Academy official said that
the payment was to transfer funds from the midshipmen fee account to
the FCO's account to cover the payroll for the upcoming fiscal year for
an Academy employee that reported directly to the Academy's academic
dean.
3. Settlement of complaint: The payment support consisted of a copy of
the check stub with the notation "Settlement fee for EEO complaint." No
documentation was provided to us to support why such a payment should
be funded using midshipmen fees.
4. Donation to start-up Museum NAFI: The payment support consisted of a
copy of the payment stub with the notation "To start-up Museum NAFI."
No documentation was provided to us on how the payment related to fees
collected from midshipmen.
5. Payroll for Regimental Morale Fund Association NAFI: The support for
this payment was a check stub with the explanation: "To cover the
amount due to FCO for Morale Fund payroll according to a June 30, 2006
FCO analysis." No information was provided as to why payroll of the
Regimental Morale Fund Association NAFI would be paid from midshipmen
fees. We were told that of 45 employees of the Morale Fund, 25 were
paid from non-appropriated funds, 19 were paid from appropriated funds,
and 1 was paid with a combination of appropriated and non-appropriated
funds. The payment support indicates that the payment is for
adjustments to the payroll costs for several of the persons paid from
non-appropriated funds.
6. Education program on alcohol: Payment was for an educational program
for the midshipmen on alcohol. Academy officials did not provide any
explanation as to why this item of expense was not considered as an
ordinary and necessary expense of the Academy payable from appropriated
funds.
7. Weight control program: Payment was for "At Work Series," a Weight
Watchers International program. However, we were provided with no
information on either why this item was not considered a personal
expense of the midshipmen in the weight control program, or why the
item was not considered a necessary expense of the Academy payable from
appropriated funds.
8. Transfer to current year's midshipmen fees account: The only
documentation supporting this payment was a copy of the payment voucher
with the explanation "transfer prior year computer money to current."
An FCO official told us that the payment was to transfer prior year
midshipmen fees for computer services--excess of collections over
payments made for goods and services--to the current years midshipmen
fees account to be used to pay for numerous invoices to the Academy
from a provider of information technology services. Academy officials
did not provide any information on why expenses payable from the
Academy's appropriated funds would be paid from midshipmen fees
collected.
9. Tire chain system for Academy ambulance: Academy officials did not
provide us with any information on why this item was not considered a
necessary expense of the Academy payable from appropriated funds,
rather than from funds collected through midshipmen fees.
10. Computer equipment lease: The $71,833 in midshipmen fee reserves
was paid toward a $106,217 installment on a 3-year computer equipment
lease (under a "lease to purchase agreement"). The balance of the
installment payment was paid with current year midshipmen fees.
Payments totaled $318,651 under this agreement and the amount funded
with prior years' midshipmen fees was $178,050 (including the $71,833
above) and $140,601 was funded with current year midshipmen fees over 3
fiscal years. An Academy official told us that prior years' and current
year's midshipmen fees were used for these payments because "the
Academy did not have sufficient appropriated funds to dedicate to this
purchase." Academy officials did not provide any information on why
amounts payable from the Academy's appropriated funds would be paid, in
part, from midshipmen fees collected.
The Academy did not provide us with any information as to why excess
fees collected from all midshipmen and transferred to prior years'
reserves were considered an appropriate source of funds for any of
these payments.
Questionable Financial Activity with GMATS and Other NAFIs:
We found that the Academy (1) improperly entered into sole-source
agreements with GMATS to provide training services to other federal
agencies and (2) inappropriately accepted and used GMATS funds. In
addition, we found other improper and questionable transactions,
including the Academy's obligating and transferring appropriated funds
to the FCO in order to preserve or "park" the funds for future use, and
the Athletic Association NAFI's retention of fees paid to this NAFI for
use of the Academy's property.
Improper Contracting for GMATS NAFI Training to Other Agencies:
During fiscal years 2006 and 2007, the Academy improperly entered into
over $6 million in agreements with GMATS to provide training services
to other federal agencies on a non-competitive basis by GMATS. The
Academy accepted interagency orders under the Economy Act[Footnote 14]
as legal authority for its use of sole-source procurements. Based on
our review of the transactions between the Academy and GMATS, we
concluded that the Academy's non-competitive awards to GMATS and the
lack of proper contractual agreements under the Federal Acquisition
Regulation may be improper procurements.[Footnote 15] For example, the
Department provided us with no documentation to support a legitimate
justification for the Academy's non-competitive awards to GMATS.
Although the services were provided by GMATS to the Academy (that, in
turn, provided the services to other federal agencies under the Economy
Act) under what likely constitute improper non-competitive contracts,
the Department did not provide us with information supporting its
reimbursements to GMATS of approximately $6 million for its costs under
these agreements.[Footnote 16]
GMATS Funds Used to Improperly Augment Academy Funds:
During 2006 and 2007, the Academy also received funds from the GMATS
NAFI and directed the GMATS NAFI to make payments on the Academy's
behalf without clear legal authority. Specifically, in fiscal years
2006 and 2007, we found that the FCO received $193,022 and $186,113,
respectively, which were described in GMATS records as annual
contributions for the benefit of the Academy of 5 percent of GMATS's
gross profits. The records of GMATS further described these amounts as
funds to be utilized by the Academy for incremental costs incurred from
GMATS's use of the Academy's campus facilities. The Academy did not
have records or analysis of whether the amount received bore any
relationship to estimated or actual costs the Academy may have
incurred. We also found that GMATS made payments to the FCO that were
held in a reserve for subsequent disbursement at the direction of
Academy officials. We were told that the payments to the FCO were to
compensate the Academy for various items such as use of the engineering
lab; use of the ship's bridge simulator, a specialized training device;
and use of a professor's time--all for GMATS business. According to
GMATS records, the amount paid by GMATS for these items totaled $52,124
in 2006; Academy officials told us that this practice was discontinued
in 2007.
In February 2008, the Administrator reported to the Deputy Secretary of
Transportation that the use of these reserves may have violated the
ADA's prohibition on obligating or expending amounts in excess of
available appropriations.[Footnote 17] We found that the Academy also
may have violated the "Miscellaneous Receipts" statute, 31 U.S.C. §
3302(b),[Footnote 18] by failing to immediately deposit all the funds
received from GMATS into the general fund of the U.S. Treasury.
[Footnote 19] Further, the use of the Superintendents Reserve fund for
official Academy expenses appears to constitute an improper
augmentation of the Academy's appropriated funds, which results in
violations of the ADA, 31 U.S.C. §1341(a), if the obligations incurred
exceed available appropriations.
Improper Use of Contracting to "Park" Funds That Would Otherwise
Expire:
We found that the Academy improperly entered into agreements with the
FCO NAFI to prevent a cumulative total of almost $389,000 in annual
appropriations from expiring ("parking funds") at the ends of fiscal
years 2006 and 2007. The Academy later transferred the $389,000 to the
FCO for future use rather than allowing the funding to expire in
accordance with the appropriation account closing law, 31 U.S.C. §1553.
For example, one agreement for $200,000 stated that the purpose was to
provide accounts payable services to the Academy during fiscal year
2007 year-end. These agreements were improper because there was no
underlying economic substance to them and there was not any description
of deliverables under the agreement, such as a statement of work. We
were told that the agreement with FCO was entered into to reserve funds
at the end of the year that would otherwise have expired.
We also found that, of the $389,000 received from the Academy, FCO used
approximately $175,000 to subsequently pay for items of expense and, at
the direction of MARAD, returned $214,000 to the Academy in March 2008.
In addition, we found that in October 2007, FCO transferred $270,000
from this reserve to the FCO's payroll checking account for what FCO
officials described as a "payroll loan". The loan was repaid in full on
December 11, 2007. However, Academy officials told us they did not have
any support and that their inquiries on this issue had not produced an
explanation as to why Academy resources would be used for a loan to the
FCO. We were told by FCO officials that the transactions were based on
a need for the funds as determined by staff and that no formal loan
documents or other written supporting documentation existed.
The Secretary of Transportation reported to the President, the
Congress, and the Comptroller General in March 2009, numerous
unidentified transactions in fiscal years 2005, 2006, and 2007,
totaling $397,740, as violations of section 1341(a)(1)(B) of the ADA,
which prohibits the involvement of the government in a contract or
obligation before an appropriation is made.[Footnote 20] As discussed
above, the Academy recorded obligations against its fixed-year
appropriated funds to reflect transfers to the FCO, via a MARAD "Form
949." MARAD officials investigated transactions occurring in fiscal
years 2005, 2006, and 2007 to determine if these transfers constituted
illegal "parking" of fiscal year appropriations and violations of the
ADA.[Footnote 21] They found that the executed forms, in a net amount
totaling $397,740, did not represent bona fide needs of the Academy for
specific goods or services at the time they were made and, therefore,
did not reflect valid obligations.[Footnote 22] Recording invalid
obligations against current fixed-year appropriations for the purpose
of using the appropriations in a subsequent year constitutes illegal
parking of the funds.
Questionable Billing and Payment Transactions Related to Use of the
Training Vessel Kings Pointer:
We found questionable billing and payment transactions related to the
use of the Academy's training ship and other Academy boats.
Specifically, we found that the SP&C NAFI, and not the Academy, billed
the user of the Kings Pointer, GMATS. The GMATS NAFI used the Academy's
224-foot training vessel, the Kings Pointer, as well as other Academy
vessels, to provide training and education to other organizations or
individuals from the marine community during fiscal years 2006 and
2007. GMATS remitted payments to the Academy for the use of its
vessels, for which the Academy then remitted a portion of the funds to
another Academy NAFI (the Sail, Power and Crew Association) and
retained a portion. Available records show that of the $366,906 the
Academy received for use of the Kings Pointer during fiscal years 2006
and 2007, the Academy made payments totaling $217,848 to SP&C. The
portion of fees the Academy received that were remitted to the SP&C
varied from about 50 percent of receipts to over 70 percent based on
directions received from SP&C. However, no documentation was provided
to support the amount or percentages of these Academy payments to the
SP&C. Further, we found that the Academy may have violated the
"Miscellaneous Receipts" statute, 31 U.S.C. §3302(b), by failing to
immediately deposit all the funds received from GMATS into the general
fund of the U.S. Treasury. Finally, without adequate supporting
documentation, the entire $217,848 in Academy payments to the SP&C
related to the outside use of the Kings Pointer during fiscal years
2006 and 2007 is questionable.
Table 6: Questionable Payment Transactions Related to the GMATS's Use
of the Kings Pointer, Fiscal Years 2006 and 2007:
Transactions: GMATS payments to the Academy;
FY 2006: $166,153;
FY 2007: $200,753;
Total: $366,906.
Transactions: Academy payments to SP&C;
FY 2006: $96,388;
FY 2007: $121,460;
Total: $217,848.
Transactions: Funds retained by Academy;
FY 2006: $69,765;
FY 2007: $79,293;
Total: $149,058.
Source: GAO analysis of unaudited Academy, SP&C, and GMATS data.
[End of table]
Questionable Use of Academy Property, Payments to Academy Employees,
and Retention of Fees by Athletic Association NAFI:
We found that the Athletic Association NAFI operated camps and clinics
on Academy property and that the Athletic Association NAFI, and not the
Academy, was compensated for the use of government property. We also
found that instructors who were compensated in part by the Academy
participated in these commercial activities on Academy property in
return for a share of the proceeds from those activities.
During fiscal year 2008, the Athletic Association collected $94,077 in
fees for conducting athletic camps and clinics. Of the funds collected,
$72,847 was paid to instructors, $19,327 was retained by the Athletic
Association as a facility fee, and $1,903 was either retained by the
Athletic Association or used for other payments not identified in our
review.
According to Athletic Association staff, $62,122 of the $72,847 paid to
instructors were payments for fee-sharing arrangements with 6
instructors, 5 of whom are current or former Academy employees.
Further, an Academy official described the Athletic Association's
retention of $19,327 as being essentially the net profit from the camps
and clinics that was retained as a facility fee. However, no portion of
the $19,327 was paid to the Academy for the use of the Academy's
facilities.
Academy Payroll Activities Contributed to Three Separate Violations of
the ADA:
Academy payroll activities contributed to three separate violations of
the ADA. First, the Academy incurred approximately $525,000 more for
salaries and benefits in fiscal year 2006 than the $23,512,000
appropriated for its salaries and benefits.[Footnote 23] The payments
were for performance awards that Academy personnel earned in fiscal
year 2006 that the Academy erroneously charged against fiscal year 2007
appropriations. Academy officials told us the amounts could not be
corrected with prior year's funds because the Academy lacked a
sufficient unobligated balance in its fiscal year 2006 salaries and
benefits appropriation to transfer the charge from the fiscal year 2007
appropriations. This resulted in a violation of the ADA,[Footnote 24]
which was included in the Secretary's reports of March 9, 2009, to the
President and the Congress that included multiple ADA violations.
Second, in March 2009 the Secretary of the Department of Transportation
reported to the President and the Congress that the Department violated
section 1342 of the ADA, which prohibits the acceptance of voluntary
services and the employment of personal services. Specifically, it
determined the Academy paid over $4 million in both fiscal years 2006
and 2007 under agreements with the FCO for illegal personal services
from the Academy's NAFIs that were provided by as many as 90 employees
who performed exclusively Academy functions, and reported to Academy
supervisors. These expenses were recorded as contracted services in the
Academy's books and records. The Secretary concluded that many
agreements called for the employment of personal services, which are
characterized as an employee-employer relationship.
For example, an agreement between the FCO and the Academy for
information technology services, dated November 14, 2006, and as
modified through August 16, 2007, provided that the Academy would pay
FCO $941,681 during fiscal year 2007 for services described in the
agreement as professional services to the Department of Information
Technology, and administrative support services. A supporting schedule
to the agreement detailed the annual salaries for 11 staff by name, the
general schedule (GS) equivalent grade for each staff except 1, the
amounts for the salaries of 2 NAFI contractors, and amounts for fringe
benefits and cost of living adjustments. The information technology
agreement covered all the staffing needs for the Academy's Department
of Information Technology except for one individual. Thus, through this
agreement the Academy paid 100 percent of the salary and benefit costs
for all 11 FCO staff and the full cost of the NAFI contractors listed.
Each of the staff covered by the agreement with the FCO performed
Academy functions under the supervision of a government employee, but
the expense for their services was classified as contract services and
not as payroll.
A similar agreement for services related to athletics, dated November
14, 2006 as modified through August 16, 2007, between the FCO and the
Academy provided that the Academy would pay the FCO $481,132 during
fiscal year 2007 for services described in the agreement as
professional services to the Academy's Department of Athletics. The
supporting schedule to the agreement detailed the annual salary amount
for 32 staff by name and amounts for fringe benefits and cost of living
adjustments. The Academy was responsible for 40 to 100 percent of the
total cost by individual. These expenses were also classified as
contract services and not as payroll.
We asked Academy and MARAD officials for an analysis supporting the
portion of the payroll that was assigned to the Academy under the
agreement for information technology and athletics services. We were
told by the Academy's Assistant CFO and the MARAD CFO that there was no
overall analysis that would support the distribution of amounts between
the Academy's appropriated funds and NAFI expense for the payroll
covered by any of the agreements between the Academy and the FCO.
In addition to the issues discussed above, the Secretary reported in
the March 2009 report to the President and the Congress that the
Academy also violated section 1342 of the ADA over the past 4 years by
employing about 50 adjunct professors under illegal personal services
contracts valued at $2.4 million. The Academy funded these services out
of the Academy's fiscal year appropriations that were unavailable for
salaries.
Weak Control Environment and Flawed Academy Internal Controls:
We found that a weak overall control environment and the flawed design
and implementation of internal controls were the root causes of the
Academy's inability to prevent, or effectively detect, the numerous
instances of improper and questionable sources and uses of funds
discussed previously. Specifically, we found the Academy lacked an
accountability structure that clearly defined organizational roles and
responsibilities; policies and procedures for carrying out its
financial stewardship responsibilities; an oversight and monitoring
process; and periodic, comprehensive financial reporting. We found that
there was little evidence of awareness or support for strong internal
control and accountability across the Academy at all levels, and risks,
such as those that flow from a lack of clear organizational roles and
responsibilities and from significant activities with affiliated
organizations, that were not addressed by Academy management. The
internal control weaknesses we identified were systemic and could have
been identified in a timely manner had Academy and MARAD management had
in place a more effective oversight and monitoring regimen. Further, we
found that the Academy did not routinely prepare financial reports and
information for use by internal and external users that could have
helped to identify the improper and questionable sources and uses of
funds.
Risks Posed by Academy and NAFI Relationships Are Not Adequately
Managed:
An entity's organizational accountability structure provides the
framework within which its activities for achieving its mission
objectives are planned, executed, and controlled. The process of
identifying and analyzing risk is a critical component of effective
internal control. GAO's Internal Control Implementation Tool[Footnote
25] provides that management should periodically evaluate its
organizational structure and the risks posed by its reliance on related
parties and the significance and complexity of the activities it
undertakes. Further, as discussed previously, one of the primary
requirements of the ADA is to establish accountability for the
obligations and expenditure of federal funds. In carrying out its
mission operations, the Academy has close relationships with its 14
affiliated NAFIs and 2 foundations. Therefore, it is important for the
Academy to recognize and appropriately manage the risks posed by the
organizational and transactional relationship between it and its NAFIs.
These risks and the volume of activities between the Academy and the
NAFIs should have signaled to Academy management that there was a need
for strong oversight and accountability over these activities and
relationships.
Our review indicated that 11 NAFIs do not have approved governing
documents, such as charters and by-laws, and the remaining 3 NAFIs with
approved governing documents perform some duties and functions which
fall outside of the narrow scope of authority set out in those
documents. Further, the relationships between the Academy and its 14
NAFIs are complex, and we found that they often involve numerous
financial transactions, the business purpose of which is frequently not
readily apparent. As such, it is not always clear where the respective
responsibilities of the Academy and its NAFIs begin and end.
In addition, we found that the Academy did not address the risks posed
by its organizational structure, including not establishing a system of
checks and balances over the sources and uses of funds with its NAFIs.
Further, the inappropriate practices and improper use of Academy
resources by Academy managers that we found occurred and continued for
years. For example, the collection of questionable midshipmen fees for
hospital services, among others: the accumulation of excess fees "off-
books" in commercial bank accounts for discretionary or "rainy day"
purposes: and the preserving or "parking" of Academy appropriated funds
with the FCO, all occurred within a culture of lax accountability
involving both Academy and NAFI management that was accepting of these
types of activities.
Further, the risks posed by the Academy's relationship with its NAFIs
led to improper transactions. For example, as previously discussed in
this report, GMATS provided a percentage of its profits each year to
the FCO for the benefit and use of the Academy. However, there was no
agreement covering these transactions. We also found insufficient
review of the Academy's use of GMATS funds and no indication that there
was consideration of the legality or appropriateness of those
transactions. There was also insufficient consideration of the legal
and internal control ramifications of Academy agreements with the FCO
for personal services. As previously discussed in this report, the
services provided by these agreements totaled over $4 million per year,
which represented about 17 percent of the annual Academy appropriation
for salaries and benefits. Also, the Academy did not provide us with
information on the authority for establishing the prior years'
reserves, or the rules, policies, and procedures for operation of the
reserves, including, for example, specifics on authorized uses of the
funds.
Financial Reporting Not Comprehensive and Did Not Address All Legal
Requirements:
Standards for Internal Control in the Federal Government[Footnote 26]
provides that for an agency to run and control its operations, it must
have relevant, reliable information, both financial and non-financial.
For example, those charged with governance should have timely
information on the amount and sources of the Academy's resources. This
includes information on the Academy's appropriated funds as well as
funds it receives from other sources, such as midshipmen fees and
receipts from affiliated organizations for goods and services provided
to them by the Academy.
If such information had been produced routinely by the Academy and made
available to decision makers and those charged with governance, they
may have identified red flags that signaled the need for attention. For
example, financial reports for the Academy that provided detailed
financial information may have signaled the need for inquiry as to the
reasons for such things as the Academy annually paying approximately $4
million from appropriated funds for contracted personal services and
reflecting such expenses as other than payroll in its books and
records.
Academy Did Not Routinely Prepare Financial Reports:
We found that for fiscal years 2006 and 2007, the Academy did not
routinely prepare financial reports separately presenting information
on all its financial activities, including its sources and uses of
funds, and amounts due to and from others. The Academy's activities are
included in MARAD's financial reports, but its activity and balances
are not separately identified.[Footnote 27] As a result, users of
MARAD's financial reports could not readily identify the sources and
uses of funds attributable to the Academy or the amounts due to and
from others by the Academy. Such information is typical in financial
reports and statements.
We found that the Academy prepared and reported selected financial
information from time to time for use by its managers. However, Academy
officials told us that such reports were sporadic, unreliable, and were
not used for decision making. For example, the head of the Academy's
Department of Information Technology told us that, among other things,
the expense and obligation information that he received was typically
not timely and that the information provided to him was inaccurate and
could not be relied upon. An Assistant Superintendent told us that he
did not typically receive financial information on the significant
business activities that he was responsible for, including a $6
million, 5-year contract for medical services with a local hospital. We
also found that comprehensive financial reports on Academy activities
and balances were not routinely prepared and made available for review
by Academy or MARAD management.
Academy Did Not Comply with Congressional Reporting Requirements:
The Academy did not fully comply with a legal requirement to annually
provide the Congress with a statement of the purpose and amount of all
expenditures and receipts. We reviewed the reports submitted to the
Congress for fiscal year 2008 and found that the reports included some,
but not all expenditure and receipt information. For example, the
reports included information on gifts and bequests received and tuition
receipts by GMATS. However, the reports did not include any information
on gifts and bequests received by the Academy and paid to others,
[Footnote 28] receipts and expenditures of GMATS, or midshipmen fees
collected or expenditures made from the fees collected by FCO. The
inquiry and analysis necessary to prepare and file a complete report
may have provided information to address the issues we discussed
previously in this report involving GMATS and midshipmen fees. The
MARAD CFO told us in August 2008 that the Academy would take actions to
include information for all NAFIs and midshipmen fee activities in
future reports to the Congress. However, we were subsequently told that
such information was not included in the May 2009 report that
accompanied the Department's budget justification document because the
necessary analysis had not been completed. MARAD officials subsequently
told us that they would submit an amended report with this data.
Further, we found that the Department did not comply with a 1994 legal
requirement to annually report to Congress any changes in midshipmen
fee assessments for "any item or service" in comparison with fees
assessed in 1994.[Footnote 29] We identified changes in the nature and
the amount of fees collected by the Academy from 1994 forward that were
not reported by the Department to the Congress. A MARAD official told
us that changes in the fees had occurred since 1994, but he did not
know why the reports had not been filed. Had changes in midshipmen fees
over the last 15 years been reported to the Congress, red flags may
have been raised about the increases and the total amount of midshipmen
fees being charged that could have been addressed by those charged with
oversight and monitoring. Further, a systematic process to identify
changes in midshipmen fees from year to year and to report the changes
to those officials charged with reporting to the Congress on these
matters may have functioned as an important early detection control.
Limited Oversight and Monitoring In Place to Assure Effective
Accountability over Academy Resources:
Standards for Internal Control in Federal Government provides that an
entity's control environment should include management's framework for
monitoring program operations to ensure its objectives are achieved.
However, the absence of effective oversight by MARAD contributed
directly to the opportunity for improper practices and questionable
activities and payments and for the continuation of such practices over
long periods of time without detection. Our review found a number of
instances in which effective oversight procedures could have helped
identify and address the Academy fund control deficiencies we discussed
previously. For example, we found that MARAD did not have or did not
enforce basic prevention and detection controls such as requiring
periodic financial reports of Academy's sources and uses of funds or
performing high level analytical reviews of reported revenues and
expense of the Academy. Also, MARAD did not enforce the existing
policies for monitoring of NAFI activities, such as the requirements
for submission and review of annual audited financial statements for
each NAFI.[Footnote 30]
We found a wide range of activities between the Academy and its 14
NAFIs that lacked transparency and for which there was insufficient
review and consideration by Academy and MARAD officials. Some of these
activities were reflected in the Academy's books and records, and some
were apparent only from looking beyond the form of the transaction to
find underlying cross subsidies and barter arrangements. For example,
we found there were no independent reviews, either by the Academy, by
MARAD officials, or by both, conducted before entering into agreements
for training services that were provided to external federal agencies
by GMATS and not the Academy.
Inadequate Accountability over Capitalizable Assets:
Our analysis of costs charged against the Academy's no-year capital
improvement appropriation identified some costs that were recorded as
repairs and maintenance expenses that appeared to represent
capitalizable assets.[Footnote 31] For example, under the no-year
capital improvement appropriation, we identified $779,731 of recorded
expenses in 2007 for payments to one vendor for items of furniture and
equipment. The MARAD CFO told us that he was aware that timely reviews
were not performed of the Academy's expenses in either 2006 or 2007.
Such reviews are important because of the large amount of capital
improvement projects at the Academy and could have identified items
that should have been capitalized with necessary adjustments made
before the books were closed for the year and financial and budgetary
reports prepared. The Academy received $15.9 million and $13.8 million
for fiscal years 2006 and 2007, respectively, in no-year appropriations
for its capital improvement projects.[Footnote 32]
At our request MARAD reviewed selected categories of expenses for
fiscal years 2006 and 2007 and identified $3,380,528 for 2006, and
$1,695,670 for 2007 (including the $779,731 described above) that
should have been capitalized as assets. The payments were appropriately
funded using the Academy's no-year appropriations. These officials told
us that adjustments to correct for the errors of $5,076,198 were made
during fiscal year 2009. MARAD also identified additional expenses of
$1,459,103 and $1,972,622 for 2006 and 2007, respectively, which were
improperly funded with the no-year capital improvement appropriation.
In June 2009, these officials told us that adjustment to correct for
these errors would also be considered before the close of fiscal year
2009 in conjunction with the other matters that we identified in this
report that may require adjustment to the Academy's appropriation
accounts.
Lack of Controls and Accountability over the Collection and Use of
Midshipmen Fees:
The Academy lacked adequate procedures and controls to maintain
effective accountability over the amounts charged to midshipmen and to
ensure that midshipmen fees collected were used only for their intended
purpose---covering the costs of goods or services provided to the
midshipmen that are generally of a personal nature. The Academy has no
policy on what midshipmen fees activity and balances should be
reflected in its official records and reports or what is properly
excludable. As discussed previously, these deficiencies resulted in the
Academy's charging midshipmen fees for items that were not of a
personal nature and in amounts that were in excess of the related
expenses for the goods or services. Further, the treatment of
midshipmen fee activities "off-book" did not provide necessary
accountability for the collection and use of the fees.
We also found that the FCO's records did not consistently support the
activity in the midshipmen fee accounts. DRM, FCO, and Academy staff
and officials, as well as the Academy's Assistant CFO informed us that
the support we requested for specific transactions could not be
located, including memorandums from staff and officials describing or
authorizing fees or supporting amounts collected or paid. We were also
told that the activities reflected in the bank accounts that held the
prior years' reserves were not reconciled to FCO records for any month
in the 3 years covered by our review. We found that reports provided to
us for monthly activity--increases and decreases--in reserve balances
for each of the separate categories did not always reflect complete
information on the sources and uses of the reserves. For example, we
found that the FCO's September 2007 activity report for the prior
years' reserves account included transactions that reduced the reserve
account balances for 4 of the 8 reserve sub accounts by a total of
$100,000, but did not identify the payee or other information on the
use of funds. FCO staff told us that this difference was due to an
error. The Academy's Assistant CFO told us that no further
documentation or explanation for this activity was available.
As indicated, the FCO was responsible for paying bills using midshipmen
fees that were presented for processing by officials with
responsibility for Academy departments such as Health Services and
Information Technology as well as requests for payments from the
Academy's Superintendent and other officials. However, we found that
FCO staff did not appropriately question the items presented for
payment to determine the sufficiency of the support for the payment
that was requested.
Lack of Accountability over GMATS Training Activities and Funding:
The Academy entered into agreements to provide training services to
other federal agencies that were provided by GMATS and not the Academy.
Federal accounting standards provide that an entity should recognize
revenue and expenses when the entity provides goods or services to
another entity in an exchange, such as by contracting to provide
training to another entity.[Footnote 33] However, we found that the
Academy recognized revenue and expenses even though it was not a party
to the exchange of services and resources. These improperly recognized
revenues and expenses were reflected in MARAD's budget and financial
reports. Further, the Academy paid GMATS for the funds received from
other federal agencies when reviewing and approving officials did not
have proper support for the payments. A summary of the revenue and
expenses that the Academy recorded for transactions between GMATS and
other federal agencies is shown in table 7.
Table 7: Revenue and Expense Recognized by the Academy from Agreements
between GMATS and Other Federal Agencies, Fiscal Years 2006 and 2007:
Accounting records of Academy: Revenue - from other federal
agencies[A];
FY 2006: $1,650,473;
FY 2007: $4,759,769.
Accounting records of Academy: Expense - payments to GMATS[B];
FY 2006: $1,428,948;
FY 2007: $4,609,113.
Source: GAO analysis of unaudited Academy data.
[A] Amounts per the Academy's data. These amounts represent funds
received from federal agencies for training provided by a non-federal
entity, GMATS.
[B] Amounts per the Academy's data. These amounts represent payments by
the Academy to GMATS for funds received by the Academy from federal
agencies.
[End of table]
In addition, the Academy did not provide proper accountability for the
acceptance and use of annual contributions from GMATS by using another
NAFI, the FCO, as recipient of the funds on behalf of the Academy.
Neither the receipt nor the use of those funds was reflected in the
Academy's accounting records. Further, the amounts accepted for the
Academy by the FCO from GMATS were not supported by appropriately
detailed billings or analysis from the Academy to GMATS. Instead, the
amounts of contributions paid from GMATS to the Academy were
unilaterally determined by GMATS and were paid to the FCO and, at
times, directly to vendors on behalf of the Academy.
Controls Ineffective in Preventing Improper Accruals and "Parking"
Funds:
Federal accounting standards provide that entities should establish
accruals only for amounts expected to be paid as a result of
transactions or events that have already occurred.[Footnote 34]
Further, federal appropriation law provides that such accruals, which
are legal obligations, must represent a bona fide need of the agency
for the fiscal year in which the accrual is recognized and that there
must be appropriations available to charge.[Footnote 35] However, we
found the Academy inappropriately recorded over $389,000 during fiscal
years 2006 and 2007. Academy officials accomplished these transactions
by preparing agreements between the Academy and FCO using the
Department's form MA 949, Supply, Equipment or Service Order/Contract.
We also found unauthorized and unsupported loans to the FCO from the
Academy funds that were improperly "parked" with the FCO. The Academy
lacks adequate controls to prevent these improper transactions.
No Policies or Procedures in Place for Usage Fee Revenues from the
Training Vessel Kings Pointer and Other Academy Training Vessels:
We found the Academy lacked policies and procedures and adequate
internal controls over the use of Academy training vessels. For
example, controls did not specify required documentation or approval
for payments with respect to the GMATS's use of the Academy's Kings
Pointer during fiscal years 2006 and 2007, and the related transfer of
funds to the SP&C NAFI. GMATS would pay the Academy for the full
amounts billed by SP&C. However, the Academy would pay a portion of the
funds received from GMATS to the SP&C. Academy payments to the SP&C for
the use of the Kings Pointer, totaling $217,848 for the 2-year period
of our review, were questionable in that (1) they were determined on a
case-by-case basis by the SP&C management and (2) no supporting
documentation was provided for these payments. We also found that the
usage rates for use of the Academy's training vessels was not supported
and not based on consideration of current costs of operation.
Billings to others for the use of government-owned property should be
made by the government agency, in this case the Academy, that owns the
property. The SP&C's billing to others for the use of Academy-owned
vessels and directing how much of the usage fees the FCO should remit
to the Academy and to itself demonstrates how intertwined the
activities and personnel of the Academy's Waterfront Department were
with those of the SP&C. Further, these activities, along with the
Academy's payment of funds to the SP&C without sufficient support for
those payments, illustrates the lack of control over the source and use
of the Academy's financial resources.
We were also told that the underlying study and analysis to determine
hourly usage fees charged for Academy marine asset use during fiscal
years 2006 and 2007 was performed in 1996 or 1997. However, we were
told that supporting documentation was not retained either for the
initial rate study or for the rates in the updated 2004 and 2008 rate
booklets. We also found that the hourly rates per the 2008 rate booklet
did not change from those in the 2004 rate booklet and had not changed
from those used in 1996-1997. Consequently, the Academy has no
assurance that the usage fees cover the full cost of operating the
Kings Pointer and other Academy-owned boats.
Lack of Policies and Procedures and Controls Over Use of Athletic Fees:
Fees for the use of government-owned property should be the property of
the agency that holds it, in this case the Academy. However, we found
the Academy and its Athletic Association NAFI lacked policies and
procedures and other internal controls to properly account for the uses
of fees collected by the Athletic Association from conducting athletic
camps and clinics using the Academy's athletic facilities.
Controls Ineffective in Preventing Improper Payroll-Related
Transactions:
We found that the lack of controls over Academy payroll activities
resulted in the over expenditure of payroll in relation to
appropriations and arrangements for illegal personal services. Also,
for fiscal years 2006 and 2007, approximately half of the Academy's
annual appropriations were designated for payroll; however, we found
that internal controls over payroll were inadequate and did not reflect
consideration of the limits on annual appropriations or the risks posed
by errors or weaknesses in the administration of payroll activities.
For example, Academy internal controls did not prevent improper payroll-
related transactions that violated the ADA. Specifically, MARAD stated
that challenges in working with MARAD's own payroll process and systems
contributed to delays in determining actual payroll expenses for
Academy employees. The payroll for these federal employees is processed
by the Academy's DRM using MARAD's existing arrangement with another
federal agency as the payroll servicer.
Further, the Academy used NAFI employees performing work for the
Academy under Academy employees' supervision to assist in carrying out
Academy mission functions. The FCO and other NAFIs would hire staff as
employees of their own organizations and then contract with the Academy
for a fee, which the NAFIs then used to pay the payroll and related
expenses of the NAFI staff. Annually, the Academy would execute
agreements with the NAFIs to provide the Academy with services using
one of the Department's standard forms designed for use with external
parties (MA 949, Supply, Equipment or Service Order/Contract). These
expenses were recorded as contracted services in the Academy's books
and records. There was insufficient consideration by Academy officials
of the legal and internal control ramifications of these personal
services agreements. The Administrator reported to the Deputy Secretary
in his February 2008 report that the relationships between the Academy
and individual employees appeared to constitute one of personal
services, which reflect an employer-employee relationship instead of an
independent contractual one. The expenses for the services provided by
these agreements totaled over $4 million per year, which represented
about 17 percent of the annual Academy appropriation for salaries and
benefits.
Actions by the Department, MARAD, and the Academy to Address Certain
Accountability and Internal Control Challenges:
Over the course of our review, we found that various actions were
taken, and were in process, that were intended to improve the Academy's
and its affiliated organizations' internal controls. For example, on
October 1, 2007, MARAD established the Academy Fiscal Oversight and
Administrative Review Board (Oversight Board).[Footnote 36] The
Oversight Board is chaired by the MARAD CFO and is charged with
providing fiscal oversight and administrative management of the Academy
in coordination with the Maritime Administrator and other MARAD and
Academy officials. Another significant action was the creation in July
2008 of the position of Assistant Chief Financial Officer for the
Academy with direct reporting responsibility to the MARAD CFO. This
position was initially temporary, but made permanent in March 2009. It
provides for a senior financial official at the Academy to conduct
oversight and monitoring of Academy financial activities on a real time
basis. This action, combined with much needed organizational support by
MARAD officials, provides an important signal emphasizing a focus on
the importance of financial accountability.
MARAD also subsequently submitted a legislative proposal to Congress
seeking authority to convert the NAFI positions to civil service
employment positions. In the Duncan Hunter National Defense
Authorization Act for Fiscal Year 2009,[Footnote 37] Congress provided
the Administrator with authority to appoint current NAFI employees to
competitive civil service positions for terms of up to 2 years.
Further, MARAD submitted a legislative proposal to Congress seeking
statutory authority to enter into personal services contracts with part-
time adjunct professors. In the Duncan Hunter National Defense
Authorization Act for Fiscal Year 2009,[Footnote 38] Congress provided
the Administrator with temporary authority for the 2008-2009 academic
year to contract with up to 25 individuals to provide personal services
as adjunct faculty.
We also found that the Department and MARAD made a number of
improvements in its controls during the course of our review. For
example, following discussions with the Department's Chief Financial
Officer, the MARAD CFO, and the Inspector General and staff during
October 2008, the MARAD CFO shortly thereafter took steps to secure and
protect the accumulated prior years' balances--held in commercial bank
accounts--of midshipmen fees that totaled approximately $1 million as
well as excess funds from the current year's fees that also may be as
much as $1 million.
We also found that action has been taken or is under way on a number of
other important issues as well, including:
* MARAD directed the Academy to stop facilitating reimbursable
contracts on behalf of GMATS.
* A billing methodology for certain services provided by the Academy to
GMATS is under development.
* The use of FCO to obtain over $4 million a year in illegal personal
services was discontinued in 2008.
* MARAD is working with Academy officials to address the inappropriate
commingling of activities that we describe in this report involving the
Academy athletics and waterfront departments and certain NAFIs.
In October 2008, the Maritime Administrator announced the selection of
a new Superintendent. We met with the Superintendent, the MARAD CFO,
and the Academy's Assistant CFO to discuss the Academy's significant
flaws in controls and the business risks that our work was identifying.
We also communicated our view that the Academy should aggressively move
forward with change efforts and not wait for a formal report from us
with targeted recommendations for action. The Superintendent agreed
with our suggestions.
On March 9, 2009, the Secretary reported several violations of the ADA
at the Academy to the President, the Congress, and the Comptroller
General, as required by the act. The Secretary estimated that the
multiple violations totaled as much as $20 million. Further, the
Secretary reported that corrective and disciplinary action had been
taken with respect to the officials responsible for the violations and
that MARAD and the Academy had revised internal control procedures and
taken actions and had other actions under way to improve internal
controls at the Academy.
Finally, the Omnibus Appropriations Act, 2009, placed certain
restrictions and limitations on the use of appropriations made for the
Academy for fiscal year 2009.[Footnote 39] For all apportionments made
(by the Office of Management and Budget) of these appropriations for
the Academy, the act required the Secretary to personally make all
allotments to the MARAD Administrator, who must hold all of the
allotments. In addition, the act conditioned the availability of 50
percent of the amount appropriated on the Secretary's, in consultation
with the MARAD Administrator, completing and submitting to the
congressional appropriations committees a plan on how the funding will
be expended by the Academy.
Conclusion:
The problems we identified concerning improper or questionable sources
and uses of funds involving the Academy and its affiliated
organizations, including the known and possible violations of the ADA
described in this report, undermines the Academy's ability to carry out
its basic stewardship responsibilities and to comply with the ADA and
other legal and regulatory requirements, and may also impair its
ability to efficiently achieve its primary mission--to educate
midshipmen. These problems can be attributed to a weak overall control
environment and the flawed design and implementation of internal
controls. Revelations of such activities call into question the
stewardship responsibilities of the Academy and signal failures of
oversight and governance responsibilities. Moreover, such activities
reflect unmitigated risks posed by the Academy's close organizational
and transactional relationships with its NAFIs, including the lack of
clearly defined roles and responsibilities. If such improper and
questionable activities are not prevented or detected in a timely
manner, they may adversely impact the Academy's credibility.
The Academy, MARAD, and the Department have begun important steps to
improve the control environment and address internal control weaknesses
at the Academy, including new leadership at the top and newly energized
oversight and monitoring practices. However, a comprehensive strategy
for addressing these weaknesses and establishing internal control
policies and procedures across virtually all aspects of the Academy's
financial activities are not yet in place. Further, given the amount of
improper and questionable uses of funds detailed in this report, MARAD
and the Academy should consider recovering funds that were improperly
paid. Vigilance by MARAD and the Department in their oversight and
monitoring of the Academy and greater transparency in the Academy's
relationships and transactions with its affiliated organizations will
be crucial to achieving effective accountability over the Academy's
funds and other resources. Sustained commitment to sound accountability
practices by leaders and management at the Department, MARAD, and
especially at the Academy will be critical to long-term success.
Recommendations for Executive Action:
We make 47 recommendations to the Department of Transportation directed
at improving internal controls and accountability at the Academy and to
address issues surrounding the improper and questionable sources and
uses of funds.
We recommend that the Secretary of the Department of Transportation
take the following actions:
To determine whether the Academy complied with the ADA, we recommend
that the following actions be taken:
* Determine whether legal authority exists to retain payments to the
Academy from GMATS, both in Academy appropriations accounts and in
commercial bank accounts of affiliated organizations, and if not,
adjust the Academy's appropriations accounts to charge available
Academy appropriations and expense accounts for the amount of official
Academy expenses that were paid by funds received from GMATS or paid
directly by GMATS on behalf of the Academy. To the extent that
insufficient appropriations remain available for these expenses report
ADA violations as required by law.
* Determine the amount of midshipmen fees that were used to cover
official Academy expenses without legal authority to do so and adjust
the Academy's accounts, as necessary, to charge available
appropriations for such expenses. To the extent that insufficient
appropriations remain available, report ADA violations as required by
law.
To provide reasonable assurance that the Academy will comply with the
ADA and other applicable laws and regulations, we recommend that the
following action be taken:
* Perform a review of the funds control processes at the Academy and
take actions to correct any deficiencies that are identified.
We recommend that the Secretary of the Department of Transportation
direct the Administrator of MARAD, in coordination with the
Superintendent of the Academy, to take the following actions:
To improve the design and operation of the internal control system at
the Academy, we recommend that the following actions be taken:
* Establish a comprehensive risk-based internal control system that
addresses the core causes and the challenges to proper administration
that we identify in this report, including the risks and challenges
that flow from the close organizational and transactional relationships
between the Academy and its affiliated organizations and implement
internal controls that address the elements of our Standards for
Internal Control in the Federal Government, including the role and
responsibilities of management and employees to establish and maintain
a positive and supportive attitude toward internal control and
conscientious management, and the responsibility for managers and other
officials to monitor control activities.
* Implement a program to monitor the Academy's performance, including:
reviews of periodic financial reports prepared by Academy officials;
and reviews of the Academy's documentation and analysis from its review
of its periodic financial reports and associated items, such as the
results of its follow-up on unusual items and balances.
To improve internal controls over activities with its affiliated
organizations, we recommend that the Academy take the following
actions:
* Perform a comprehensive review and document the results of an
analysis of the risks posed by the Academy's organizational structure
and its relationships with each of its affiliated organizations,
including: address the inherent organizational conflicts of interest
that we identify in this report regarding Academy managers having
responsibility for activities with affiliated organizations that are in
conflict with the managers' Academy responsibilities, and determine
whether the current organizational structure should be maintained or
whether an alternative organizational structure would be more efficient
and effective, while at the same time reducing risk and facilitating
improvement in internal control and accountability.
* Require that all affiliated organizations have approved governing
documents and that the functions they will perform in the future are
consistent with their scope of authority.
* Perform an analysis to identify each activity involving the Academy
and its affiliated organizations and for each activity determine: the
business purpose; the reason for Academy involvement; the business risk
that each activity presents; and if the activity complies with law,
regulation, and policy. Design a robust system of checks and balances
for each activity with each affiliated organization that is consistent
with the business risk that each activity presents considering, among
other things, the nature and volume of the activities with each
affiliated organization.
* Establish formal written policies and procedures for each activity
involving the Academy and an affiliated organization and specify for
each activity: the required documentation requirements, necessary
approvals and reviews, and requirements for transparency (e.g., require
regular financial reports for each activity for review and approval by
Academy management and MARAD officials charged with oversight).
Establish internal controls for each activity with each affiliated
organization, including (1) the planned timing of performance of the
control activity (e.g., periodic reconciliations of billings with
collections); (2) the responsibilities for oversight and monitoring and
the documentation requirements for those performing oversight and
monitoring functions; and (3) the necessary direct, compensating and
mitigating controls for each activity.
To improve accountability and internal controls over midshipmen fee
activities and to resolve potential issues surrounding the past
collections and uses of midshipmen fees, the Academy should take the
following actions:
* Perform an analysis to identify all midshipmen fee collections for
fiscal years 2006, 2007, and 2008, to include: identifying those items
for which the fee collected is attributable to (1) an activity between
the midshipmen as customer and a NAFI as service provider (e.g.,
collections for haircuts); and (2) an activity between the midshipmen
as customer and the Academy as service provider (e.g., collections for
personal computers).
- Determine if the (1) fee collected for each item was for a personal
item of the midshipmen and consistent with law, regulation, and policy
for such collections; (2) amount of the fee collected for each item was
properly supported, based on, among other things, an analysis of the
cost to the Academy for the good or service; and (3) amount collected
exceeded the cost of the good or service.
- Determine if any liability may exist for collections that (1) are not
consistent with law, regulation, and policy as personal items of the
midshipmen; (2) were not properly supported, in whole or part; and (3)
exceeded the cost to the Academy for the good or service.
* Perform an analysis to identify all payment activity and other uses
of the funds collected for midshipmen fees for fiscal years 2006, 2007,
and 2008, to include: reviewing payment activity to identify the
payees, amounts, and other characteristics of the uses of the funds
collected and conducting a detailed review of payment activity and
other uses (e.g., transfers to prior years' reserves) for items
considered as high risk.
- Review all questionable payments, and other questionable uses of
funds, such as transfers to commercial checking accounts for the excess
of collections over funds used, as well as the questionable payments
that we identify in this report.
- For each payment and other use of funds that is determined to be for
other than a proper governmental purpose and that is not consistent
with law, regulation, and policy, consider pursuing recovery from the
organization or individual that benefited from the payment.
* Establish policies and procedures that require those charged by the
Academy with the responsibility for midshipmen fee collections and
payments to: (1) maintain detailed accounting records for all
midshipmen fee activity that reflect accurate and fully supported
information on collections, payments, and other activity that is
consistent with document retention practices; (2) implement written
review and approval protocols for all midshipmen fee collections and
uses of funds consistent with policies and procedures established by
the Academy and MARAD; and (3) provide monthly detailed reports of all
midshipmen fee activity in the aggregate and by item to Academy and
MARAD officials.
* Establish policies and procedures and perform the necessary analysis
to support annual reports to the Congress to address changes in "any
item or service" in midshipmen fees from that existing in 1994 as
required by law.
* Establish written policy and criteria for determining the baseline
items that are properly due from midshipmen for personal items, the
amount of fees to be collected (based on underlying studies), and the
approved uses of the fees collected.
* Establish written policy for the underlying analysis that is required
and the approvals that must be obtained before changes are made in the
baseline of midshipmen fee items, or before a change is made in the
amount of such fees, or in the approved uses of the fees collected.
* Utilize the information obtained from the analysis of midshipmen fees
collected in prior years and other work to determine the amount of
midshipmen fees that should be charged to midshipmen for personal items
in subsequent years.
* Establish written policy for internal reviews of monthly reports of
midshipmen fee activity and balances, identified anomalies, and
questioned items as well as the results from the associated follow-up.
* Perform an analysis to determine whether and, if applicable, the
extent to which appropriated funds and midshipmen fees collected should
be used to pay for contracted medical services.
To improve internal controls over financial information, the Academy
should take the following actions:
* Implement financial reporting policies and procedures that, among
other things, will provide visibility and accountability to Academy
activities and balances to facilitate oversight and monitoring,
including: (1) periodic reporting of actual and budget amounts for
revenues and expenses for the current and cumulative period; (2)
periodic reporting of amounts for activity and balances with affiliated
organizations in detail; and (3) identification of items of revenue and
expense for each funding source, including annual and no-year
appropriated funds and other collections.
* Implement comprehensive policies and procedures for the review of
financial reports, to include requiring: reviews by the preparers of
the financial reports as to their completeness and accuracy; evidence
of departmental management reviews; and written records of identified
anomalies and questioned items, as well as requirements for maintaining
evidence of the results from associated follow-up on all identified
anomalies and questioned items.
* Identify and evaluate the potential misstatements of amounts in the
financial records for the Academy in fiscal years 2006, 2007, and 2008
to determine if restatement or reassurance of budget and financial
reports and statements prepared from those records is appropriate,
including:
- $5,076,198 of errors in accounting for repairs and maintenance
expenses and capital additions, and $3,431,725 of expenses that were
improperly funded with no-year capital improvement appropriations;
- $6,410,242 and $6,038,061 of recorded revenue and expenses,
respectively, from GMATS training programs;
- amounts for midshipmen fee collections and payment activity including
effects on reported revenues, expenses, assets and liabilities; and:
- amounts for sources and uses of funds handled "off-book" that we
identify in this report, including transactions in three
Superintendent's Reserves and with GMATS and FCO.
* Implement policies and procedures to obtain the information necessary
to timely comply with the requirement identified in this report for
annual reports to the Congress that provides all expenditure and
receipt information for the Academy and its affiliated organizations.
To improve accountability and internal controls over the acquisition of
personal services from NAFIs, and to resolve potential issues
surrounding past personal services activities and payments, the Academy
should take the following actions:
* Perform an analysis to identify the nature and full scope of personal
services activities and the associated sources and uses of funds to
include a review of all questionable payments, including those that we
identify in this report for personal services totaling more than $8
million for fiscal years 2006 and 2007. For each such personal services
arrangement: (1) determine if the amounts paid were consistent with the
services received by the Academy; (2) quantify the amounts, if any,
paid by the Academy for personal services that were not received by the
Academy; and (3) document the decisions made with respect to any
payments by the Academy for personal services that were not received,
including decisions to seek recovery from other organizations for such
amounts.
* Develop written policy guidance on acquiring services from NAFIs that
complies with the requirements of law, regulation, and policy on the
proper use of funds by the Academy.
To address funds held in commercial bank accounts of the FCO from prior
years' reserves and Superintendent's Reserves and to resolve issues
surrounding the past collections and uses of funds for excess
midshipmen fee collections, the Academy should take the following
actions:
* Perform an analysis to identify all activities in the prior years'
and other reserves including all sources and uses of funds for fiscal
years 2006, 2007 and 2008.
- Review all the questionable payments and other activity, including
payments that we identify in this report that according to FCO records
total $605,347.
- For each payment that is determined to be for other than a proper
governmental purpose and that is not consistent with law, regulation,
and policy, consider pursuing recovery from the organization or
individual that benefited from the payment.
* Investigate the unexplained $100,000 transaction(s) in September 2007
per the off-line or "cuff" accounting records maintained by FCO and
take actions as appropriate.
* Finalize actions to protect and recover Academy funds held in
commercial bank accounts by the FCO from current and prior years'
midshipmen fees that totaled approximately $2 million at September 30,
2008.
* Require that: (1) bank reconciliations be prepared for all activity
in the commercial bank accounts of the FCO used for these reserves
during fiscal years 2006, 2007 and 2008; (2) documentation be prepared
for all questionable items as well as the related follow-up; and (3)
going forward such bank reconciliations be timely prepared and
independently reviewed by Academy staff with no direct involvement in
the reconciliations or the activity in the bank accounts.
To improve internal controls over activities with GMATS, the Academy
should take the following actions:
* Perform an analysis to identify all activities between the Academy
and the NAFI, GMATS, during fiscal years 2006 and 2007 and determine
for each activity: the nature of the activity; the amounts collected by
the Academy or others for the benefit of the Academy; the nature and
amounts paid, by the Academy or by others for the benefit of the
Academy from the funds collected; the business purpose; the reason for
Academy involvement; and if the activity complies with law, regulation,
and policy.
* For each payment that is determined to be for other than a proper
governmental purpose and that is not consistent with law, regulation,
and policy, consider pursuing recovery from the organization or
individual that benefited from the payment.
* Establish formal written policies and procedures that, among other
things, specify the allowable activities and transactions between the
Academy and GMATS, and details the necessary approvals and reviews
required for each activity.
* Establish targeted internal controls for each direct and indirect
activity between the Academy and GMATS.
To improve internal controls over accruals and to resolve potential
issues surrounding past "parking" of appropriated funds, the Academy
should take the following actions:
* Perform an analysis to identify all activities involving accrual
accounts used to "park" appropriated funds with the FCO, including all
sources and uses of funds for fiscal years 2006 and 2007.
* For each payment that is determined to be for other than a proper
governmental purpose, consider pursuing recovery from the organization
or individual that benefited from the payment.
* Establish written policy guidance on the accrual of items of expense
at year-end.
* Establish targeted internal controls that, among other things,
provide the criteria for accruals, specify the documentation
requirements for accruals, and provide management's review and approval
procedures.
To improve internal controls over activities from usage of the training
vessel--Kings Pointer and other Academy-owned boats--by others, the
Academy should take the following actions:
* Perform an analysis to identify all activity involving the use of the
Kings Pointer and Academy-owned boats by others, including all sources
and uses of funds for fiscal years 2006 and 2007.
- Identify and recover the cost of any unreimbursed non-governmental
uses, to the extent authorized by law.
- For each payment, including payments to affiliated organizations,
that is determined to be for other than a proper governmental purpose
and that is not consistent with law, regulation, and policy, consider
pursuing recovery from the organization or individual that benefited
from the payment.
* Establish written policies and procedures to govern the use of the
Academy-owned training vessel the Kings Pointer and other boats,
including addressing issues for ship's crews, insurance, security,
billing procedures, and other responsibilities.
* Perform or contract out for a comprehensive usage-rate study to
establish usage rates. Such a study should include (1) consideration of
the full cost to the Academy of the training vessels and other boats,
including salaries and benefits of Academy personnel, major repairs,
routine maintenance, non-routine maintenance and long-term repairs,
fuel and dockage; and (2) identification of indirect expenses and
imputed costs as appropriate (e.g., depreciation).
* Establish policy for the timing and extent of the analysis required
for periodic updates to the usage-rate study.
* In coordination with the Department or MARAD legal counsel, as
appropriate, determine if the Academy had the legal authority to retain
and use any collections from the use of the Academy-owned training
vessel the Kings Pointer and other boats; otherwise, deposit them in
the general fund of the U.S. Treasury.
To improve internal controls over camps and clinics operated by the
Athletics Association NAFI or others on Academy property, the Academy
should take the following actions:
* Perform an analysis to identify practices at the Academy involving
camps and clinics operated by the Athletics Association or others using
Academy property and other assets. Document the nature and scope of
such activities, including all sources and uses of funds for fiscal
years 2006 and 2007 and take corrective action on any improper
transactions.
* Establish written policies and procedures for camps and clinics
operated by the Athletics Association NAFI or others on Academy
property.
* Establish targeted internal controls that include: approvals
required; costs to be recovered by the Academy; requirements (such as
advance approval) for participation by Academy employees in the
activities; and other matters of importance such as, insurance
requirements, security, and required accountings to be provided to the
Academy on the sources and uses of funds from each event.
To improve internal controls over processing of vendor invoices and
accounting for repairs and maintenance expenses and additions to
capital assets, the Academy should take the following actions:
* Perform an analysis to identify the causes of the errors in the
recording of repairs and maintenance expenses that should have been
capitalized totaling $5,076,198, and $3,431,725 of expenses that were
improperly funded with the no-year capital improvement appropriation,
during fiscal years 2006 and 2007.
* Establish written policies and procedures for repairs and maintenance
expenses and capital asset additions that require: (1) periodic reviews
of recorded amounts for repairs and maintenance expenses and capital
asset additions to identify and timely address issues requiring
management attention; and (2) correction of errors before financial
reports are prepared from the books and records.
* Establish polices and procedures for periodic reporting of financial
information for repairs and maintenance expenses and capital additions
to assist users in monitoring these items as well as the funding
sources--annual appropriations or no-year appropriations for long-term
improvement projects.
Agency Comments and Our Evaluation:
We received written comments from the Department of Transportation on a
draft of this report (see appendix V). The Department stated that the
Academy and MARAD have initiated many corrective actions to address the
internal control weaknesses identified in our draft report and that
management at the Academy, MARAD, and the Department take very
seriously our findings and recommendations. The Department also stated
that MARAD will produce a comprehensive strategy and corrective action
plan to address all of the internal control weaknesses, as well as a
detailed response to each recommendation. The Department also
separately provided technical comments that we incorporated, as
appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. We will then send copies to other appropriate
congressional committees, the Secretary of Transportation; the
Administrator, Maritime Administration; and the Superintendent, United
States Merchant Marine Academy. In addition, the report will be
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact me at (202) 512-2600 or franzelj@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made key contributions
to this report are listed in appendix VI.
Signed by:
Jeanette M. Franzel:
Managing Director:
Financial Management and Assurance:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Objectives:
This report responds to your request that we study the internal control
environment and selected activities and expenditures of the Academy and
its non-appropriated fund instrumentalities (NAFIs), in addition to the
oversight and monitoring practices by the Maritime Administration
(MARAD), an operating administration of the Department of
Transportation. Our specific objectives were to determine whether there
(1) were any potentially improper or questionable uses of funds by the
Academy, including transactions with its affiliated organizations; (2)
was an effective control environment with key controls in place over
the Academy's sources and uses of funds, including transactions with
its affiliated organizations; and (3) were any actions taken, under
way, or planned to improve controls and accountability over the
Academy's funds and resources.
Scope and Methodology:
To address the first two objectives, we analyzed whether the Academy's
policies and procedures were adequate to ensure that Academy funds were
used as intended and for proper governmental purposes and assessed the
Academy's internal controls over its activity and balances against our
Standards for Internal Control in the Federal Government, [Footnote 40]
Internal Control Management and Evaluation Tool, Guide for Evaluating
and Testing Controls Over Sensitive Payments, and Strategies to Manage
Improper Payments.[Footnote 41] Specifically, we:
* reviewed laws, regulations, policies, and procedures over Academy
operations and activities;
* reviewed the MARAD report and discussed the objectives, scope, and
methodology of the internal control review with MARAD officials;
* interviewed selected Department, Department--Office of Inspector
General (OIG), MARAD, Academy, and NAFI staff and officials to obtain
an understanding of (1) their roles and responsibilities, (2) the
internal control environment at the Academy, including the Academy's
organizational structure and relationships to the NAFIs and
management's attitude towards and knowledge of internal controls; (3)
the internal controls over selected Academy payments and activities
with its affiliated organizations--the 14 NAFIs and 2 foundations; and
(4) MARAD and Department practices for overseeing and monitoring the
Academy; and:
* obtained an understanding of the sources of funding for both the
Academy and the NAFIs, including the appropriated funds of the Academy.
We obtained a database of Academy expenses at the transaction level
covering fiscal years 2006 and 2007 and:
* compared these data to amounts reported for the Academy by MARAD in
the Department's annual performance and accountability reports;
* compared the total amounts--MARAD including the Academy--in the
database provided to us with the amounts in the statements of net cost
that MARAD submitted to the Department;[Footnote 42]
* reconciled the MARAD Statement of Net Cost in the database to the
Department's audited financial statements by agreeing the net cost
amounts for MARAD including the Academy that were reported in the
audited financial statements and separately identified in consolidating
statements of net cost schedules for the Department;
* analyzed Academy and NAFI payments, Academy collections of midshipmen
fees, and funds from the FCO and GMATS to identify selected payments
for further testing; and:
* reviewed available documentation supporting selected Academy payment
transactions and requested additional support and explanations from
Academy and NAFI officials to justify the purpose of these transactions
and the sources of funds used.
To review the collection of current year's fees from midshipmen and use
of those fees for fiscal years 2006 and 2007, as well as prior years'
reserve activity for fiscal years 2006 to 2008, we:
* analyzed the collection and payment activity reflected in records
maintained by the FCO;
* requested and reviewed available support to justify the amounts
collected from the midshipmen;
* interviewed Academy and NAFI officials with responsibility for
midshipmen fee collections;
* discussed the results of our analysis with Academy and FCO officials
and as appropriate requested additional information and explanations
from these officials; and:
* considered the support and responses we received to assess whether
the collection and use of midshipmen fees were questionable.
We identified numerous improper or questionable activities and uses of
funds. However, the results of our work are not generalizable to the
population of transactions as a whole because we selected transactions
on a nonstatistical basis. We selected transactions that were
significant to the Academy or the NAFIs and appeared to have a higher
risk of being improper. Consequently, there may be other improper or
questionable activities and transactions that our work did not
identify. We reviewed the March 9, 2009, report of the Secretary to the
President, the Vice President (as President of the Senate), the Speaker
of the House, and the Acting Comptroller General to report several
violations of the Antideficiency Act that occurred over several years
and that the Department estimated totaled as much as $20 million.
To address our third objective, we obtained relevant documentation on
actions taken, under way, or planned, including the MARAD order
establishing the Academy's Fiscal Oversight and Administrative Review
Board.[Footnote 43]
During our review, we visited the Academy in Kings Point, New York, and
MARAD and Department headquarters in Washington, D.C. We also held
teleconferences with Academy officials in New York and MARAD and
Department officials in Washington, D.C. We also reviewed prior OIG and
GAO reports for items of possible relevance to MARAD and Academy
activities and internal controls.
We conducted this performance audit from June 2008 to August 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Department of Transportation, MARAD, Academy, and
Affiliated Organization Relationships:
The following presents the organizational environment in which the
Academy operates and illustrates the nature and amount of some of the
activity that occurred during fiscal year 2007 between the Academy and
its affiliated organizations.
Figure: organizational environment:
[Refer to PDF for image: illustration]
Department of Transportation:
2007 Net Cost of Operations: $63.1 billion, including $931.1 million
for MARAD.
MARAD:
2007 Net Cost of Operations: $931.1 million, including $62.0 million
for USMMA.
USMMA (Academy):
2007 Net Cost of Operations: $62.0 million, including $13.4 million for
payments to NAFIs.
Payments totaling $13.4 million for 2007 were made by the Academy to 10
of the 14 NAFIs. The 14 NAFIs spent a total of $24.4 million. The
Academy paid $2.5 million for 2007 to the NAFIs from gifts and bequests
it received from two foundations. The NAFIs provide services to the
Academy.
Gifts and bequests totaling $2.5 million for 2007 were made by two
foundations to the Academy:
USMMA Alumni Foundation;
USMMA Sailing Foundation.
14 NAFIs:
American Merchant Marine Museum;
Athletic Association;
Chapel Fund;
Cultural Events;
Employees Association;
Faculty and Staff Housing;
Fiscal Control Office;
Global Maritime and Transportation School;
Melville Hall;
Midships Publications;
Music Program;
Regimental Morale Fund Association;
Sail, Power and Crew Association;
Ship’s Service Store.
Source: GAO.
[End of figure]
[End of section]
Appendix III: Academy Expenses by Category, Fiscal Years 2006 and 2007:
Table 8: Academy Expenses by Category, Fiscal Years 2006 and 2007:
2006:
Compensation and benefits;
Payments to NAFIs: ($0.4);
Total expenses: $24,429.7.
Travel and transportation;
Payments to NAFIs: $48.7;
Total expenses: $987.2.
Operating expenses: Operations and maintenance, utilities, other;
Payments to NAFIs: $1,454.4;
Total expenses: $12,723.6.
Operating expenses: Other contractual services;
Payments to NAFIs: $6,059.0;
Total expenses: $13,399.4.
Total operating expenses;
Payments to NAFIs: $7,513.5;
Total expenses: $26,123.0.
Equipment, depreciation;
Payments to NAFIs: [Empty];
Total expenses: $2,079.3.
Gifts and bequests;
Payments to NAFIs: $2,053.6;
Total expenses: $2,062.4.
Total expenses;
Payments to NAFIs: $9,615.4;
Total expenses: $55,681.6.
2007:
Compensation and benefits;
Payments to NAFIs: $38.1;
Total expenses: $26,074.1.
Travel and transportation;
Payments to NAFIs: $3.4;
Total expenses: $888.9.
Operating expenses: Operations and maintenance, utilities, other;
Payments to NAFIs: $1,547.8;
Total expenses: $12,867.4.
Operating expenses: Other contractual services;
Payments to NAFIs: $9,339.0;
Total expenses: $16,025.5.
Total operating expenses;
Payments to NAFIs: $10,886.8;
Total expenses: $28,892.9.
Equipment, depreciation;
Payments to NAFIs: [Empty];
Total expenses: $3,686.6.
Gifts and bequests;
Payments to NAFIs: $2,477.0;
Total expenses: $2,482.7.
Total expenses;
Payments to NAFIs: $13,405.3;
Total expenses: $62,025.2.
Source: GAO analysis of MARAD's unaudited data for the Academy.
Note: Total expenses per this table represent the Academy's expenses
that were included by MARAD as gross expenses in its statement of net
cost for fiscal years 2006 and 2007. Expenses for both fiscal years
include amounts funded by annual appropriations and multi-year
appropriations.
[End of table]
[End of section]
Appendix IV: The Antideficiency Act:
The ADA is one of the major laws in the statutory scheme by which the
Congress exercises its constitutional control of the public purse.
[Footnote 44] The ADA contains both affirmative requirements and
specific prohibitions, as highlighted below. The ADA:
* Prohibits the incurring of obligations or the making of expenditures
in advance or in excess of an appropriation. For example, an agency
officer may not award a contract that obligates the agency to pay for
goods and services before the Congress makes an appropriation for the
cost of such a contract or that exceeds the appropriations available.
* Requires the apportionment of appropriated funds and other budgetary
resources for all executive branch agencies. An apportionment may
divide amounts available for obligation by specific time periods
(usually quarters), activities, projects, objects, or a combination
thereof. OMB, on delegation from the President, apportions funds for
executive agencies.
* Requires a system of administrative controls within each agency,
established by regulation, that is designed to (1) prevent obligations
and expenditures in excess of apportionments or reapportionments; (2)
fix responsibility for any such obligations or expenditures; and (3)
establish the levels at which the agency may administratively subdivide
apportionments, if it chooses to do so.
* Prohibits the incurring of obligations or the making of expenditures
in excess of amounts apportioned by OMB or amounts of an agency's
subdivision of apportionments (i.e., "allotments").
* Prohibits the acceptance of voluntary services or the employment of
personal services, except where authorized by law.[Footnote 45]
* Specifies potential penalties for violations of its prohibitions,
such as suspension from duty without pay or removal from office. In
addition, an officer or employee convicted of willfully and knowingly
violating the prohibitions may be fined not more than $5,000,
imprisoned for not more than 2 years, or both.
* Requires that for violations of the act's prohibitions, the relevant
agency report immediately to the President and to the Congress all
relevant facts and a statement of actions taken with a copy to the
Comptroller General of the United States.
The requirements of the ADA and the enforcement of its proscriptions
are reinforced by, among other laws, the Recording Statute, 31 U.S.C. §
1501(a), which requires agencies to record obligations in their
accounting systems, and the 1982 law commonly known as the Federal
Managers' Financial Integrity Act of 1982, 31 U.S.C. § 3512(c), (d),
which requires executive agencies to implement and maintain effective
internal controls. Federal agencies use "obligational accounting" to
ensure compliance with the ADA and other fiscal laws. Obligational
accounting involves the accounting systems, processes, and people
involved in collecting financial information necessary to control,
monitor, and report on all funds made available to federal agencies by
legislation--including both permanent, indefinite appropriations and
appropriations enacted in annual and supplemental appropriations laws
that may be available for 1 or multiple fiscal years. Executive branch
agencies use obligational accounting, sometimes referred to as
budgetary accounting, to report on the execution of the budget.
[Footnote 46]
[End of section]
Appendix V: Comments from the Department of Transportation:
U.S. Department of Transportation:
Office of the Secretary of Transportation:
Assistant Secretary for Administration:
1200 New Jersey Avenue, SE:
Washington, DC 20590:
July 16, 2009:
Ms. Jeanette Franzel:
Managing Director:
Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street N.W.
Washington, DC 20548:
Dear Ms. Franzel:
The United States Merchant Marine Academy provides a vital service to
the Nation by supplying many of the highly trained and skilled people
necessary to sustain American flag shipping in support of the Nation,
both in war and in peace. Given the Academy's vital service, the
Department was especially concerned when a 2008 Maritime Administration
(MARAD) report brought to light the significant internal control issues
at the Academy. MARAD shared this report with Congress while continuing
to identify the full nature and extent of the issues and implement
solutions. As described below, substantial actions are underway at the
Academy. For example, the Secretary has appointed a blue ribbon panel
to provide outside expertise to help ensure that the Academy makes
sound investments in its future. Actions are also underway to ensure
the Academy has the financial internal controls necessary to continue
fulfilling its duties and responsibilities to the Nation in sustaining
a capable American flag fleet.
MARAD Took Immediate Action to Address Key Issues:
MARAD took swift and appropriate actions to address the serious
internal control deficiencies at the Academy. These actions started at
the top, as MARAD appointed a new Superintendent for the Academy in
November 2008. In order to ensure appropriate oversight for the use of
funds, MARAD established and filled a new position of Assistant Chief
Financial Officer (CFO) for Academy Operations, who reports directly to
MARAD's CFO. This official offers the onsite financial expertise
previously lacking, and with the reporting relationship to the MARAD
CFO, maintains a high level of independence in managing the Academy's
financial affairs. This reporting relationship also provides for the
quick and effective flow of information directly to MARAD management
and helps to ensure that funds are derived from appropriate sources.
Management awareness and information flow are further enhanced by the
establishment of the Fiscal Oversight Board, comprised of senior MARAD
headquarters officials, to assist the Superintendent and his staff in
implementing corrective measures. Further, the level of oversight and
interaction has significantly increased with the appointment of
dedicated legal counsel and direct headquarters administration of human
resources and procurement functions.
Longer Term Actions Underway to Improve the Academy's Internal
Controls:
MARAD and the Academy are developing approaches and procedures to
rectify the issues identified in the GAO draft report. We appreciate
the draft report's recognition of many of the actions underway and plan
to provide a full accounting of the specific actions taken and planned
in response to the recommendations in the final report. However, it
would be useful to highlight some of these actions now.
MARAD is working with officials at the Academy to strengthen the
school's internal controls environment. This includes the full
conversion of the Academy to the Department's accounting system of
record, Delphi, and implementation of the associated funds control and
budget mechanisms that are part of that system. The school also has
reformed its relationships with two important donor organizations, the
Alumni Foundation and the Sailing Foundation, to maintain the
appropriate level of independence between the school and these
organizations. Complementing these reforms, procedures for accepting
gifts from these foundations and other donors have been updated to
provide a greater level of legal oversight and improved accounting for
these funds.
MARAD has taken several important steps to address issues related to
Midshipmen Fees. First, the CFO has taken custody of Midshipmen Fee
bank accounts and has frozen accounts holding prior year excess
collections in anticipation of returning this money to former students.
Further, special administrative procedures were instituted by the CFO
during the 2008/2009 Academic Year, which ensured that fee revenue was
only spent for authorized purposes. As a result of these efforts, the
2008/2009 Academic Year ended with an excess balance in the Midshipmen
Fee account, which will be refunded to students after final accounting
for midshipmen expenses is reconciled for the school year. At the
direction of the Acting Deputy Maritime Administrator, the Academy
revisited the entire schedule of Midshipmen Fees for the 2009/2010
Academic Year. Based on this thorough review, a new, significantly
reduced fee schedule was approved in May and was reflected in bills
sent to all students in June. In addition, MARAD will examine
Midshipmen Fee collections for prior years not reviewed by GAO to
assess whether it is possible to determine if similar issues existed
for those years. Finally the President's 2010 Budget proposes a
critical reform in the management of these funds. Rather than
collecting and accounting for this money in commercial bank accounts,
MARAD is seeking statutory authority to collect these fees into the
Treasury and access these funds through a permanent appropriation that
restricts spending to the authorized and specific purposes of the fees.
This change will greatly enhance accountability for these funds and
provide a high degree of transparency, as these transactions will now
be part of the agency's official accounting records.
MARAD also is committed to reforming the Academy's non-appropriated
fund instrumentalities (NAFI) structure to significantly reduce the
potential for the kinds of irregularities arising from interactions
between the Academy and its NAFIs. These changes will ensure
independent NAFIs through non-Government management, accountability,
and revenue stream while significantly reducing the number of NAFIs and
narrowing their focus to traditional morale, welfare and recreation
activities. In addition, these reforms will address many of the
outstanding internal control weaknesses identified in GAO's report,
particularly with respect to the school's Athletics program and
Waterfront Activities.
MARAD Preparing Comprehensive Strategy for Corrective Action:
As indicated above, the Academy and MARAD have initiated many
corrective actions to address the full range of internal control
weaknesses identified in the GAO draft report. We are now carefully
reviewing the full extent of the GAO report's recommendations and will
provide a detailed response to each recommendation upon issuance of the
final report. MARAD will produce a comprehensive strategy and
corrective action plan to address the internal control weaknesses and
ensure effective internal control procedures govern all aspects of the
Academy's activities. This will be conducted as part of an overall,
systematic management review of the Academy.
Management at the Academy, MARAD and the Department take very seriously
the findings and recommendations in the GAO draft report and intend to
ensure that effective action is taken in each area. Specific and
focused attention will be applied to ensure that appropriate actions
are implemented to address the issues identified by the GAO and
strengthen the Academy. This will enable the Academy to move forward
and take its place as the premier institution in maritime education and
a source of continuing pride for the school's alumni, this Department,
and the Nation.
Sincerely,
Signed by:
Linda J. Washington:
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Jeanette M. Franzel, (202) 512-2600 or franzelj@gao.gov:
Acknowledgments:
In addition to the contact named above, staff members who made key
contributions to this report include Robert Owens, Assistant Director;
Lisa Brownson; F. Abe Dymond, Assistant General Counsel; Tony Eason;
Frederick Evans; Tiffany Epperson; Jehan-Abdel-Gawad; Thomas Hackney;
Paul Kinney; Scott McNulty; and Meg Mills.
[End of section]
Footnotes:
[1] Report to the Deputy Secretary of Transportation, Internal Controls
Review of the U.S Merchant Marine Academy, February 6, 2008, from the
Maritime Administrator.
[2] 31 U.S.C. §§ 1341-42, 1349-51, 1511-19.
[3] We considered transactions associated with sources and uses of
funds to be questionable if (1) the source of funds was not supported
by sufficient documentation to enable an objective third party to
determine the purpose of the funds received or there was a possible
violation of law, regulation, or policy, or (2) the use of funds was
not supported by sufficient documentation to enable an objective third
party to determine if it was a valid use of government funds or there
was a possible violation of law, regulation, or policy.
[4] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999); Internal Control Management and
Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001); Guide
for Evaluating and Testing Controls Over Sensitive Payments,
[hyperlink, http://www.gao.gov/products/GAO/AFMD-8.1.2] (Washington,
D.C.: May 1993); and Strategies To Manage Improper Payments: Learning
From Public and Private Sector Organizations, [hyperlink,
http://www.gao.gov/products/GAO-02-69G] (Washington D.C.: October
2001).
[5] Maritime Administrative Order No. 150-3, October 1, 2007.
[6] 46 U.S.C. § 51314(a).
[7] 46 C.F.R. § 310.62(a).
[8] 46 C.F.R. § 310.62(b).
[9] Midshipmen are assessed fees for the academic year beginning July 1
and ending June 30. Our review of fee collections and uses of fees
covered the Academy's fiscal years ending September 30.
[10] The Academy can avoid ADA violations resulting from improper
augmentations if it adjusts its appropriations accounts by charging
them for such expenses, provided sufficient amounts are available in
the accounts. It could transfer available unobligated balances to the
non-appropriated fund accounts or account for the constructive receipt
and use of the non-appropriated funds to the extent that the Department
can exercise some legal authority to receive and use them absent
additional appropriations.
[11] In addition, by collecting amounts that are used to cover expenses
that are more accurately characterized as tuition, room, or board, the
Academy may have violated the statutory prohibition on charging
midshipmen for such expenses. See 46 U.S.C. § 51314.
[12] After the end of an academic year, the FCO typically transferred
the excess of midshipmen fees collected over payments made to a
commercial bank account that was not reflected in the books and records
of the Academy ("off-book"). FCO tracked the accounts' transaction
activity using off-line ("cuff") records.
[13] Our review identified 3 separate "Superintendent's Reserves" in
operation at the Academy. This superintendent's reserve was created
from excess fees collected from midshipmen; another superintendent's
reserve was created from appropriated funds inappropriately "parked"
with the FCO; and a third superintendent's reserve was used for funds
received from GMATS as payments for its use of Academy facilities.
[14] 31 U.S.C. § 1535.
[15] B-289605.2, July 5, 2002; B-235742, Apr. 24, 1990; 68 Comp. Gen.
62 (1988); 64 Comp. Gen. 110 (1984)
[16] B-199533, Aug. 25, 1980; 58 Comp. Gen. 94, 100 (1978).
[17] 31 U.S.C. § 1341(a)
[18] Absent other specific statutory authority, all officers of the
government receiving funds for the benefit of the government must
promptly deposit such funds into the general fund of the U.S. Treasury.
[19] In a September 3, 2008, letter to the Department's General
Counsel, we solicited information and the Department's legal views on
this potential violation, but the Department has not responded.
[20] Heads of agencies are required to report immediately to the
President and the Congress violations of the ADA. A copy of the report
must be transmitted concurrently to the Comptroller General, 31 U.S.C.
§1519, 1351.
[21] Our review of transactions covered only fiscal years 2006 and
2007.
[22] MARAD found that the Academy recorded additional invalid
obligations on the MARAD Form 949, but after the MARAD investigation,
the funds were returned as improper payments and credited to Academy
appropriation accounts.
[23] Public Law Number 109-115 (Nov. 30, 2005) appropriated
$122,249,000 in fiscal year 2006 under the MARAD Operations and
Training account, of which $23,512,000 (after a 1 percent rescission)
was for salaries and benefits of Academy employees.
[24] 31 U.S.C. §1517(a)(2), 1341(a).
[25] Internal Control Management and Evaluation Tool, GAO-01-1008G
(Washington, D.C.: August 2001).
[26] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[27] MARAD's financial information is included in the Department's
annual audited financial statements that are contained in its
performance and accountability reports.
[28] In 2008, MARAD questioned the authority of the Academy to accept
gifts or donations exceeding $2,500, which was the maximum amount
delegated by the Secretary and MARAD for acceptance. MARAD requested
and Congress granted unlimited authority to MARAD to accept gifts for
the Academy and the NAFIs in the Duncan Hunter National Defense
Authorization Act for Fiscal Year 2009, Pub. L. No. 110-417, div. C,
title XXXV, §3506(g), 122 Stat. 4356, 4764 (October 14, 2008).
[29] 46 U.S.C. § 51314(b). Congressional notification of any changes to
the fees or changes since 1994 is also required by the statute.
[30] MARAD Order No. 400-11, August 14, 2000.
[31] According to Statement of Federal Financial Accounting Standards
(SFFAS) No. 6, Accounting for Property, Plant, and Equipment, the
criteria for an item to be capitalized as an item of property, plant,
or equipment asset are that the item have an estimated useful life of 2
years or more, not be intended for sale in the ordinary course of
operations, and be acquired or constructed with the intention of being
used, or being available for use, by the entity. Repairs and
maintenance expenses are typically recognized in the year when they are
incurred, whereas the cost of capitalizable assets are recognized as
expenses in the years in which the asset is used.
[32] These funds are provided by no-year appropriation accounts which
remain available for an indefinite period.
[33] Statement of Federal Financial Accounting Standards (SFFAS) No. 7,
Accounting for Revenue and Other Financing Sources and Concepts for
Reconciling Budgetary and Financial Accounting.
[34] Statement of Federal Financial Accounting Standards (SFFAS) No. 5,
Accounting for Liabilities of the Federal Government.
[35] 31 U.S.C. § 1502(a). Agencies may incur obligations against fixed-
year appropriations before they expire only for bona fide needs that
arise during the period of availability of the appropriation.
[36] Maritime Administrative Order No. 150-3, October 1, 2007.
[37] Pub. L. No. 110-417, div. C, title XXXV, § 3506(h), 122 Stat.
4356, 4765 (Oct. 14, 2008).
[38] Pub. L. No. 110-417, div. C, title XXXV, §§ 3506(a)-(f), 122 Stat.
4356, 4763 (Oct. 14, 2008).
[39] Pub. L. No. 111-8, div. I, title I, 123 Stat. 524, 943 (Mar. 11,
2009).
[40] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999); Under GAO's Standards for Internal
Control in the Federal Government, agencies should have internal
control sufficient to provide reasonable assurance that the objectives
of the agency are being achieved and, among other things, should (1)
establish and maintain a positive and supportive attitude toward
internal control and conscientious management, (2) identify the risks
that may impede the achievement of agency objectives, (3) establish
effective and efficient control activities that help ensure that
management's directives are carried out, (4) ensure that information is
recorded and communicated to management and others within the
organization that need it and in a form and within a time frame that
enables them to carry out their internal control and other
responsibilities and (5) internal control monitoring should assess the
quality of performance over time.
[41] GAO, Internal Control Management and Evaluation Tool, [hyperlink,
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August
2001); Guide for Evaluating and Testing Controls Over Sensitive
Payments, [hyperlink, http://www.gao.gov/products/GAO/AFMD-8.1.2]
(Washington, D.C.: May 1993); and Strategies To Manage Improper
Payments, [hyperlink, http://www.gao.gov/products/GAO-02-69B]
(Washington D.C.: October 2001).
[42] The Academy did not prepare separate financial statements for
fiscal years 2006 and 2007. To determine the population of payments and
obligations, we worked with MARAD to design a data base of such
activity for purposes of our audit.
[43] Maritime Administrative Order 150-3, October 1, 2007.
[44] "No money shall be drawn from the Treasury, but in Consequence of
Appropriations made by law." U.S. Const. art. I, § 9, cl. 7.
[45] The prohibition against the employment of unauthorized personal
services covers contracts with individuals who have an employment
relationship with the federal agency. 30 Op. Atty. Gen. 51 (1913). The
purpose of this prohibition is to preclude agencies from "coercing"
Congress into making additional appropriations to cover the cost of the
additional services. Id. The federal procurement regulations also
contain a general prohibition against the making of contracts for
personal services. FAR § 37.104(b). In this context, as explained in a
Comptroller General decision,
"[a] personal services contract is one that, by its express terms or as
administered, makes the contractor personnel appear, in effect,
government employees. FAR §§ 37.101, 37.104(a). The government is
normally required to obtain its employees by direct hire under
competitive appointment or other procedures required by the civil
service laws. FAR § 37.104(a). Obtaining personal services by contract,
rather than by direct hire, circumvents those laws unless Congress has
specifically authorized acquisition of the services by contract. Id.
Agencies may not award personal services contracts unless specifically
authorized by statute to do so. FAR § 37.104(b)." Matter of: Encore
Management, Inc., B-278903.2, Feb. 12, 1999.
[46] The Department must also implement and maintain proprietary (or
financial) accounting to record financial information that is
summarized in financial statements prepared in accordance with U.S.
generally accepted accounting principles and audited on an annual
basis. The Department's audited financial statements include a
Statement of Budgetary Resources that presents information on the
status of appropriations. For a description of the different methods
for tracking funds in the federal government, see appendix III of GAO,
A Glossary of Terms Used in the Federal Budget Process, [hyperlink,
http://www.gao.gov/products/GAO-05-734SP] (Washington, D.C.: September
2005).
[End of section]
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