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entitled 'Internal Control: Improvements Needed in the Library of 
Congress' Capitol Preservation Fund-Related Internal Controls' which 
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May 25, 2007: 

The Honorable James H. Billington: 
Librarian of Congress: 
United States Library of Congress: 

Subject: Internal Control: Improvements Needed in the Library of 
Congress' Capitol Preservation Fund-Related Internal Controls: 

Dear Dr. Billington: 

On March 13, 2007, we issued our report[Footnote 1] on our audit of the 
Capitol Preservation Fund's (CPF) fiscal years 2005 and 2004 financial 
statements, including the results of our tests of related internal 
control and selected provisions of laws. In that report, we noted the 
need to improve certain CPF-related internal controls established by 
the Library of Congress (Library) in conjunction with financial 
management services it provides to the Capitol Preservation Commission 
(Commission). The purpose of this report is to discuss further those 
internal control deficiencies and to make four recommendations to the 
Library for improving its CPF-related internal controls and related 
procedures. 

Results in Brief: 

In our audit of the CPF's fiscal years 2005 and 2004 financial 
statements, we found that the Library's CPF-related internal controls 
associated with CPF payments and financial reporting needed to be 
improved. Specifically, we found that Library controls were ineffective 
in ensuring that the CPF had sufficient cash in its account with the 
U.S. Treasury[Footnote 2] to cover payments from the account. We also 
found that the Library's internal controls associated with the 
preparation and review of the CPF's financial statements for fiscal 
years 2005 and 2004 were not operating effectively. 

While not considered material weaknesses,[Footnote 3] these 
deficiencies represent reportable conditions[Footnote 4] with respect 
to the Library's CPF-related internal controls. 

Our four recommendations follow the sections in which corresponding 
internal control issues are discussed. In commenting on a draft of this 
report, the Library agreed that its CPF-related internal controls can 
be improved and identified actions that will be taken to respond to our 
recommendations. 

Scope and Methodology: 

As part of our audit of the CPF's fiscal years 2005 and 2004 financial 
statements, we obtained a sufficient understanding of the Library's CPF-
related internal controls over financial reporting and compliance with 
laws and regulations to plan our audit. In addition to examining, on a 
test basis, evidence supporting the amounts and disclosures in the 
financial statements; assessing the accounting principles used and 
significant estimates made in preparing the CPF's financial statements 
and notes, and evaluating the overall presentation of the financial 
statements and notes; we also tested selected internal controls over 
financial reporting (including safeguarding of assets) and compliance 
and tested compliance with selected provisions of laws that have a 
direct and material effect on the CPF's financial statements. We 
conducted our audit in accordance with U.S. generally accepted 
government auditing standards. 

Background: 

The Commission was established by Public Law 100-696, 102 Stat. 4608 
(November 18, 1988) to provide improvements in, preservation of, and 
acquisitions for the U.S. Capitol and other locations under the control 
of the Congress. To finance the Commission's activities, Public Law 100-
696 established the CPF within the U.S. Treasury. The CPF's assets 
consist of amounts derived from contributions, surcharge proceeds from 
the sale of certain commemorative coins, and interest earned from 
Treasury securities purchased with available CPF assets. 

The Commission does not have permanent staff or employees. To help 
facilitate Commission activities, Public Law 100-696 requires the House 
of Representatives Fine Arts Board, the Senate Commission on Art, and 
the Architect of the Capitol to provide staff support and assistance, 
as requested. The Library is also required to provide financial 
management services to the Commission.[Footnote 5] The financial 
management services provided by the Library include coordinating with 
the U.S. Treasury on deposits to and payments from the CPF; managing, 
in accordance with an established investment policy, the purchase and 
redemption of CPF-related investments in Treasury securities; 
maintaining records and related internal controls associated with the 
CPF's investment transactions, assets, liabilities, net assets, 
revenues, and expenses; and preparing the CPF's financial statements in 
conformity with U.S. generally accepted accounting principles. In 
providing these services, the Library relies on the financial 
information it receives and maintains and other information provided to 
the Library by representatives of the Commission, the U.S. Treasury, 
and the Architect of the Capitol. 

CPF Payment-Related Internal Control Deficiencies: 

The Library did not have adequate controls and procedures to ensure 
that the CPF has sufficient cash in its account with the U.S. Treasury 
prior to approving payments from the account. Over a 4-week period 
covering late September and early October 2004, significant 
deficiencies in the Library's CPF-related safeguarding controls led to 
five CPF payments that exceeded the CPF's available cash balance, 
resulting in negative balances in the CPF's cash account with Treasury. 
Several factors contributed to these negative cash balances: a mistake 
in the process of recommending a vendor invoice for payment, a lack of 
supervisory review of the invoice payment recommendation, and reliance 
on inaccurate spreadsheet data used to monitor the CPF's available cash 
balance. 

As a matter of practice, the Library invests CPF funds obligated for 
contracts until the related obligations are due to be paid. As a 
result, it is important that the Library effectively manage the CPF's 
investments and cash balance to ensure that there is sufficient cash 
available when contract invoices are to be paid. 

The CPF's initial negative cash balance occurred when a Library 
official recommended an approved vendor invoice for payment under the 
assumption that the invoice was related to another fund managed by the 
Library. When the invoice was paid, it was correctly charged to the CPF 
resulting in a negative cash balance. In reviewing the events 
surrounding the payment, we found that there was no supervisory review 
of the Library official's recommendation that the invoice should be 
paid. 

An electronic spreadsheet that was used by the Library official, who 
had recommended the vendor invoice for payment, to monitor the 
availability of funds and manage CPF investment purchases was not 
updated to reflect the use of CPF funds to pay the vendor invoice. As a 
result, the spreadsheet overstated the amount of CPF funds available 
for investment. On four occasions, the inaccurate spreadsheet data were 
relied upon to support recommendations for the purchase of new Treasury 
investments, each of which exceeded the amount available in the CPF for 
investment. 

Following the Library's review and approval of each investment 
recommendation, the Bureau of Public Debt (Bureau) executed the 
investment purchase resulting in new negative balances in the CPF's 
cash account with Treasury. In reviewing the investment purchases, we 
noted that the Library did not have procedures for reconciling the 
spreadsheet data on CPF funds available for investment to relevant 
information from the CPF's general ledger. We also noted that the 
supervisory review and approval of the investment recommendations did 
not effectively determine whether or not there were sufficient funds 
available to pay for the investments purchased. Library officials told 
us that they learned about the negative cash balance in mid-October 
2004 and addressed this deficiency by redeeming, prior to maturity, 
Treasury investments to increase the CPF's cash balance to a positive 
balance. During the remainder of fiscal year 2005, the CPF's cash 
account remained positive. 

The five instances of negative cash balance with Treasury constituted 
procedural violations of the Department of the Treasury's operating 
guidance[Footnote 6] applicable to investments in Treasury securities 
by government investment accounts, such as the CPF. The Treasury 
guidance requires that sufficient funds be available in the account 
(CPF) before a payment is made to vendors or to invest funds. With 
regard to the negative cash balances, the Library's internal controls 
applicable to recommending and approving CPF payments did not provide 
adequate assurance that sufficient CPF funds were available before the 
payments were made. In discussing the need to strengthen the CPF- 
related payment controls, the Library acknowledged that, going forward, 
recommendations for CPF payments should be based on supporting 
information from the CPF's general ledger and other reliable sources 
(i.e., Bureau confirmations of investment redemptions) and those 
reviewing and approving payment recommendations should confirm the 
availability of funds needed to cover planned payments. 

Recommendations: 

To help strengthen internal controls over CPF-related payments for 
vendor invoices and investments in Treasury securities, we recommend 
that the Librarian of Congress direct the Library's Chief Financial 
Officer to revise applicable processes and procedures to require that: 

 all CPF-related payment recommendations be based on available cash 
balance data that have been reconciled with the CPF general ledger and 
other reliable source information to confirm that the CPF will have 
sufficient cash to fund the planned payments at the time they will be 
made, and: 

 all CPF-related payment recommendations receive supervisory review 
and approval that includes reviewing evidence confirming that 
sufficient funds will be available to fund the recommended payment. 

CPF-Related Financial Reporting Deficiencies: 

During our audits of the CPF's fiscal years 2005 and 2004 financial 
statements, we identified significant errors in the CPF's fiscal year 
2005 financial statements that were not detected during the Library's 
preparation and review of the financial statements. These errors 
represented significant deficiencies in the Library's CPF-related 
financial reporting controls. Specifically, we found that the fiscal 
year 2005 financial statements: 

* contained significant, though offsetting, errors in amounts received 
from and used by investing activities in the Statement of Cash Flows 
because Library staff mistakenly assumed that certain general ledger 
data represented investment purchase and redemption activities when the 
data actually represented corrections of earlier errors in recording 
investment transactions; 

* did not correctly identify and present the amount of the change in 
net assets as part of the reconciliation of the change to the net cash 
provided/used by operating activities in the Statement of Cash Flows as 
required by U.S. generally accepted accounting principles; and: 

* did not correctly identify and present the amount of temporarily 
restricted net assets released from restrictions during the year in the 
Statement of Activities as required by U.S. generally accepted 
accounting principles. 

We identified the above errors, as well as other less signficant 
errors, during our audit. They were corrected in the CPF's final fiscal 
years 2005 and 2004 financial statements. However, the Library's 
internal controls related to the preparation and review of the CPF's 
financial statements for fiscal years 2005 and 2004 did not provide 
adequate assurance that errors and omissions in the financial 
statements were prevented or detected on a timely basis by Library 
staff in the normal course of carrying out their CPF-related 
responsibilities. In discussing the need to improve the CPF financial 
statement preparation and review, the Library acknowledged that, going 
forward, the statements will be effectively reviewed and approved 
before they are provided to potential users. 

Recommendations: 

To improve the reliability of CPF financial statements provided to 
potential users, we recommend that the Librarian of Congress direct the 
Library's Chief Financial Officer to strengthen the Library's CPF- 
related financial statement preparation and review process by 
establishing procedures that: 

* specify the nature and source of financial information needed to 
prepare and support accurate CPF financial statement balances and 
classifications and facilitate their review, and: 

* require review of the CPF's financial statements and the related 
supporting financial information used in their preparation. 

Agency Comments: 

In commenting for the Library on a draft of this report, the Library's 
Chief Financial Officer agreed that the Library's CPF-related internal 
controls can be improved and identified actions that will be taken to 
strengthen applicable payment-related and financial reporting controls. 
The Library plans to implement procedures that will require all 
recommendations for CPF-related payments to be based on cash balance 
data that have been reconciled to the CPF general ledger data and the 
CPF financial statements to be reviewed prior to being provided to 
potential users. We will evaluate the Library's planned actions during 
our next audit of the CPF financial statements. 

This report contains recommendations to you. The head of a federal 
agency is required by 31 U.S.C. 720 to submit a written statement on 
actions taken on the recommendations to the Senate Committee on 
Homeland Security and Governmental Affairs and the House Committee on 
Oversight and Government Reform not later than 60 days from the date of 
this report. A written statement also must be sent to the House of 
Representatives and Senate Committees on Appropriations with the 
agency's first request for appropriations made more than 60 days after 
the date of this report. 

This report is intended for the use of the management of the Library of 
Congress and representatives of the Capitol Preservation Commission. We 
are sending copies to representatives of the Capitol Preservation 
Commission, the Chairman and Ranking Minority Member of the Senate 
Committee on Homeland Security and Governmental Affairs and the House 
of Representatives Committee on Oversight and Government Reform. In 
addition, this report will be available to other interested parties at 
no charge on GAO's Web site at http://www.gao.gov. 

We acknowledge and appreciate the cooperation and assistance provided 
by the Library management and staff during our audit of the Capitol 
Preservation Fund's fiscal years 2005 and 2004 financial statements. If 
you have any questions about this report or need assistance in 
addressing these issues, please contact me at (202) 512-9471 or by e-
mail at franzelj@gao.gov. Contact points for our Office of 
Congressional Relations and Office of Public Affairs may be found on 
the last page of this report. 

Sincerely yours, 

Signed by: 

Jeanette M. Franzel: 
Director: 
Financial Management and Assurance: 

Enclosure: 

[End of section] 

Enclosure I: Comments from the Library of Congress: 

The Library Of Congress: 
101 Independence Avenue, S.E. 
Washington, D.C. 20540-9100: 
Office Of The Chief Financial Officer: 

May 17, 2007: 

Dear Ms. Franzel: 

I am writing in response to your proposed report entitled Internal 
Control: Improvements Needed in the Library of Congress' Capitol 
Preservation Fund-Related Internal Controls (GAO-07-732R). 

The Library agrees overall with the facts and circumstance associated 
with each internal control deficiency identified by GAO and with GAO's 
conclusion that CPF-related internal controls can be improved. The 
Library also agrees to take the action needed to strengthen payment- 
related and financial reporting controls. Specifically, the Library 
will put procedures in place to help ensure that the CPF-related 
payment recommendations are based on available cash balance data that 
has been reconciled with the CPF general ledger data and that the 
supervisory review will occur and include verification of sufficient 
funds available (including verification of the reconciled information 
cited above). The Library will implement procedures to review financial 
statements before they are provided to potential users. The Library 
appreciates GAO's professionalism and its collaborative communications 
approach in dealing with the CPF. 

Sincerely, 

Signed by: 

Jeffrey Page: 
Financial Officer: 

Ms. Jeanette M. Franzel: 
Director: 
Financial Management and Assurance: 
United States Government Accountability Office: 
441 G Street, N W: 
Washington, DC 20548: 

[End of section] 

(194655): 

FOOTNOTES 

[1] GAO, Financial Audit: Capitol Preservation Fund's Fiscal Years 2005 
and 2004 Financial Statements, GAO-07-335 (Washington, D.C.: Mar. 13, 
2007). 

[2] Treasury Fund Symbol 09X8300 United States Standard General Ledger 
account 1010 - Fund Balance with Treasury. 

[3] A material weakness is a reportable condition in which the design 
or operation of one or more of the internal control components does not 
reduce to a relatively low level the risk that errors, fraud, or 
noncompliance in amounts that would be material in relation to the 
financial statements may occur and not be detected promptly by 
employees in the normal course of performing their duties. 

[4] Reportable conditions are matters coming to the auditor's attention 
that, in the auditor's judgment, should be communicated because they 
represent significant deficiencies in the design or operation of 
internal control, which could adversely affect the ability to meet the 
financial reporting and compliance objectives of internal control. The 
objectives of financial reporting controls are to provide reasonable 
assurance that transactions are properly recorded, processed, and 
summarized to permit the preparation of the financial statements in 
conformity with U.S. generally accepted accounting principles and 
assets are safeguarded against loss from unauthorized acquisition, use, 
or disposition. The objectives of compliance controls are to provide 
reasonable assurance that transactions are executed in accordance with 
laws governing the use of budget authority and other laws and 
regulations that could have a direct and material effect on the 
financial statements. 

[5] Public Law 101-45 103 Stat. 97, 107 (June 30, 1989). 

[6] See the Department of the Treasury, Operating Circular, 
Responsibilities Relating to Government Investment Accounts and 
Investment in Government Account Series (GAS) Treasury Securities, at 
www.publicdebt.treas.gov, effective November 15, 2002. Chapter 6000, 
Responsibilities Relating to Disbursement of Moneys from Government 
Investment Accounts requires that investment accounts have a cash 
balance at least equal to the amount planned to be disbursed before 
making the disbursement. In addition, Section 4060, Policies governing 
investment of monies in government investment accounts, requires that 
funds to be invested in Treasury securities be available to the 
Department in the Treasury general fund to pay for the purchase of 
Treasury investments. 

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