B-158487, JULY 17, 1981, 60 COMP.GEN. 602

B-158487, JULY 17, 1981, 60 COMP.GEN. 602

GENERAL SERVICES ADMINISTRATION - PROCUREMENT - ACCELERATED PAYMENT PROCEDURE - APPROVAL OF USE THIS OFFICE CONTINUES TO APPROVE USE OF ACCELERATED PAYMENT PROCEDURE BY GENERAL SERVICES ADMINISTRATION (GSA) WHEREBY PAYMENT IS MADE TO VENDOR BASED UPON ASSURANCE THAT GOODS HAVE BEEN SHIPPED RATHER THAN AWAITING NOTIFICATION THAT GOODS HAVE BEEN RECEIVED BY CONSIGNEE WHERE IT IS NECESSARY TO TAKE ADVANTAGE OF PROMPT PAYMENT DISCOUNTS AND ADEQUATE SECURITY HAS BEEN PROVIDED TO SAFEGUARD INTERESTS OF UNITED STATES. WHILE ACCELERATED PAYMENT PROCEDURES THEORETICALLY MAY BE MORE SUBJECT TO FRAUD AND ABUSE THAN SYSTEM UNDER WHICH GOODS MUST BE RECEIVED BEFORE PAYMENT IS MADE, THERE IS NOTHING TO INDICATE THAT BENEFITS BESTOWED BY ACCELERATED PAYMENT SYSTEM PREVIOUSLY USED BY GSA WERE OUT-WEIGHED BY ANY LOSSES INCURRED. CONTRACTS - PAYMENTS - ADVANCE - PRIOR TO RECEIPT OF SUPPLIES, ETC. - ACCELERATED PAYMENT PROCEDURE - INTERNAL CONTROL ADEQUACY WHILE SPECIFIC INTERNAL CONTROLS NECESSARY TO PROTECT GOVERNMENT'S INTEREST WILL VARY WITH NATURE OF PARTICULAR ACTIVITY INVOLVED, IT IS ESSENTIAL THAT AGENCIES USING ACCELERATED PAYMENT PROCEDURES HAVE ADEQUATE INTERNAL CONTROLS TO ASSURE THAT THEY GET WHAT THEY PAY FOR. AGENCIES ORDERING FROM GSA MUST KEEP RECORDS THAT PERMIT THEM TO DETERMINE THAT WHAT IS PAID FOR IS RECEIVED IN PROPER QUANTITY AND CONDITION. IT IS INCUMBENT ON AGENCY PLACING ORDER WITH GSA TO MATCH ORDER WITH INVOICE, PAYMENT AND RECEIVING REPORT ON A TIMELY BASIS. IF DISCREPANCIES EXIST, THE ORDERING AGENCY SHOULD CONTACT GSA FOR FOLLOWUP ACTION TO ASSURE THESE DISCREPANCIES ARE ADJUSTED. GENERAL SERVICES ADMINISTRATION - SERVICES FOR OTHER AGENCIES - PROCUREMENT - SUPPLIES, ETC. - ACCELERATED PAYMENT PROCEDURE - INTERNAL CONTROL ADEQUACY ONCE AN ORDER IS PLACED WITH GSA AND GSA PAYS ON CERTIFICATION BY VENDOR THAT GOODS HAVE BEEN SHIPPED, ORDERING AGENCY'S INTERNAL CONTROL SYSTEM SHOULD AUTOMATICALLY ON A REGULAR BASIS REQUIRE FOLLOWUP BY ORDERING AGENCY TO DETERMINE THAT ALL GOODS HAVE BEEN RECEIVED. IF, AFTER A REASONABLE PERIOD OF TIME, GOODS HAVE NOT BEEN RECEIVED, GSA SHOULD THEN BE NOTIFIED TO INITIATE ADJUSTMENT WITH VENDOR. CONTRACTS PAYMENTS - ADVANCE - PRIOR TO RECEIPT OF SUPPLIES, ETC. - ACCELERATED PAYMENT PROCEDURE - INTERNAL CONTROL RELIABILITY - TESTING ORDERING AGENCIES SHOULD CONSIDER USE OF STATISTICAL SAMPLING IN ORDER TO TEST RELIABILITY OF OPERATION OF SYSTEM OF INTERNAL CONTROLS ESTABLISHED TO PROTECT GOVERNMENT'S INTEREST UNDER ACCELERATED PAYMENT PROCEDURES WITH AIM OF IDENTIFYING PROBLEMS AND INSTITUTING CORRECTIVE CHANGES. FURTHERMORE, WHERE STATISTICAL SAMPLES INDICATE POSSIBLE PROBLEMS, SAMPLE SHOULD BE EXPANDED IN ORDER TO ACHIEVE BETTER UNDERSTANDING OF MAGNITUDE OF PROBLEMS.

MATTER OF: PAYMENT FOR GOODS IN ADVANCE OF NOTIFICATION OF RECEIPT, JULY 17, 1981:

THIS DECISION TO THE ADMINISTRATOR OF GENERAL SERVICES IS IN RESPONSE TO AN INQUIRY FROM RAYMOND A.FONTAINE, ASSISTANT ADMINISTRATOR, OFFICE OF PLANS, PROGRAMS, AND FINANCIAL MANAGEMENT, OFFICE OF THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION (GSA), CONCERNING GSA'S PRACTICE OF PAYING DIRECT DELIVERY INVOICES FROM VENDORS PRIOR TO RECEIVING A NOTIFICATION OF RECEIPT OF GOODS FROM THE CONSIGNEE (ORDERING AGENCY). WHILE WE HAVE PREVIOUSLY SANCTIONED THIS PRACTICE UNDER CERTAIN CONDITIONS IN ORDER TO ASSURE PROMPT PAYMENT TO VENDORS, SEE B-158487, APRIL 4, 1966, RECENT EVENTS HAVE RAISED DOUBTS WITHIN GSA THAT THIS IS STILL AN ACCEPTABLE PRACTICE AND CAUSED GSA TO QUESTION WHETHER ADDITIONAL SAFEGUARDS ARE REQUIRED TO PROTECT THE GOVERNMENT AGAINST FRAUD. AS DISCUSSED BELOW, WE AFFIRM OUR POSITION THAT GSA'S ACCELERATED PAYMENT PROCEDURE SHOULD CONTINUE TO BE USED IN APPROPRIATE CIRCUMSTANCES.

THE ASSISTANT ADMINISTRATOR INDICATES THAT:

IN ACCORD WITH YOUR 1966 DECISION, IT HAS BEEN THE PRACTICE OF GSA TO PAY DIRECT DELIVERY INVOICES WITHOUT ANY REQUIREMENT FOR THE SUBMISSION OF A RECEIVING REPORT FROM THE RECIPIENT AGENCIES. THERE WAS TOTAL RELIANCE ON THE ASSUMPTION OF NOTIFICATION ON NON-RECEIPT BY THE CONSIGNEE AS NOTED IN THE FIRST PARAGRAPH OF THIS LETTER. RECENT REVIEWS OF INTERNAL PROCEDURES OCCASIONED BY PUBLICIZED CHARGES OF SCANDAL WITHIN THE AGENCY HAVE RESULTED IN OUR OFFICE OF FINANCE AND OFFICE OF AUDITS TAKING EXCEPTION TO THIS POLICY. THEY BELIEVE IT CIRCUMVENTS ACCEPTABLE INTERNAL CONTROLS AND MAKES IT EASIER FOR THE PERPETRATION OF FRAUDS.

AS A RESULT OF THE VIEWS OF OUR FINANCE AND INTERNAL AUDITS OFFICES, GSA PUBLISHED A CHANGE TO THE FPMR'S AS TEMPORARY REGULATION A-14 ON MAY 1, 1980, TRANSFERRING THE RESPONSIBILITY FOR PAYMENT OF NONSTOCK DIRECT DELIVERIES TO THE ORDERING AGENCY OR ACTIVITY. THIS HAS CREATED SEVERE PROBLEMS FOR TIMELY PAYMENTS BY MANY OF THESE ACTIVITIES (PARTICULARLY THE DEPARTMENT OF DEFENSE). AS A RESULT OF THE NOVEMBER 1980 IMPLEMENTATION OF THESE DIRECT BILLING AND PAYING PROCEDURES, CONTRACTORS ARE EXPERIENCING SERIOUS DELAYS IN MAKING COLLECTIONS FROM THESE ACTIVITIES *

ALTHOUGH GSA HAS DECIDED TO REVIEW ITS DETERMINATION TO TRANSFER RESPONSIBILITY FOR PAYMENT OF NONSTOCK DIRECT DELIVERIES TO THE ORDERING AGENCIES OR ACTIVITY, THERE IS SOME CONCERN ON GSA'S PART THAT WE MAY NO LONGER APPROVE OF THE USE OF PROCUREMENT PRACTICES WHEREBY PAYMENT IS MADE FOR GOODS BEFORE RECEIVING NOTIFICATION OF RECEIPT FROM THE CONSIGNEE. THE ASSISTANT ADMINISTRATOR POINTS TO A RECENT GAO DRAFT GUIDELINE AS EVIDENCE OF A POSSIBLE CHANGE IN OUR POSITION REGARDING THE ACCEPTABILITY OF THIS PRACTICE. THE DRAFT DOCUMENT, ENTITLED "INTERNAL CONTROL ASSESSMENT GUIDE" WAS RECENTLY CIRCULATED FOR COMMENT BY THIS OFFICE TO VARIOUS FEDERAL AGENCIES (INCLUDING GSA). AFTER OUR OFFICE HAS ANALYZED THE COMMENTS RECEIVED AND MADE NECESSARY CHANGES, WE PLAN TO ISSUE THE DOCUMENT AS A GENERAL GUIDE FOR AGENCIES TO USE IN ASSESSING THEIR INTERNAL CONTROL SYSTEMS.

THE ASSISTANT ADMINISTRATOR MADE REFERENCE TO A STATEMENT IN OUR GUIDE THAT "PAYMENTS MUST BE SUPPORTED BY PROPER DOCUMENTATION WHICH INCLUDES THE AUTHORIZATION FOR PURCHASE, RECEIPT, ACCEPTANCE, AND VALIDITY OF THE VENDOR INVOICE DATA." HE ALSO POINTS OUT THAT CHECK LIST QUESTIONS 51 AND 52, INCLUDED IN THE DRAFT GUIDE, REFER TO THE COMPARISON OF RECEIPTS, QUANTITIES, NATURE AND CONDITION TO THE ORDERS, AND THAT QUESTION 53 ASKS "ARE CERTIFICATIONS THAT SERVICES HAVE BEEN RENDERED OR GOODS HAVE BEEN RECEIVED IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THE CONTRACT SUBMITTED TO AN AUTHORIZED OFFICIAL FOR APPROVAL BEFORE PAYMENT IS MADE?" ABSENT ANYTHING ELSE, THIS COULD BE VIEWED AS A SHIFT IN THIS OFFICE'S POSITION AWAY FROM THE ONE TAKEN IN OUR 1966 DECISION AUTHORIZING PAYMENT FOR GOODS IN ADVANCE OF RECEIVING A NOTIFICATION OF RECEIPT FROM THE CONSIGNEE. ON THE OTHER HAND, THE ASSISTANT ADMINISTRATOR MENTIONS GAO'S LETTER OF AUGUST 17, 1979, TO THE HEADS OF ALL DEPARTMENTS AND AGENCIES, B-160725, WHICH ENDORSED THE PAYMENT OF BILLS PRIOR TO RECEIPT OF RECEIVING REPORTS.

CONSEQUENTLY, WE HAVE BEEN ASKED WHETHER PAYMENT IN ADVANCE OF NOTIFICATION OF RECEIPT OF GOODS IS STILL AN ACCEPTABLE PRACTICE WHEN NECESSARY TO ASSURE PROMPT PAYMENT; AND IF SO, WHAT INTERNAL CONTROLS ARE CONSIDERED BY THIS OFFICE TO BE ADEQUATE IN ORDER TO PROTECT THE GOVERNMENT'S INTEREST.

IN B-158487, APRIL 4, 1966, WE HELD THAT BY VIRTUE OF AUTHORITY SET FORTH IN SECTION 305 OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, AS AMENDED, 41 U.S.C. 255, GSA (AND ANY OTHER EXECUTIVE AGENCY) COULD PAY DIRECT DELIVERY VOUCHERS PRIOR TO RECEIPT OF RECEIVING REPORTS FROM CONSIGNEES, PROVIDED THE AGENCY DETERMINED THAT THE PROVISIONS INCLUDED IN EACH SPECIFIC CONTRACT OR IN THE GENERAL PROVISIONS OF THE STANDARD FORM FOR SUPPLY CONTRACTS PROVIDED "ADEQUATE SECURITY" TO SAFEGUARD THE INTERESTS OF THE UNITED STATES, AND THAT THE ADVANCE PAYMENT PROCEDURE FOR DIRECT DELIVERIES WAS IN THE PUBLIC INTEREST.

IN THAT CASE, THE FACT THAT GSA WAS DOING BUSINESS WITH REPUTABLE AND FINANCIALLY RESPONSIBLE VENDORS ON A RECURRING BASIS, COUPLED WITH THE FACT THAT ORDERING AGENCIES WOULD PROMPTLY NOTIFY GSA OF NON RECEIPT OF GOODS, WERE DEEMED ADEQUATE SECURITY TO PROTECT THE INTEREST OF THE UNITED STATES. THUS, IF GOODS WERE NOT RECEIVED BY THE ORDERING AGENCY, THE AGENCY WOULD NOTIFY GSA, WHICH IN TURN COULD SEEK ADJUSTMENTS IN ITS NEXT PROCUREMENT FROM THE VENDOR. FURTHERMORE, THE DECISION RECOGNIZED THAT IT IS IN THE PUBLIC'S INTEREST TO PAY VENDORS QUICKLY IN ORDER TO TAKE ADVANTAGE OF PROMPT PAYMENT DISCOUNTS.

SINCE THAT DECISION, WE HAVE AUTHORIZED USE OF SIMILAR PROCEDURES BY OTHER AGENCIES, B-155253, AUGUST 20, 1969, AND B-155253, OCTOBER 26, 1967, AND HAVE BEEN CRITICAL OF AGENCIES OF THE GOVERNMENT FOR NOT TAKING FULL ADVANTAGE OF THE SAVINGS OFFERED THROUGH ACCELERATED PAYMENT PROCEDURES. SEE OUR REPORT TO THE CONGRESS ENTITLED "THE FEDERAL GOVERNMENT'S BILL PAYMENT PERFORMANCE IS GOOD BUT SHOULD BE BETTER" (REPORT), FGMSD 78-16, PP. 20-21, FEBRUARY 24, 1978. WE BASED OUR CRITICISMS ON THE BELIEF THAT AGENCY FAILURE TO USE THESE ACCELERATED PAYMENT PROCEDURES IN SOME CIRCUMSTANCES WAS COSTING THE GOVERNMENT MONEY THROUGH LOST PROMPT PAYMENT DISCOUNTS OFFERED BY THE VENDORS. NOTHING WE HAVE BEEN MADE AWARE OF SINCE WE FIRST APPROVED USE OF THE ACCELERATED PAYMENT PROCEDURES HAS CAUSED US TO ALTER OUR POSITION IN THIS REGARD.

WHILE AN ACCELERATED PAYMENT PROCEDURE THEORETICALLY MAY BE MORE SUBJECT TO FRAUD AND ABUSE THAN A SYSTEM UNDER WHICH GOODS MUST BE RECEIVED BEFORE PAYMENT IS MADE, WE HAVE BEEN SHOWN NOTHING THAT WOULD INDICATE THE BENEFITS BESTOWED BY THE ACCELERATED PAYMENT SYSTEM PREVIOUSLY USED BY GSA WERE OUTWEIGHED BY ANY LOSSES INCURRED. FURTHERMORE, EVEN IF PROBLEMS ARE IDENTIFIED, THERE MAY EXIST A REASONABLE SOLUTION TO THE IDENTIFIED PROBLEMS WHICH WOULD PROTECT THE GOVERNMENT'S INTEREST BUT PRESERVE THE BENEFITS BESTOWED BY ACCELERATED PAYMENTS. AT A MEETING HELD TO DISCUSS THIS MATTER, WHICH WAS ATTENDED BY REPRESENTATIVES OF GSA, THE DEPARTMENT OF DEFENSE AND THIS OFFICE, NO SPECIFIC EXAMPLES OF FRAUD COULD BE CITED TO DEMONSTRATE HOW THE ACCELERATED PAYMENT PROCEDURES HAD BROKEN DOWN IN PROTECTING THE GOVERNMENT'S INTEREST. HOWEVER, PROMPT PAYMENT DISCOUNT LOSSES SUFFERED UNDER THE NEW DIRECT BILLING AND PAYMENT SYSTEM IMPLEMENTED IN 1980 AND DISCUSSED ABOVE, WERE ESTIMATED TO BE BETWEEN $1.8 AND $2 MILLION DOLLARS.

AS MENTIONED PREVIOUSLY, THE DRAFT "INTERNAL CONTROL ASSESSMENT GUIDE" IS INTENDED TO BE USED AS A GENERAL GUIDE. AS A GENERAL RULE, THERE IS LITTLE QUESTION THAT PAYMENTS SHOULD BE MADE ONLY FOLLOWING RECEIPT OF GOODS. HOWEVER, BEFORE ISSUING THE GUIDE IN ITS FINAL FORM, WE PLAN TO REVISE IT TO RECOGNIZE THAT EXCEPTIONS EXIST TO THE GENERAL RULE REQUIRING RECEIPT OF GOODS BEFORE PAYMENT AS LONG AS GSA AND THE ORDERING AGENCY CAN BE ASSURED THAT THE GOVERNMENT'S INTEREST IS PROTECTED.

THE SPECIFIC SYSTEM OF INTERNAL CONTROLS NECESSARY TO PROTECT THE GOVERNMENT'S INTEREST WILL VARY WITH THE NATURE OF THE PARTICULAR ACTIVITY INVOLVED. THE CONTROLS THAT MAY BE ADEQUATE IN A SITUATION WHERE A LARGE VOLUME OF SMALL PURCHASES ARE MADE ON A RECURRING BASIS FROM REPUTABLE VENDORS MAY BE INADEQUATE IN OTHER SITUATIONS. HOWEVER, IT IS ESSENTIAL THAT AGENCIES USING ACCELERATED PAYMENT PROCEDURES HAVE ADEQUATE INTERNAL CONTROLS TO ASSURE THAT THEY GET WHAT THEY PAY FOR.

AGENCIES MUST KEEP RECORDS THAT PERMIT THEM TO DETERMINE THAT WHAT IS PAID FOR IS RECEIVED IN THE PROPER QUANTITY AND CONDITION. SEE REPORT P.21. TO DO THIS, IT IS INCUMBENT UPON THE AGENCY PLACING AN ORDER WITH GSA TO MATCH THE ORDER WITH THE INVOICE, THE PAYMENT AND THE RECEIVING REPORT AND TO MAKE THIS DETERMINATION ON A TIMELY BASIS. IF ANY DISCREPANCIES EXIST, THE ORDERING AGENCY SHOULD CONTACT GSA IN ORDER TO INITIATE FOLLOWUP ACTIONS TO ASSURE THESE DISCREPANCIES ARE ADJUSTED.

ADDITIONALLY, THE SYSTEM EMPLOYED BY THE ORDERING AGENCY SHOULD NOT BE PASSIVE IN NATURE. THAT IS, ONCE AN AGENCY PLACES AN ORDER WITH GSA AND GSA PAYS ON THE CERTIFICATION BY THE VENDOR THAT THE GOODS HAVE BEEN SHIPPED, THE SYSTEM SHOULD AUTOMATICALLY ON A REGULAR BASIS REQUIRE FOLLOWUP BY THE ORDERING AGENCY TO DETERMINE THAT ALL GOODS IN FACT HAVE BEEN RECEIVED. IF AFTER A REASONABLE PERIOD OF TIME THE GOODS HAVE NOT BEEN RECEIVED, GSA SHOULD BE NOTIFIED TO INITIATE ADJUSTMENT WITH THE VENDOR.

FURTHERMORE, ORDERING AGENCIES SHOULD CONSIDER THE USE OF STATISTICAL SAMPLING IN ORDER TO TEST THE RELIABILITY OF THE OPERATION OF THE SYSTEM OF INTERNAL CONTROLS ESTABLISHED TO PROTECT THE GOVERNMENT'S INTEREST WITH THE AIM OF IDENTIFYING PROBLEMS AND INSTITUTING CORRECTIVE CHANGES. FURTHERMORE, WHERE STATISTICAL SAMPLES INDICATE POSSIBLE PROBLEMS, WE RECOMMEND EXPANSION OF THE SAMPLE IN ORDER TO ACHIEVE A BETTER UNDERSTANDING OF THE MAGNITUDE OF THE PROBLEMS.

SHOULD PROBLEMS DEVELOP WITH THE ACCELERATED PAYMENT PROCEDURE TO SUCH AN EXTENT THAT IT CAN NO LONGER BE ASSURED THAT THE GOVERNMENT'S INTEREST IS PROTECTED, THEN AT THAT POINT ABANDONMENT OF THIS PROCEDURE MAY BE IN ORDER.