Financial Management:

Improvements Needed in NIH's Controls Over Royalty Income

AIMD-00-210: Published: Jul 21, 2000. Publicly Released: Jul 21, 2000.

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Pursuant to a congressional request, GAO provided information on the deficiencies in the National Institutes of Health (NIH) internal controls over royalty income that is distributed to institutes and inventors.

GAO noted that: (1) although NIH has established policies and procedures for administering its royalty income, GAO identified deficiencies in internal controls that affect the monitoring of licensees and the completeness and accuracy of royalty income received; (2) specifically, with the exception of one licensee, the Office of Technology Transfer (OTT) did not follow up on the biennial audits of licensees' sales to ensure that licensees with sales that exceed $2 million had been properly audited; (3) OTT's follow-up on one licensee yielded previously uncollected royalty payments of $9.2 million and the expectation that another $1.2 million would be collected; (4) given the experience with this licensee, it would seem reasonable for OTT to obtain assurances that the net sales from these more lucrative licensees be routinely and timely audited; (5) also, OTT did not exercise its right to designate auditors to conduct reviews and verifications of semiannual royalty reports and payments for the majority of its licensees; (6) these biennial audits and verifications of semiannual royalty payments could provide OTT assurance that royalty income received from licensees is based on accurate sales amounts; (7) GAO also found that OTT did not enforce its collection policies and procedures to ensure timely payment of royalty fees; (8) as a result, institutes and inventors may not be receiving their share of royalty income in a timely manner; (9) in addition, NIH's systems and processes hampered proper management of royalty income; (10) the systems maintained by the Office of Financial Management (OFM) and OTT that are used to account for royalty income were not integrated; (11) as a result, the monthly royalty income reconciliation process was labor-intensive and was not always performed in a timely manner; (12) licensees are instructed to remit payments to a Treasury lockbox administered by a commercial bank; (13) OFM, which receives payment information from the Treasury lockbox, did not record royalty income received from licensees in its general ledger in a timely manner; (14) delays in recording royalty income in its own general ledger increase the risk that financial and budgetary reports to Treasury will be inaccurate and may tend to delay distribution of funds; and (15) timely posting of royalty income to its general ledger could help provide assurance that royalty income is properly accounted for and reported.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: According to NIH, HHS has directed the department-wide use of an off-the-shelf business software package that automates and integrates NIH's administrative processes such as finance, travel, acquisitions, and property. It was not designed or modified to address the complex requirements of tracking patents and licenses. NIH's Office of Technology Transfer designed and uses proprietary software for the administration of Employee Invention Reports, Patents, Cooperative Research and Development Agreements, Waivers, Licenses, and Royalties. Because of the incompatibility of the software, it is unlikely that the systems will be directly integrated. However, NIH said that OTT recently hired a person who will revise the Royalty Module and will research the various possibilities of electronically reconciling the two systems. Currently, reconciliations are done using exported Excel spreadsheets from both systems which are manually verified. Although an integrated system has not yet been achieved, GAO conclude that current action by NIH to address such a system satisfies the intent of this recommendation.

    Recommendation: To strengthen controls over the royalty receipt process, the Acting Director of NIH should develop and implement a centralized database system that integrates data used by OFM and OTT to facilitate the reconciliation process.

    Agency Affected: Department of Health and Human Services: Public Health Service: National Institutes of Health

  2. Status: Closed - Implemented

    Comments: NIH concurred that royalty income reconciliations should be prepared in a timely manner, and NIH believes that the reconciliation is completed in a timely manner considering the complexity of the process. Regarding supervisory review, NIH initiated a requirement that all participating Institutes or Centers approve the final reconciliation before payments are made.

    Recommendation: To strengthen controls over the royalty receipt process, the Acting Director of NIH should prepare timely royalty income reconciliations and ensure proper supervisory review and approval of these reconciliations.

    Agency Affected: Department of Health and Human Services: Public Health Service: National Institutes of Health

  3. Status: Closed - Not Implemented

    Comments: NIH will not be addressing this recommendation. In NIH's July 2000 comments on the report, NIH stated that when it receives cash, often there is insufficient data upon which to properly classify the receipts in a timely manner. In a September 2001 update on the status of actions taken, NIH did not address this recommendation. In March 2005, NIH stated it continues to record royalty income into the Treasury suspense account until it has been properly identified and reconciled and confirmed that it will not address this recommendation.

    Recommendation: To strengthen controls over the royalty receipt process, the Acting Director of NIH should discontinue the practice of recording royalty income in the Treasury suspense account when received--instead, record royalty income in the NIH general ledger when it is received.

    Agency Affected: Department of Health and Human Services: Public Health Service: National Institutes of Health

  4. Status: Closed - Implemented

    Comments: NIH has taken action to address this recommendation. In a September 2001 update on the status of actions taken, NIH stated that its Office of Technology Transfer (OTT) recruited a person to assist the Royalty Administration unit who helped identify problem licenses and resolve payment issues in a more timely manner and enhanced NIH's ability to move cases to the NIH Debt Collection Officer (DCO) for assessment of interest and penalties and collection of delinquent royalty payments. In March 2005, NIH told us that OTT had referred approximately 27 cases to the DCO for the period CY 2001-2004. Most of the cases have been resolved. OTT and the Office of Financial Management will review the remaining outstanding cases.

    Recommendation: To strengthen controls over the royalty receipt process, the Acting Director of NIH should impose and collect interest and penalties on licensees delinquent in submitting royalty payments.

    Agency Affected: Department of Health and Human Services: Public Health Service: National Institutes of Health

  5. Status: Closed - Not Implemented

    Comments: NIH will not be addressing this recommendation. In NIH's July 2000 comments on the report, NIH agreed that appropriate and timely monitoring activities are necessary, but it did not concur with particular aspects of the recommendation. In a September 2001 update on the status of actions taken, NIH did not address this recommendation. Further, in March 2005, NIH confirmed that it will not address this recommendation.

    Recommendation: To strengthen controls over the royalty receipt process, the Acting Director of NIH should review and revise NIH policies and procedures for monitoring activities to include: (1) the use of biennial audits for all licensees with sales over $2 million; (2) periodic reviews of the accuracy of semiannual royalty sales reports, including those under $2 million; and (3) specific due dates for the submission of biennial audit reports.

    Agency Affected: Department of Health and Human Services: Public Health Service: National Institutes of Health

  6. Status: Closed - Implemented

    Comments: The report cited a one-time occurrence of this situation. In a September 2001 update on the status of actions taken, NIH stated that the individual responsible had been informed that this event was inappropriate and not consistent with NIH policy and that funds control mechanisms were in place to ensure this situation did not occur again. In March 2005, NIH explained the corrective action. The Royalty Coordinator sends an electronic copy of the backup for an apportionment request to the General Ledger Branch (GLB) as well as Central Services Branch. The GLB reviews and provides their concurrence prior to the creation of the apportionment request. NIH's Office of Financial Management requires concurrence by three branches to ensure that the apportionments are correct and proper, prior to notifying the institutes.

    Recommendation: To strengthen controls over the royalty receipt process, the Acting Director of NIH should ensure that royalty income apportionment requests are approved prior to issuance of advice of allotments to institutes.

    Agency Affected: Department of Health and Human Services: Public Health Service: National Institutes of Health

 

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