FMS' Monitoring of Lockbox Bank Operations:

Internal Control Weaknesses Identified and Actions Taken

AIMD-00-225R: Published: Jul 26, 2000. Publicly Released: Jul 26, 2000.

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In connection with GAO's audit of the U.S. Government's financial statement, GAO reviewed the Financial Management Service's (FMS) internal control actions to improve the monitoring of lockbox bank operations.

GAO reported on weaknesses in, and recommended improvements to, FMS' monitoring of lockbox operations related to on-site reviews and lockbox bank audits. GAO noted that: (1) FMS has taken significant steps to strengthen its monitoring of its lockbox bank operations but additional actions are needed to assure that federal collections are adequately safeguarded and properly processed; (2) FMS has addressed GAO's concerns related to on-site reviews; (3) FMS acted on GAO's recommendations related to requiring and providing guidance for lockbox bank audits; however, due to the timing of the bank audits, FMS had not obtained the results of such audits as of the end of GAO's fieldwork; and (4) it was too early to assess the effectiveness of FMS' enforcement of the audit requirement, review of the audit results, and follow-up on weaknesses identified, if any, in lockbox operations, as GAO recommended. In performing the fiscal year 1999 testing, GAO found that additional actions are needed to: (a) follow up on problems at lockbox banks identified by the federal agencies for which the lockbox services are provided; and (b) ensure the sufficiency of collateral pledged by the lockbox banks. While FMS performed some procedures to investigate thefts identified by one agency at its general lockbox bank site, FMS' actions did not include determining what deficiencies at the bank allowed such thefts to occur; therefore, FMS was unable to assess whether the corrective actions taken by the bank were adequate to prevent such thefts from occurring in the future. Once GAO brought this matter to FMS' attention, FMS investigated the thefts further and found that additional controls were needed at the bank to adequately safeguard the collections. FMS had not monitored the sufficiency of the collateral pledged by the lockbox banks since 1995 when it entered into lockbox service agreements with the banks, even though its internal procedures require that reassessments be performed every 2 years. After GAO identified this problem, FMS reassessed the collateral pledged by the banks and found that three of the four lockbox banks were significantly undercollateralized. Without effectively monitoring banks' lockbox operations, FMS does not know whether the banks are adequately safeguarding and properly processing billions of dollars of federal collections.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: FMS developed and implemented an Incident Tracking System to track problems identified at the lock box banks, such as those reported by agencies. The system is designed to document reported problems and to track the actions taken by the Financial Services Division (FSD) and the bank to resolve these problems. Beginning in August 2000, the Incident Reports are submitted monthly to FSD management for review. Management is monitoring progress to ensure that problems are corrected timely and that adequate corrective action is taken to prevent similar problems from occurring in the future.

    Recommendation: To correct the new weaknesses GAO identified in the Financial Management Service's (FMS) monitoring of lockbox operations, the Commissioner of FMS should direct the Assistant Commissioner for Federal Finance to ensure that the Financial Services Division establishes procedures to thoroughly follow up on problems agencies identify at lockbox banks, such as the thefts identified at one of the general lockbox banks, to ensure that problems are corrected in a timely manner and that adequate corrective actions are taken to prevent similar problems from occurring in the future.

    Agency Affected: Department of the Treasury: Financial Management Service

  2. Status: Closed - Implemented

    Comments: FMS's Financial Services Division (FSD) developed detailed procedures for ensuring adequate collateral coverage for lockbox deposit accounts maintained by commercial lockbox banks. These procedures include, among others, steps for periodic reassessments of the amount of collateral pledged by the bank. FMS also designated officials responsible for verifying on a monthly basis that sufficient collateral is on hand at the Federal Reserve to cover deposits held overnight by the banks. GAO reviewed the June 2002 Security Account Collateral Monitoring Recap Report, provided by the Federal Reserve to FMS, and verified that there was sufficient collateral to cover each day's total and that the Federal Reserve would reject deposits if the bank was unable to fully collateralize the deposit. FMS reviews these Recap reports for discrepancies each month as evidenced by four sign-offs, including two Directors.

    Recommendation: To correct the new weaknesses GAO identified in FMS' monitoring of lockbox operations, the Commissioner of FMS should direct the Assistant Commissioner for Federal Finance to ensure that the Financial Services Division performs periodic reassessments of collateral pledged by lockbox banks, as prescribed in FMS' internal policies and procedures.

    Agency Affected: Department of the Treasury: Financial Management Service

 

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