Internal Controls:

FMS' Monitoring of Lockbox Bank Operations Needs Improvement

AIMD-99-219: Published: Aug 20, 1999. Publicly Released: Aug 20, 1999.

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Pursuant to a legislative requirement, GAO reviewed the Financial Management Service's (FMS) internal controls over cash receipts collected on behalf of the federal government, focusing on testing the effectiveness of FMS' internal controls over lockbox collections.

GAO noted that: (1) FMS needs to improve its monitoring of lockbox bank operations to ensure that federal collections are adequately safeguarded and properly processed; (2) there were weaknesses in FMS' monitoring of lockbox bank operations related to on-site reviews and lockbox bank audits; (3) on-site reviews performed by FMS and Internal Revenue Service (IRS) lockboxes were not always effective in detecting certain internal control weaknesses at the banks; (4) FMS did not perform periodic on-site reviews of the general lockbox bank operations prescribed in its internal policies and procedures and authorized by its agreements with the banks; (5) FMS did not have a policy to and did not obtain and review the results of the internal and external audits of general lockbox bank operations, even though these audits were required under the agreements with the banks; and (6) FMS did not include any audit requirements in its IRS lockbox agreements. Without performing these key monitoring activities, FMS is not assured of timely identifying and resolving internal control weaknesses at lockbox banks. Such weaknesses increase the risk of loss of federal collections. GAO and other auditors recently reported on weaknesses in internal controls and instances of actual theft of federal tax payments by employees of banks that provide IRS lockbox services. These problems emphasize the importance of establishing adequate controls and effectively monitoring lockbox banks to timely identify and resolve internal control weaknesses that otherwise put billions of dollars of government collections and taxpayer data at risk.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Guidance issued to the lockbox banks by FMS includes a requirement for the banks to provide a schedule of due dates for their internal and external audits. Internal audits are required twice a year and external audits are required every other year. In the year that an external audit is conducted, the bank is not required to conduct a second internal audit. FMS also implemented a penalty clause related to noncompliance with lockbox audit requirements. The clause states that FMS will withhold the awarding of any new, or the expansion of any current, lockbox accounts until the required actions are completed by the bank. In addition, FMS has implemented a tracking schedule that includes scheduled internal and external audit dates, expected dates audit reports are to be received by FMS, and audit reports actually received. Based on GAO's review in September 2002 of this tracking schedule and copies of internal and external audit reports, it appears that FSD has been enforcing the requirement for banks to obtain the internal and external audits in compliance with the lockbox depositary agreements.

    Recommendation: To correct the internal control weaknesses GAO identified with lockbox operations, the Commissioner of Financial Management Service should direct the Assistant Commissioner for Federal Finance to ensure that FSD enforces the requirement for banks to obtain internal and external audits in compliance with their lockbox depository agreements with FSD.

    Agency Affected: Department of the Treasury: Financial Management Service

  2. Status: Closed - Implemented

    Comments: Based on GAO's recommendation, FMS issued comprehensive audit guidance in a supplement to its Lockbox Depository Agreements with the banks. Audits of the general lockbox banks are now in process and will provide FMS more assurance that internal control weaknesses at lockbox operations, if any, are timely identified and resolved, and that government collections are adequately safeguarded and properly processed. Also, FMS has more assurance that the external audits of lockbox bank operations are consistent as to the level of work being performed.

    Recommendation: To correct the internal control weaknesses GAO identified with lockbox operations, the Commissioner of Financial Management Service should direct the Assistant Commissioner for Federal Finance to ensure that FSD develops and provides to the banks specific guidance as to the type and scope of the external audits or other services.

    Agency Affected: Department of the Treasury: Financial Management Service

  3. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, FMS established this requirement and issued a supplement to its Lockbox Depository Agreements that includes the audit requirements. Audits of IRS lockbox operations are now in process and will provide FMS more assurance that internal control weaknesses at lockbox operations, if any, are timely identified and resolved, and that IRS collections are adequately safeguarded and properly processed.

    Recommendation: To correct the internal control weaknesses GAO identified with the lockbox operations, the Commissioner of Financial Management Service should direct the Assistant Commissioner for Federal Finance to ensure that FSD requires banks to obtain semiannual internal and biannual external audits of their IRS lockbox operations.

    Agency Affected: Department of the Treasury: Financial Management Service

  4. Status: Closed - Implemented

    Comments: According to FSD, the Assistant Commissioner for Federal Finance required FSD to submit biweekly status reports of actions being taken to address GAO's recommendations until all recommendations were successfully implemented. FMS completed actions to address three out of five recommendations. For the remaining two recommendations, FMS also took actions. However, due to the nature of the actions, it was too early to assess the impact of such actions. Nonetheless, GAO is closing this recommendation because it believes FMS was responsive to this recommendation to monitor FSD's efforts.

    Recommendation: The Commissioner of the Financial Management Service should direct the Assistant Commissioner for Federal Finance to monitor FSD's efforts in this area and take steps to ensure compliance.

    Agency Affected: Department of the Treasury: Financial Management Service

  5. Status: Closed - Implemented

    Comments: According to FSD, a requirement to ensure that periodic on-site reviews of the general lockbox banks are performed by FSD, has been included in the performance plans for the Director, Cash Management Directorate, the Director, Financial Services Division, and the Team Leader, Collections Management Team. In response to the recommendation, FMS established an aggressive schedule for performing on-site reviews, and completed reviews at all seven general lockbox bank sites by December 31, 1999. As a result, FMS is better able to timely identify and resolve control weaknesses at the banks that may otherwise have put government collections at risk.

    Recommendation: To correct the internal control weaknesses GAO identified with lockbox operations, the Commissioner of the Financial Management Service should direct the Assistant Commissioner for Federal Finance to ensure that the Financial Services Division (FSD) performs the periodic on-site reviews of general lockbox banks as prescribed in its internal policies and procedures.

    Agency Affected: Department of the Treasury: Financial Management Service

  6. Status: Closed - Implemented

    Comments: FMS's newly established Bank Review Office is responsible for coordinating annual announced and unannounced security and personnel reviews of lockbox banks. The procedural guidelines for the reviews require the review team to review available internal and external audit reports of the lockbox sites to be visited so that follow-up on weaknesses identified can be performed on-site. Weaknesses previously identified, which have not been addressed by bank management, are included in the review team's reports, which are submitted to the Bank Review Office. In addition, FMS entered into a Memorandum of Understanding (MOU) with IRS on April 1, 2003, to define the roles and responsibilities of the respective parties for lockbox security, including follow-up on reported weaknesses. The MOU requires FMS to ensure that banks take corrective actions when findings are identified.

    Recommendation: To correct the internal control weaknesses GAO identified with lockbox operations, the Commissioner of the Financial Management Service should direct the Assistant Commissioner for Federal Finance to ensure that the FSD develops and implements a policy to obtain and review audit results including procedures to follow up with banks and agencies on any weaknesses identified in lockbox operations to ensure that the problems are corrected.

    Agency Affected: Department of the Treasury: Financial Management Service

 

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