This is the accessible text file for GAO report number GAO-04-114R 
entitled 'U.S. Coast Guard National Pollution Funds Center: Claims 
Payment Process Was Functioning Effectively, but Additional Controls 
Are Needed to Reduce the Risk of Improper Payments' which was released 
on October 03, 2003.

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October 3, 2003:

The Honorable Lane Evans:

Ranking Minority Member:

Committee on Veterans Affairs:

House of Representatives:

The Honorable Bob Filner:

Ranking Minority Member:

Subcommittee on Coast Guard and Maritime Transportation:

Committee on Transportation and Infrastructure:

House of Representatives:

The Honorable Corrine Brown:

House of Representatives:

Subject: U.S. Coast Guard National Pollution Funds Center: Claims 
Payment:

Process Was Functioning Effectively, but Additional Controls Are 
Needed to Reduce the Risk of Improper Payments:

The Oil Spill Liability Trust Fund (Fund) is a $1 billion fund 
authorized by the Oil Pollution Act of 1990 (OPA) to pay for (1) 
federal removal actions, (2) certain claims for uncompensated removal 
costs and damages, and (3) natural resource damage and restoration 
activities resulting from oil spills or the substantial threat of oil 
spills to the waters or shorelines of the United States. The Fund is 
administered by the National Pollution Funds Center (NPFC) of the U.S. 
Coast Guard. In May 2002, at your request, our Office of General 
Counsel reported on legal issues and limitations of the Fund and 
concluded that certain administrative costs were inappropriately being 
paid out of the Fund. In light of this conclusion, you asked that we 
review the internal controls over disbursements from the Fund.

This report summarizes the information provided during our briefing on 
our review of claim payments made from the Fund, which was provided to 
your staff on September 17, 2003. A second briefing will be provided to 
your staff on the results of our review of controls over operating 
expenses and other disbursements from the Emergency Fund.[Footnote 1] 
The enclosed briefing slides highlight the results of our work and the 
information provided. Specifically, we reviewed the Fund to determine 
whether (1) the design of internal controls over the claims process 
provides reasonable assurance that improper payments will not occur or 
will be detected in the normal course of business and (2) internal 
controls over the claims process are operating as designed to help 
ensure proper payment of claims.

Results in Brief:

The U.S. Coast Guard NPFC follows a systematic and effective process 
for payment of claims. However, there are some weaknesses in the design 
of internal controls over the claims process that expose the Fund to 
improper payments. The weaknesses in the design of controls include (1) 
ineffective access restrictions to the Authorization-to-Pay[Footnote 
2] (ATP) form, (2) lack of segregation of duties between individuals 
preparing and approving ATPs for payment, (3) lack of procedures to 
verify the validity of ATPs prior to payment by the U.S. Coast Guard 
Finance Center, (4) lack of compliance with certain established 
policies and procedures in the claims process and the claims processing 
system, and (5) inadequate documentation of the originator of actions 
in the claims processing system.

We found that existing internal controls related to the documentation 
and approval of claims were generally operating in accordance with 
established policies and procedures. Of the 88 statistically sampled 
paid claims for fiscal year 2002, all but 3 had adequate 
documentation.[Footnote 3] We found no exceptions with approvals for 
the 88 statistically sampled claims. We also found that all 88 claims 
met NPFC's 10 requirements for validity, as listed in appendix I of the 
attached slides. Through data mining,[Footnote 4] we selected a 
nonstatistical sample of 50 claim payments and 8 denied claims for 
fiscal years 1998 through 2002 and performed limited tests to determine 
if the claims payments were valid and if the denied claims were 
properly processed. While we found some documentation and approval 
issues, we found that the 50 claim payments were valid and that the 8 
denied claims were properly processed.

Recommendations for Executive Action:

To improve the design of internal controls over the claims process, we 
recommend that the Commandant of the U.S. Coast Guard direct the 
Director of the National Pollution Funds Center to:

* require automatic control numbers for each ATP form;

* limit access to the ATP form control numbers to one individual and an 
alternate in each claims division;

* require two signatures on each ATP form, one for the preparer and one 
for the approver;

* establish procedures requiring the National Pollution Funds Center to 
authenticate ATP forms prior to submitting them to the U.S. Coast Guard 
Finance Center for payment;

* establish and implement controls so that any required legal reviews 
of claims are completed before they are approved for payment;

* establish and implement controls to ensure that a release form is 
received from a claimant before a claim can be approved for payment; 
and:

* modify the claims processing system to consistently identify the 
originator of all actions on user screens.

We also recommend that the Commandant of the U.S. Coast Guard direct 
the Chief Financial Officer of the U.S. Coast Guard to require that the 
Finance Center verify the validity of ATP forms prior to processing 
claim payments.

Agency Comments:

We obtained oral comments on a draft of our briefing slides from the 
U.S. Coast Guard. U.S. Coast Guard officials agreed with our findings 
and recommendations and stated that they have already begun to take 
corrective actions to implement many of them and will continue to take 
additional actions as soon as possible to address the remaining 
recommendations. They provided us with a detailed list of actions taken 
or to be taken, which if properly implemented, should address our 
recommendations. U.S. Coast Guard officials also provided technical and 
clarifying comments that we incorporated as appropriate.

Scope and Methodology:

To determine whether the design of internal controls over the claims 
process provided reasonable assurance that improper payments would not 
occur or would be detected in the normal course of business, we (1) 
reviewed OPA and related sections of the Code of Federal Regulations, 
(2) reviewed the Comptroller General's Standards for Internal Control 
in the Federal Government,[Footnote 5] (3) reviewed NPFC's Standard 
Operating Procedures related to the claims process, and (4) performed 
walkthroughs of the claims process, including the claims processing 
system, and compared the results to NPFC's Standard Operating 
Procedures and the Comptroller General's Standards for Internal Control 
in the Federal Government.

To determine if internal controls over the claims process were 
operating as designed to ensure proper payments of claims, we selected 
a statistical sample of 88 paid claims for fiscal year 2002, and 
reviewed the related claim files and the claims processing system 
records to test for adequate documentation, proper approvals, and 
validity. To test for validity, we also performed limited data mining 
of claims paid in fiscal years 1998 through 2002 to identify unusual 
transactions and patterns. Based on the data mining, we selected a 
nonstatistical sample of 50 claim payments and 8 denied claims, 
reviewed the related documentation, and performed limited tests.

We requested comments on a draft of the enclosed briefing slides from 
the Commandant of the U.S. Coast Guard or his designee and have 
included any comments as appropriate in the letter and enclosed slides. 
We conducted our work from December 2002 through July 2003, in 
accordance with generally accepted government standards.

- - - - -:

This report is available at no charge on our home page at http://
www.gao.gov. If you have any questions about this report, please 
contact me at (202) 512-9508 or Rosa R. Harris, Assistant Director, 
Financial Management and Assurance, at 
(202) 512-9492. You may also reach us by e-mail at calboml@gao.gov or 
harrisrr@gao.gov. Additional contributors to this assignment were H. 
Donald Campbell, Lisa J. Crye, and Edward F. Tanaka.

Linda M. Calbom:

Director, Financial Management and Assurance:

Signed by Linda M. Calbom:

Enclosure:

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FOOTNOTES

[1] The Emergency Fund is used to pay for emergency removal activities 
and the initiation of natural resource damage assessments.

[2] An ATP is a form used to approve claim payments and generate the 
payments to claimants. 

[3] Based on these results, we estimate that 3.4 percent of the fiscal 
year 2002 paid claims lacked adequate documentation. We are 95 percent 
confident that the error rate was between 1 to 9 percent for claims 
paid in fiscal year 2002.

[4] Data mining applies a search process to a data set, analyzing for 
trends, relationships, and interesting associations. For instance, it 
can be used to efficiently query transaction data for characteristics 
that may indicate potentially improper activity.

[5] U.S. General Accounting Office, Standards for Internal Control in 
the Federal Government, GAO/AIMD-00-21.3 (Washington, D.C.: November 
1999).