This is the accessible text file for GAO report number GAO-04-340R 
entitled 'U.S. Coast Guard National Pollution Funds Center: 
Improvements Are Needed in Internal Control Over Disbursements' which 
was released on January 13, 2004.

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January 13, 2004:

The Honorable Lane Evans 
Ranking Democratic Member 
Committee on Veterans Affairs 
House of Representatives:

The Honorable Bob Filner 
Ranking Democratic 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: Improvements 
Are Needed in Internal Control Over Disbursements:

The Oil Spill Liability Trust Fund (Fund) is a $1 billion fund that has 
two major components: the Emergency Fund and the Principal Fund. The 
Emergency Fund is used for paying for federal removal actions and the 
initiation of natural resource damage assessments by designated 
federal, state, or Indian tribe officials, resulting from oil spills or 
the substantial threat of oil spills to the waters or shorelines of the 
United States. The Principal Fund is used for paying certain claims for 
uncompensated removal costs and damages 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 (USCG).

In May 2002, at your request, we issued a legal opinion related to the 
uses and limitations of the Fund and concluded that the Fund is not 
available to pay employee salaries and other operating 
expenses.[Footnote 1] The USCG reported that from fiscal years 1998 
through 2002, $32.8 million from the Fund was used to pay costs 
associated with processing claims, including salaries and other 
operating expenses. In April 2003, the USCG returned the $32.8 million 
to the Fund. In light of our conclusion regarding the appropriate use 
of these funds, you asked that we review the control over disbursements 
from the Fund and assess the propriety of these disbursements.

On September 17, 2003, we briefed your offices on the results of our 
review of internal control over claim payments made from the 
Fund.[Footnote 2] We provided a second briefing on December 3, 2003, 
related to our review of internal control over disbursements for 
operating expenses paid from the Principal Fund and removal costs paid 
from the Emergency Fund. This report summarizes the information 
provided during that second briefing. The enclosed briefing slides 
highlight the results of our work and the information provided.

We reviewed disbursements for operating expenses and removal costs to 
determine whether (1) the design of existing internal control provided 
reasonable assurance that improper payments would not occur or would be 
detected in the normal course of business, (2) they were made in 
accordance with established USCG and NPFC policies and procedures, and 
(3) they were made in accordance with the uses specified in the Oil 
Pollution Act of 1990 (OPA) and other federal laws and regulations, and 
represented a proper use of government funds. Also at your request, we 
are providing information about NPFC's payroll expenses and claim 
activity fluctuations for fiscal years 1998 through 2003. This 
information is included in appendix I of the attached slides.

Results in Brief:

The USCG and NPFC have established a system of internal control over 
operating expenses and Emergency Fund disbursement processes. However, 
we found some weaknesses in the design and operation of internal 
control over operating expenses and disbursements from the Fund that 
increase the risk of improper payments. Weaknesses in the design of 
control included a lack of documented reconciliations of the amounts 
included in removal cost reports with those recorded in USCG's 
accounting system. We found additional internal control weaknesses in 
that USCG/NPFC did not always follow established policies and 
procedures that are intended to help ensure the validity of 
disbursements.

Of the nonstatistical selection of 467 disbursements obtained through 
data mining[Footnote 3] for fiscal years 1998 through 2002, we found 
that 33, or 7 percent of these disbursements, totaling $43,425, lacked 
adequate supporting documentation. Of the 33 disbursements, 9 
transactions lacked purchase receipts such as invoices, 10 additional 
transactions lacked purchase request forms, and 14 lacked both purchase 
receipts and purchase request forms. We also found that 25, or 5 
percent of the 467 disbursements, totaling $26,182, lacked proper 
approvals. Specifically, 3 transactions lacked proof of approval from 
supervisors, 18 additional transactions lacked proof of approval from 
fund certifying officers before purchases were made, and 4 lacked proof 
of approval from supervisors and fund certifying officers. Another 39 
transactions totaling $155,994 for payments to contractors and other 
government agencies, and reimbursements to employees and others lacked 
documentation of supervisory review and approval before payments were 
made. In addition, equipment purchases totaling $62,700 were not 
recorded in the property tracking system.

We also used the nonstatistical selection of disbursements obtained 
through data mining to determine whether these disbursements complied 
with certain federal laws and regulations and represented a proper use 
of government funds. We found that (1) NPFC did not properly document 
their justification for using federal funds to reimburse $14,481 in 
travel expenses for 11 nonfederal potential claimants to attend natural 
resource damage (NRD) seminars, (2) the USCG Finance Center (FINCEN) 
incurred a total $24,546[Footnote 4] in late payment fees and lost 
discounts, and (3) the validity of 17[Footnote 5] disbursements tested 
totaling $6,589 was questionable because adequate supporting 
documentation was missing. The weaknesses we identified in the design 
and operation of internal control over the disbursement processes, if 
left uncorrected, increase the Fund's vulnerability to future improper 
payments.

In addition, during fiscal year 2003, NPFC continued to improperly use 
the Fund to pay about $645,000 in operating expenses and obligated 
another $151,000 against the Fund. NPFC officials told us that they are 
in the process of transferring these transactions from the Fund into a 
newly established account created for recording NPFC operating 
expenses. As with the $32.8 million previously returned, this transfer 
will not compensate the Fund for lost interest. NPFC's continued 
improper use of the Fund to pay for operating expenses is a violation 
of federal law. Not only does this practice expose the Fund to misuse, 
but we estimate that the Fund may have lost as much as $1.6 million in 
interest[Footnote 6] as a result.

Recommendations for Executive Action:

To improve the design of internal control over disbursements from the 
Fund, we recommend that the Commandant of the U.S. Coast Guard direct 
the Director of the National Pollution Funds Center to establish 
policies and procedures to require that:

* case officers document the reconciliation of removal costs reports to 
amounts paid in the accounting system, and:

* case officers' supervisors document their review of these 
reconciliations.

To establish better compliance with U.S. Coast Guard/National Pollution 
Funds Center policies and procedures, we recommend that the Commandant 
of the U.S. Coast Guard direct the Director of the National Pollution 
Funds Center to:

* reinforce documentation and approval requirements by instituting 
training for all relevant employees,

* institute monitoring techniques such as periodic spot checks to help 
ensure that such requirements are consistently followed, and:

* establish a mechanism to ensure that accountable assets are properly 
recorded in USCG's fixed assets system.

To enforce compliance with the Oil Pollution Act of 1990 and other 
federal laws and regulations and reduce the risk of improper payments, 
we recommend that the Commandant of the U.S. Coast Guard direct the 
Director of the National Pollution Funds Center to:

* expedite actions needed to cease using the Fund to pay operating 
expenses as advised in our May 2002 legal opinion,

* record obligations against USCG's annual operating expense 
appropriation in order to ensure that adequate funds are available to 
reimburse the Fund for any unreimbursed or future use of the Fund to 
pay operating expenses,

* complete the transfer of all operating expenses that were improperly 
paid from the Fund in fiscal year 2003 to the new operating expense 
account,

* ensure proper justification exists for nonfederal travelers to be 
reimbursed to attend NRD seminars in advance of any such travel, and:

* follow up on transactions that were missing purchase invoices to 
determine what was purchased and whether the items were for legitimate 
government needs.

We also recommend that the Commandant of the U.S. Coast Guard direct 
the Chief Financial Officer of the U.S. Coast Guard to:

* reinforce documentation and approval requirements for disbursements 
from the Fund by instituting training for all relevant employees, and:

* institute a monitoring system such as periodic spot checks to help 
ensure that such requirements are consistently followed.

Agency Comments:

We obtained oral comments on a draft of our briefing slides from the 
Director of the U.S. Coast Guard National Pollution Funds Center and 
other officials. They agreed with our recommendations. The officials 
emphasized that at the time they initially began using the Fund to pay 
operating expenses, they had an opinion from the USCG Chief Counsel 
that this was a proper use of the Fund. As noted earlier, we concluded 
in May 2002 that the Fund is not available to pay NPFC operating 
expenses. The officials also emphasized that they now have electronic 
approvals that they believe provide better supervisory review and 
oversight. They provided technical and clarifying comments, which we 
incorporated as appropriate.

Scope and Methodology:

To determine whether the design of existing internal control over 
operating expenses and Emergency Fund removal costs disbursement 
processes provide reasonable assurance that improper payments will not 
occur or will be detected in the normal course of business, we (1) 
reviewed USCG/NPFC's policies and procedures related to operating 
expenses and Emergency Fund removal costs disbursements, (2) considered 
the Comptroller General's Standards for Internal Control in the Federal 
Government,[Footnote 7] (3) interviewed staff and officials in the USCG 
and the NPFC offices, and (4) performed walkthroughs of the operating 
expenses and Emergency Fund removal costs disbursement processes, and 
compared the results to USCG/NPFC's policies and procedures and the 
Standards for Internal Control in the Federal Government.

To determine whether disbursements were made in accordance with USCG/
NPFC's policies and procedures, we (1) performed data mining of 
operating expenses paid from the Fund during fiscal years 1998 and 2002 
to identify unusual transactions and patterns including personal use 
items, Internet purchases, training and travel, equipment purchases, 
employee reimbursements, contract payments other than removal costs, 
and late payment fees, and (2) used a nonstatistical selection of 467 
disbursements obtained through data mining and tested for adequate 
documentation, proper approvals, and adequate safeguarding of assets.

We also used the nonstatistical selection of disbursements obtained 
through data mining to determine whether these disbursements were made 
in accordance with OPA and other federal laws and regulations and 
represent a proper use of government funds. Specifically, we reviewed 
OPA and federal laws and regulations to obtain an understanding of 
allowed costs, and reviewed purchase receipts or invoices to ensure 
that purchases were made for official government use and were allowed 
costs. We did not project our test results to the universe of NPFC 
disbursements in fiscal years 1998 through 2002.

To determine the fluctuations in payroll expenses and claims activity, 
we obtained data from the USCG and NPFC and identified significant 
fluctuations in payroll and claims activity for fiscal years 1998 
through 2002, and obtained USCG/NPFC's explanations for these 
fluctuations. We did not verify the accuracy of the amounts included in 
NPFC's payroll and claim systems.

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 November 2002 through November 2003, in 
accordance with generally accepted government auditing standards.


This report is available at no charge on our home page at [Hyperlink, 
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 [Hyperlink, calboml@gao.gov]
or [Hyperlink, harrisrr@gao.gov]. 
Additional contributors to this assignment were Lisa Crye, Anh Dang, 
Tyshawn Davis, Christine Fant, Ryan D. Holden, Gabriella Kusz, Robert 
Preshlock, and Sandra S. Silzer.

Linda M. Calbom: 
Director, Financial Management and Assurance:

Signed by Linda M. Calbom:

Enclosure:

[End of section]

Enclosure:

[See PDF for image]

[End of figure]

[End of section]

(190118):

FOOTNOTES

[1] These costs are to be paid out of an annual operating expense 
appropriation.

[2] U.S. General Accounting Office, 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, 
GAO-04-114R (Washington, D.C.: Oct. 3, 2003).

[3] Data mining applies a search process to a dataset, 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.

[4] Of the 467 disbursement transactions, the USCG FINCEN incurred a 
total of $8,868 in late payment fees and lost discounts. We extended 
our test beyond the 467 disbursements to include all late payment fees 
and lost discounts incurred during fiscal years 1998 through 2002. As a 
result, we found that NPFC incurred an additional $15,678 for a total 
of $24,546.

[5] As discussed earlier, 23 disbursements lacked adequate supporting 
documentation. Of the 23 disbursements, 17 were missing purchase 
receipts or invoices and were therefore questionable. Another 6 had 
partial supporting documentation and were not considered questionable.

[6] To calculate interest, we multiplied the average 6-month rate for 
U.S. Treasury bills (the rate at which the Fund earns interest) times 
the average operating expense balance for each fiscal year.

[7] U.S. General Accounting Office, Standards for Internal Control in 
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 
1999).