Overview

Federal agencies receive annual and multi-year appropriations to finance their
operations. Federal agencies obligate money from their appropriations when they
identify a specific spending need, such as the acquisition of goods or services. After
an agency receives goods or service, it pays for them from the obligated amount. Any
amount remaining after all goods and services have been received and paid for should
be deobligated and made available for other needs. ©

Obligations from annual appropriations are valid for 5 years. On September 30 of the
fifth fiscal year after the annual appropriation period ends, the appropriation is closed
and any remaining balance, whether obligated or unobligated, is canceled and not
available for obligation or expenditure for any purpose.

The head of each agency is required to establish internal controls to assure that an
adequate review of obligated balances is performed annually. After the close of each
fiscal year, the head of each agency is required to submit to the President and the
Secretary of the Treasury a report regarding the unliquidated obligations, unobligated
balances, and canceled balances and adjustments made to appropriation accounts
during the completed fiscal year. The report is required to be submitted no later than
15 days after the date on which the President’s budget for the next fiscal year is
submitted to Congress.

‘Objectives, Scope and Methodology

Our objectives were to (1) determine if controls are in place to ensure that an adequate
review of obligated balances is performed as required by U.S.C. Title 31 and (2)
determine if any unliquidated obligations should be deobligated. Our procedures
included obtaining an understanding of the procedures and controls over the Bureau
of Alcohol, Tobacco and Firearms’ (ATF) obligation process, and testing obligations
to determine if any should be deobligated. Our objective was not to opine on the
fairness of ATF’s unliquidated obligations balance.

To meet our objectives, we:

e met with budget and financial staff from ATF to obtain an understanding of its
internal controls over the obligation process, including controls over
deobligations;

¢ performed walkthroughs of key transactions and events in the obligation process;

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Appendix 1

Management Comments

DEPARTMENT OF THE TREASURY
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
WASHINGTON, DC 20226

oT 14m

ASSISTANT
DIRECTOR

404021:DTC
1990

MEMORANDUM TO: Assistant Inspector General of Aj

OM: Assistant Director (Management) /
Chief Financial Officer

SUBJECT: Management Comments on the FY 1999 Audit of
ATF's Unliguidated Obligations

ATF has reviewed the draft report on the audit of ATF's
Uniiquidated Obligations and provides the following
comments.

During the last four-year period, ATF went through four
major restructurings within the Directorates of Field
Operations; Office of Science and Technology; Firearms,
Explosives & Arson; and Training & Professional Development
that azfected over 2,500 employees. With the restructuring
came changes in program responsibil d personnel.

PricewaterhouseCoopers (PwC) first identified the issue

the unligui: j obligations process during its
1998 financial In response to the PwC Managem
Letter Comment, policy and procedures ve been developed
and corrective actions are being implemented.

Finding: ATF's Review of Unliquidated Obligations should be
Improved.

ATF agrees with the recommendation. ATF was conducting its
d-year review of unliquidated obligations when OIG began
its review. Since at time, ATF has completed its review
and deobligated amounts as necessary. We believe that much
stronger focus and controls have been placed on unliquidated
obligation reviews. New procedures 2 be implemented as
an outcome of the previous year's audit recommendations.
addition, the functionality of the new financial system,
which is being installed for FY 2000, will further enhance
the controis over the unliquidated obligations review.

The new financial system will place the responsibility of
Geobligations with the program office for they will have on-
line, real-time capability. Monthly reviews by all program
ces will be conducted.

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Audit Results

We concluded that, except for the internal control matters discussed below, controls
are in place to ensure that an adequate review of obligated balances is performed as
required by U.S.C. Title 31 and that ATF’s unliquidated balances should be adjusted
for the effect of the errors identified in our testing.

ATF’s Review of Unliquidated Obligations Should bé Improved

_ Although ATF had established policies and procedures for conducting semiannual
reviews of unliquidated obligations, ATF did not properly identify all amounts that
should have been deobligated during its latest review. The results of our tests of
unliquidated obligations disclosed 12 invalid and 2 unsupported unliquidated
obligations as discussed in the subsequent finding from the 43 sample items tested.
ATF had only identified 5 of the 14 items during its review, which was ongoing at the
time of our audit.

One error was identified during our testing of key items. This error resulted from an
improper payment entry that caused the unliquidated obligation to be understated by
approximately $69,100. The 13 remaining errors, related to non-key items, resulted in
unliquidated obligations being overstated by approximately $34,500. These items
related to balances that were either not billed or were only partially billed by the
vendor. In each supported instance, no further invoices were expected from the
vendor. Therefore, the remaining balances should have been deobligated. The net
effect of the 14 errors identified resulted in an understatement of unliquidated
obligations of approximately $34,600.

In accordance with Financial Management Division Policy ~ Unliquidated
Obligations, Control Number 99-III-E, program offices are required to indicate on
receiving reports of payment/posting documents when final goods or services have
been received. Upon final payment, the Financial Management System should close
out any outstanding unliquidated obligations remaining in ATF’s financial system.
The results of our testing revealed that these closeout procedures were not
consistently performed.

We projected the overstatement errors identified in our statistically selected sample of
non-key items to the remaining unliquidated obligations not tested. Our projection
indicated a possible overstatement of unliquidated obligations at June 1, 1999 of $12
million or 6%. This projection reflects a possible amount to be deobligated had the
entire population of non-key items been reviewed. We excluded the $69,100
understatement as it represented a key item and all key items were tested.

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a

e reviewed ATF’s reconciliation of unliquidated obligations to the Report on ”
Budget Execution (SF 133);

© tested a statistically selected sample of the unliquidated obligation balance of
approximately $188 million at June 1, 1999. We selected a sample of 43
unliquidated obligations, of which 15 were key items of $1,000,000 or greater and
28 were randomly selected as statistical representation of the remaining
population (non-key items). We reviewed source dotumentation related to each
sample item to determine if the item represented a valid obligation;

¢ provided ATF with a list of all unliquidated obligations of $50 or less for review
for possible deobligation. These items were excluded from the population of
unliquidated obligations tested;

¢ searched the database for obligations over 5 years old and determined that none
existed; and

reviewed the unliquidated obligation account detail for unusual items.

We conducted our audit in accordance with Government Auditing Standards, issued
by the Comptroller of the United States.

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Failure to retain supporting documentation affects ATF’s ability to justify and
validate open obligations. Moreover, reports generated on the basis of such
information may not be accurate and critical decisions may be based upon erroneous
information.

Recommendations
We recommend that the Director of ATF: .

1, Reemphasize ATF’s policies and procedures relating to the retention of
documentation supporting all unliquidated obligations.

2. Ensure that a review is performed to reassess the validity of all transactions that
are not supported.

OIG-00-012 REPORT ON THE AUDIT OF THE BUREAU OF
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UNLIQUIDATED OBLIGATIONS PAGES


REPORT ON THE AUDIT OF THE BUREAU
OF ALCOHOL, TOBACCO AND FIREARMS’
UNLIQUIDATED OBLIGATIONS

OIG-00-012 November 3, 1999

Office of Inspector General

shen

United States Department of the Treasury



Appendix 2
Major Contributors to This Report

Antoine Elachkar, Director, Financial Management Division
Mike Fitzgerald, Audit Manager

Marie Maguire, Audit Manager

Shonya Thomas, Auditor-in-Charge

Ade Bankole, Auditor

Alex Biggs, Auditor

OIG-00-012 REPORT ON THE AUDIT OF THE BUREAU OF
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Appendix 1

Management Comments

-2+

Assistant Inspector General of Audit

Finding: ATF’s Controls Over the Retention of Supporting
Documentation Should be Strengthened.

We agree with the finding that supporting documentation of
all transactions and significant events must be retained =o
justify and validate transactions. FMD will develop and
distribute policy to the program offices to ensure
supporting documentation is being retained.

ATF appreciates the opportunity to review and comment on the
OIG findings. If you have any questions regarding this

memorandum, please contact Marquerite Moccia, Deputy Chief
Financial Officer, on (202) 927-8420.

SS yee
fee Willian T. Earle

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UNLIQUIDATED OBLIGATIONS PAGE7


Subsequent to the end of our fieldwork, ATF completed their ongoing review of
unliquidated obligations and identified and deobligated transactions as necessary.

In accordance with Title 31 U.S.C. Section 1554 (b) (1), after the close of each fiscal
year, the head of each agency shall submit to the President and the Secretary of the
Treasury a report regarding the unliquidated obligations, unobligated balances,
canceled balances, and adjustments made to appropriation account of that agency
during the completed fiscal year. Title 31 USC Section 1554 (c) states that the head
of each agency shall establish internal controls to assure that an adequate review of
obligated balances is performed to support the certification.

Recommendation
We recommend that the Assistant Director (Management)/Chief Financial Officer:
1. Reemphasize ATF’s policies and procedures relating to unliquidated obligations;

2. Ensure that all amounts subject to deobligation are properly identified and timely
processed.

ATF’s Controls Over the Retention of Supporting Documentation Should be
Strengthened

ATF management is responsible for ensuring and supporting the validity and accuracy
of financial information. To effectively fulfill this responsibility, documentation
substantiating all transactions and significant events should be properly maintained.
During our audit, ATF was not able to provide documentation substantiating
obligations for 2 of the 28 non-key items tested. Supporting documentation was
either missing or had been discarded. These 2 items were referred to in the previous
finding.

Title 31 U.S.C. 1501 states that “an amount shall be recorded as an obligation of the
United States Government only when supported by documentary evidence of (1) a
binding agreement between an agency and another person (including an agency) that
is (A) in writing, in a way and form, and for a purpose authorized by law; and (B)
executed before the end of the period of availability for obligation of the
appropriation or fund used for specific goods to be delivered, real property to be
bought or leased, or work or service to be provided.” In addition, the General
Records Schedule 3, Section 3. Routine Procurement Files, requires files such as
contract, requisition, and purchase order records be maintained for 6 years and 3
months after final payment.

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TABLE OF CONTENTS

OVerVieW............scecccccceccssesosesssesssesseessnteseesesceeenecsenanseesceceeseneasenenescuesece

Objectives, Scope, and Methodology..

AUdit Results..........ccccsccsssssseecssssesssereessecesecenecessegenscenseenaeensesnensessaseens

ATF’s Review of Unliquidated Obligations Should be Improved.............+0+

Recommendation ..

ATF’s Controls Over the Retention of Supporting Documentation
Should be Strengthened ....

Recommendations...........-.seccecssesccsnscceesccsseenecescterscesesssseseccossseeenenes

Appendices

1 Management Comments..
2 Major Contributors to This Report.........sssscccosssecccessseeesseonsseasesessoneres

3 Report Distribution

OIG-00-012 REPORT ON THE AUDIT OF THE BUREAU OF
"ALCOHOL, TOBACCO AND FIREARMS’ ~
UNLIQUIDATED OBLIGATIONS


Page 2

Our findings and recommendations have been reviewed with
your staff during our audit, and we have incorporated their
comments aS appropriate. Based on our mutual agreement we
are issuing this report as final.

Should you or your staff have any questions, you may
contact me at (202) 927-5400 or Michael Fitzgerald, Acting
Director of Financial Audits at (202) 927-5789. We
appreciate the cooperation and the courtesies extended to

our staff.

Attachment


DEPARTMENT OF THE TREASURY
WASHINGTON

November 3, 1999

INSPECTOR GENERAL

MEMORANDUM FOR JOHN W. MAGAW, DIRECTOR
BUREAU OF ALCOHOL, TOBAfSCO AND FIREARMS
. cee ( bAherk
FROM: Dennis S. Schindel [porns f
Assistant Inspector General for Audit

Y

SUBJECT: Report on the Audit of the Bureau of
Alcohol, Tobacco and Firearms’
Unliquidated Obligations

This memorandum transmits the final report on the Office of
Inspector General’s audit of the Bureau of Alcohol, Tobacco
and Firearms’ (ATF) unliquidated obligations as of

June 1, 1999. Our objectives were to (1) determine if
controls are in place to ensure that an adequate review of
obligated balances is performed as required by U.S.C. Title
31 and (2) determine if any unliquidated obligations should
be deobligated. Our procedures included obtaining an
understanding of the procedures and controls over ATF’s
obligation process, and testing obligations to determine if
any obligations should be deobligated. Our objective was
not to opine on the fairness of ATF’s unliquidated
obligations balance.

The work we performéd satisfied our objectives. We
identified matters that we would like to bring to
Management’s attention regarding ATF’s process for the
review of unliquidated obligations and the retention of
‘supporting documentation which should be improved. These
matters are discussed in detail in our report.

In accordance with the Department of the Treasury Directive
No. 40-01, we request a corrective action plan be provided
to us within 30 days of the date of this report for each
recommendation. We recognize that certain corrective
actions have already been undertaken and we encourage the
continuance of these efforts.


Appendix 3

Report Distribution

Treasury Departmental Offices

Director, Office of Strategic Planning and Evaluations
Director, Office of Budget
Director, Office of Accounting and Internal Control

Bureau of Alcohol, Tobacco and Firearms .

William T. Earle, Chief Financial Officer
Marguerite Moccia, Deputy Chief Financial Officer
Victoria McDowell, Chief, Accounting Branch
Kathleen Downs, Chief, Accounting Operations
Laura Jenkins, Supervisory Accountant

Office of Management and Budget

Esther Rosenbaum, Budget Examiner

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