GOVERNMENT-WIDE FINANCIAL MANAGEMENT 

SERVICES:

 Additional Control and Oversight Needed to Reduce 

Costs and Improve the Plastic Card Network 

 OIG-03-088 July 11, 2003

Office of Inspector General

*******

The Department of the Treasury
Contents

Additional Control and Oversight Needed to Reduce Costs and Improve 

the Plastic Card Network (OIG-03-088) 

Page 1

Audit Report....................................................................................................... 3

Results in Brief.................................................................................................. 3

Background....................................................................................................... 5

Findings and Recommendations.......................................................................... 7

More Effective Payment Options Need To Be Considered For Reimbursing 

Financial Agents For PCN Operating Expenses ............................................... 7

Recommendations ...................................................................................... 16

Management Controls For The Review, Recording, And Accounting For

 PCN Cost Data Need To Be Strengthened.................................................. 18

Recommendations .................................................................................. ... 23

Information Technology Security Control Reviews Were Not Performed 

And PCN Systems Were Not Recertified.................................................... 25

Recommendations ....................................................................................... 27

Appendices

Appendix 1: Objectives, Scope, and Methodology......................................... 30

Appendix 2: Office of Inspector General’s Attempts to Test Transaction

Fees.................................................................................. ..31

Appendix 3: Schedule of Recommendations That Funds Be Put

To Better Use........................................................................... 33

Appendix 4: Management Response............................................................. 35

Appendix 5: Major Contributors to the Report............................................... 39

Appendix 6: Report Distribution.................................................................... 40

Abbreviations

ATD Applied Technology Division

BAMRS Bank of America Merchant Services System

BOA Bank of America

ETD Emerging Technology Division
Contents

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EBSD Electronic Banking Services Division

FMS Financial Management Service

Mellon Mellon Bank

OMB Office of Management and Budget

PCN Plastic Card Network

TGA Treasury General Account
OIG Audit

Report

The Department of the Treasury

Office of Inspector General

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July 11, 2003

Richard L. Gregg

Commissioner

Financial Management Service

The Financial Management Service (FMS) implemented the Plastic 

Card Network (PCN) in 1987 to expedite the collection and deposit 

of revenues from Federal agencies’ credit and debit card sales. 

Any Federal agency that accepts such cards in the sale of goods 

and services to the public can elect to join the PCN. FMS utilizes 

the services of two financial agents—Bank of America (BOA) and 

Mellon Bank (Mellon)—to conduct the daily operations of the PCN. 

The FMS reimburses the two financial agents for PCN operating 

costs through compensating balances deposited with these 

institutions.

We completed an audit to determine how effectively the FMS has 

(1) monitored the performance of the PCN financial agents and 

their subcontractors and (2) controlled PCN costs. We interviewed 

FMS personnel and reviewed FMS’ records related to the PCN and 

the use of compensating balances to acquire banking services; 

interviewed representatives of other Federal agencies, as well as 

corporate officers of entities that manage networks similar to the 

PCN; and obtained feedback on PCN performance from member 

agencies. Our audit generally covered the period January 1998 

through December 2001. Our objectives, scope, and methodology 

are discussed in more detail in Appendix 1.

Results in Brief

We found that more effective payment options need to be 

considered for reimbursing financial agents for PCN operating 

expenses. FMS needs to evaluate alternative methods of payment 
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and reassess the current earnings credit rate used on the 

$2.8 billion of compensating balances established to pay for PCN 

costs. Our analysis found that the policy of using the current rate 

has caused the Treasury Department to forego approximately 

$42.2 million over the first 4 years of the PCN agreements with 

the financial agents. In addition, our review showed that, if current 

policies and practices continue, the government will pay 

$797 million in future PCN costs and accordingly will have to 

increase the level of compensating balances to $5.3 billion by the 

end of 2007, the final year of the PCN agreement. 

FMS had also not established complete and effective management 

controls over its administration of the PCN. Control weaknesses 

included inadequate controls over such critical functions as 

reviewing financial agents’ billing statements; recording PCN cost 

data; calculating FMS earnings on compensating balances; and 

making payments to financial agents. Because of these control 

weaknesses, FMS had less assurance that over $124 million of 

payments to financial agents were proper and/or accurate.

In addition, we found that computer security reviews of PCN 

systems operating at the financial agents’ and their subcontractors’ 

sites were not performed, and that such systems continued to 

function without the required recertification. Neither FMS nor the 

financial agents had standard operating procedures in place to 

ensure that such reviews were performed and in a timely fashion. 

As a result, FMS is unable to determine that PCN system 

safeguards remain sufficient to counter threats and vulnerabilities. 

We surveyed the six top dollar agencies and asked them about 

their relationships with the FMS. They stated that the FMS has 

responded to their questions and complaints effectively and timely, 

and generally gave the FMS high marks for customer service. 

Our report contains recommendations that provide options that will 

more effectively reduce the cost of operating the PCN and improve 

the program’s management and information technology controls. 

FMS management concurred with our recommendations and their 
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written response provided the status of their actions to date. FMS 

is continuing its analysis of the recommendations and plans to 

develop a detailed corrective action plan. The complete text of 

FMS management’s response is provided as Appendix 4. 

Background

FMS instituted a number of projects to assist Federal agencies in 

expediting collections associated with electronic commerce 

transactions. One of these projects is the PCN. The PCN was 

started in 1987. Its objective is to expedite the collection and 

depositing of revenues resulting from agencies’ credit and debit 

card sales. Any Federal agency that accepts such cards for the 

sale of goods and services to the public can elect to join the PCN. 

However, agencies are not required to join and use the PCN. For 

example, the United States Postal Service and the Smithsonian 

Institution manage and operate their own plastic card networks and 

pay for the related operating expenses.

The FMS utilizes the services of two financial agents to conduct 

the daily operations of the PCN. The financial agents, in turn, 

subcontract segments of the PCN operations to companies that 

specialize in specific phases of the plastic card network cycle, such 

as transaction authorization and processing. In 1987, FMS 

selected BOA and Mellon as the financial agents for the PCN. In 

1998, FMS again awarded the financial agency contracts for the 

PCN to BOA and Mellon. 

FMS reimburses the two financial agents through compensating 

balances deposited with these institutions. Compensating balances 

(also known as time balances) are non-appropriated funds 

deposited with banks and other financial institutions as 

compensation for banking services. The financial institutions 

obtain compensation for the services they perform from the earning 

value generated by the deposited funds. The amount of the 

compensating balance is determined by matching the earning value 
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of the compensating balance with the cost of the services that are 

performed by the depositary.

An interest credit is imputed monthly to the holders of the funds 

using an earnings credit rate that is based on the 3-month Treasury 

bill rate. The compensating balance levels are then adjusted by the 

net result of comparing the imputed interest amount to the cost of 

PCN operations as billed by each of the two financial agents. 

PCN collections have been dramatically increasing over the years. 

Collections have increased from $731 million in 1998, to $1.6 

billion in 1999, to $2.2 billion in 2000, and to $3.0 billion in 2001. 

PCN operating expenses have increased proportionally. Because of 

this increased expense, coupled with decreases in interest rates, 

the calendar year-end PCN compensating balances have steadily 

increased from $330 million in 1998 to a total of $2.8 billion in 

2001. 

The financial agent agreements establish and define the relationship 

between the FMS and the banking institutions. As part of the 

transaction processing terms, both financial agents provide the 

FMS with monthly invoices that detail PCN fees and charges. 

The financial agent agreements also identify certain information 

security requirements, which the financial agents addressed when 

they submitted their technical responses. It requires that the 

financial agents be familiar and comply with the Computer Security 

Act of 1987 (Public Law 100-235) and all applicable standards and 

regulations established thereunder.
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Findings and Recommendations

Finding 1 More Effective Payment Options Need To Be Considered 

For Reimbursing Financial Agents For PCN Operating 

Expenses 

FMS has paid for the cost of the PCN by using a static imputed 

interest rate that is calculated on compensating balances held by 

the financial agents. FMS and the Treasury Department have a 

long-standing practice of using the interest rate on 3-month 

Treasury securities to impute interest on compensating balances. 

Although this rate may have been appropriate when initially 

instituted, it was not the most cost effective payment method for 

the Treasury Department. FMS has recently conducted a study to 

review its use of the traditional credit rate and terms of 

compensating balances and has concluded the rate needs to be 

changed. However, our analysis of historical trends of various 

securities’ rates, PCN operating expenses, and compensating 

balance levels show other options need to be considered in 

selecting a payment arrangement that is more cost effective for the 

Treasury Department. Under the current business practice, FMS 

deposited up to $2.8 billion in compensating balances that have 

earned below market rate of return. This lower yield has ultimately 

caused the government to forego approximately $10.8 million to 

$42.2 million in interest, depending on the security, over the first 

4 years of the agreements with the financial agents (1998 –

2001). 

In addition, FMS has incurred $124.5 million in PCN operating 

costs that could have optionally been absorbed by PCN member 

agencies or their customers if alternative payment scenarios had 

been chosen. Furthermore, because PCN costs are not paid with 

appropriated funds, the Congress and the Office of Management 

and Budget (OMB) have little, or no scrutiny over projects financed 

using imputed interest on compensating balances. 
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If our report’s recommendations are implemented, the $2.8 billion 

in compensating balances could be returned to the Treasury general 

fund and made available for other uses. 

Analysis of the Current Policy and Practice to Use Compensating 

Balances for Acquiring PCN Banking Services 

Since 1942, the Treasury Department has used the imputed 

interest on compensating balances to obtain certain banking 

services. FMS has paid for the cost of the PCN using imputed 

interest calculated on compensating balances on deposit with 

financial agents which totaled $2.8 billion as of calendar year-end 

2001. Although this decision might have been the best course of 

action at the time the agreements were reached, we believe the 

financial impact of the continued practice must be reassessed from 

a cost-benefit standpoint. For the past 40 years, Treasury has 

followed a practice that the earnings credit rate on all 

compensating balances is the rate earned on 3-month Treasury 

bills. This rate applies regardless of the length of time funds are 

held on deposit with the financial agents. Interest rates for 

Treasury securities (and corporate securities) generally increase as 

the term to maturity lengthens. That is, the 3-month rate is 

typically less than the 6-month rate, which in turn is less than the 

12-month rate. On the other hand, the financial agents can invest 

these compensating balances in any instrument they feel is 

appropriate but must pledge acceptable collateral as determined by 

the Bureau of the Public Debt to secure the funds in Treasury’s 

account. The types of securities that financial agents can invest in 

can provide them a much higher yield than 3-month Treasury bills.

A September 2001 FMS report entitled Report on Expected Term 

of Treasury Time Balances presented the results of its review of 

the average time that Treasury time (or compensating) balances 

remain on deposit with financial institutions. The principal finding 

of the report suggested that the current basis for the earnings 

credit rate was not accurate. It concluded that the Treasury should 

receive a rate on its compensating balances equal to a 6-month, 

but no higher than a 12-month rate. We discussed the report 
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findings with FMS officials who stated that the policy of using the 

3-month Treasury bill rate was fair because the time balances held 

by the financial agents are callable with little or no notice, although 

a 14-day notice is often provided. FMS based this conclusion on 

the assumption that, when the time balances are called, the 

financial agents sell their related investment portfolios to raise the 

cash needed to return to the United States Treasury. However, 

FMS could not provide any written analysis that supported this 

assumption. 

This assumption may not be entirely valid. We asked 

representatives from both BOA and Mellon about actions they took 

to raise cash when Treasury called their time balances. They 

stated that they either used their own cash, if available, or 

borrowed from another bank at the Federal funds rate, which is 

slightly higher than the 3-month Treasury bill. It is a rate banks 

charge each other for overnight loans and is set by the Federal 

Reserve. Since the inception of the PCN, calls were infrequent and 

lasted from 1 day to 8 days. When the call ended, time balances 

were returned to the financial agents. Regardless of whether time 

balances are called, financial agents will ultimately receive full 

compensation for services they provided to operate the PCN.

The PCN agreements with the two financial agents is for 5 years 

and is renewable by an additional five 1-year options. Accordingly, 

these contractual agreements could conceivably extend to 10 years 

(1998-2007). Under that scenario, the two financial agents would 

continue to hold the related compensating balances for as long as 

the agreements are in effect. 

Although the FMS Report on Expected Term of Treasury Time 

Balances recommended an increase of the earnings credit rate to a 

6- or 12-month rate, we believe these rates do not provide the 

Treasury with a fair rate of return because of the length of time 

these agreements are in effect. 
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To illustrate the variation between what Treasury is presently 

earning; what it could earn with different securities instruments; 

and what the financial agents could be potentially earning on 

compensating balances, see Graph 1 for the average earning rates, 

spanning calendar years 1998-2001, for the 3-month Treasury 

security, as well as the 2-year and 5-year Treasury and corporate 

securities.

Graph 1 

Comparison of Treasury and Corporate Securities 

(Average Rates CYs 98-01)

4.0

4.3

4.6

4.9

5.2

5.5

5.8

6.1

3-M-Treas 2-Y-Treas 2-Y-Corp 5-Y-Treas 5-Y-Corp

In Percent

It should be noted that the Federal Reserve Bank of St. Louis 

ensures that securities pledged are compliant with the list of 

acceptable securities established by the Bureau of the Public Debt. 

We further analyzed what these rate variations meant to the 

Treasury in lost interest earnings on its PCN compensating 

balances during the 4-year period January 1998 through December 

2001. We calculated the amount FMS could have earned versus 

the 3-month Treasury bill rate. For example, Graph 2 shows the 

Treasury could have earned $42.2 million more, over the first 

4-year phase of the contract, if interest was imputed based on the 

5-year corporate security.
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Graph 2

10.8 12.3

25.6

42.2

0

5

10

15

20

25

30

35

40

45

2-yr Treas. 2-yr Corp. 5-yr Treas. 5-yr Corp.

Imputed Interest Dollars Lost on CBs (98 through 01) When Earnings 

Rate is Based on One of These Instruments 

OMB Circular A-123, Management Accountability and Control, 

states, “The proper stewardship of Federal resources is a 

fundamental responsibility of agency managers. Federal employees 

must ensure that government resources are used efficiently and 

effectively to achieve intended program results. Resources must 

be used consistent with agency mission, in compliance with law 

and regulations, and with minimal potential for waste, fraud and 

mismanagement.” It further states, “... agencies and individual 

Federal managers must take systematic and proactive measures to 

develop and implement appropriate cost effective management 

controls.”
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Other Options For Reimbursing Financial Agents For PCN Operating 

Expenses 

In an April 1985 report entitled Improvements Needed in 

Controlling and Accounting for Treasury Banking Arrangements, 

the U.S. General Accounting Office stated: 

“Using these balances rather than appropriations reduces 

the visibility of banking costs, avoids the Congressional 

oversight through the appropriation process, and reduces 

the incentive for minimizing costs. Further, FMS has not 

adequately monitored banking costs and some banks may 

be over or underpaid as a result”. 

During our audit, FMS personnel stated that paying for PCN 

operating expenses via compensating balances allows PCN 

operations to function year-to-year without interruption. FMS staff 

expressed concern that if such expenses were financed with 

annually appropriated funds, the PCN operations and, therefore, 

banking services, may be interrupted if Congress did not timely 

pass the annual appropriations legislation by the beginning of the 

fiscal year.

Additional information we obtained provides reasons the FMS 

should consider alternative payment methods for operating the 

PCN. First, we surveyed five publicly held corporations in various 

fields of business that accept credit cards for the sale of their 

goods and services. All paid for these operational expenses on a 

service fee basis. Second, we contacted two non-PCN member 

Federal agencies that accept credit cards for their sales - the United 

States Postal Service and the Smithsonian Institution. Likewise, 

they pay for their plastic card operational expenses on a service fee 

basis. To put it in another context, the combined plastic card sales 

of the United States Postal Service and the Smithsonian Institution 

were $4.1 billion, or 137 percent of total 2001 PCN sales of $3.0 

billion. If they decided to join the PCN, the current compensating 

balances would have to increase proportionately by $3.8 billion to 

a total of $6.6 billion.
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The use of domestic banks for depositing agencies’ collections and 

paying for their services through compensating balances is a long 

standing practice by the Treasury Department. In 1983, there 

were approximately 700 of these Treasury General Accounts 

(TGAs) with 500 domestic banks. On May 2, 1983, The Financial 

Management Task Force of the President’s Private Sector Survey 

on Cost Control issued a report on its assessment of the TGAs. 

The Task Force recommended that agencies competitively bid 

TGAs wherever possible on a service fee basis, and to eliminate 

compensating balances. This recommendation was accepted by 

the then Fiscal Assistant Secretary with the caveat that 

“competitive bidding and the payment of fees would be pursued 

only to the extent that it is cost beneficial to do so”. The Treasury 

Department adopted this approach as part of its policy on the use 

of compensating balances on December 12, 1984.

It should be noted that the FY 2004 Budget of the United States 

Government, issued as we were completing our audit fieldwork, 

proposed to establish a permanent, indefinite appropriation to allow 

FMS to reimburse financial institutions for services provided in their 

capacity as depositaries and fiscal agents for the United States. 

As stated in the Analytical Perspectives to the budget: 

“[This proposal] is expected to simplify Treasury’s cash 

and debt management, making it more efficient, especially 

when interest rates change sharply. The proposal is also 

expected to reduce the deficit, with the interest saved on 

lower borrowing being more than the outlays to pay for 

the services. The budget estimates savings of $637 

million for the five years 2004-2008.”

FMS Does Not Have To Be Solely Responsible For Paying PCN 

Operating Costs

The objective of the PCN is to expedite the collection and 

depositing of revenues resulting from member agencies’ credit and 

debit card sales. FMS manages the PCN for the benefit of member 

agencies and has through compensating balances paid for the 
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operating expenses that result from those agencies’ plastic card 

transactions. Through this arrangement, the Government has 

incurred $175.4 million in PCN operating expenses during the 

calendar year periods 1999 through 2002. (See Graph 3). 

Graph 3

PCN Operating Expenses (99 through 02)

29.0 34.7 46.4 65.3

175.4

0

50

100

150

200

99 00 01 02 Total

Millions $

In contrast, publicly held corporations typically pass the cost of 

their plastic card operations on to consumers. In our survey of five 

publicly held corporations, we asked for their viewpoints and 

business practices on the cost of their credit card operations. They 

all stated that the expenses of credit card operations are 

recognized as a cost of doing business that they pass on to their 

consumers. 

Officials we interviewed from two government agencies that 

operated their own plastic card networks said that related costs 

are, in effect, passed on to consumers. Also, we surveyed the six 

top dollar sales PCN member agencies on the likely actions they 

would take if they had to reimburse FMS for the operating costs of 

the PCN. The agencies’ officials all stated that if they had to pay 

the cost, it would be passed on to the buyers of their goods and 

services in the form of increased prices. 

For the remaining five 1-year options of the financial agents’ 

agreements, we estimate that the Government will incur an 
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additional $797 million in PCN operating costs (See Graph 4). 

Also, the related level of compensating balances needed to fund 

these costs will increase to $5.3 billion by 2007 from the present 

$2.8 billion (See Graph 5). 

Both of these projections are based on the average growth of 

expenses from calendar years 1999 through 2002 as billed by the 

two financial agents as well as the average earnings rate of the 3-

month Treasury security as measured in the same time frame.

Graph 4

Projected PCN Operating Expenses

 (03 through 07)

85.8 112.7 148.1 194.7

255.8

797.1

0

100

200

300

400

500

600

700

800

900

03 04 05 06 07 Total

Millions $
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Graph 5

Projected PCN Compensating Balance Levels 

(03 through 07)

2.3

3.1

4.0

1.8

5.3

0 1 2 3 4 5 6

03

04

05

06

07

Billions $

Recommendations

The Commissioner of FMS and the Fiscal Assistant Secretary 

should jointly consider the following actions:

1. If the current practice of paying for the PCN costs is continued, 

then a study should be done to compare the financial impact of 

using different securities’ rates to determine the rate that 

provides the most cost benefit to the Treasury Department. 

Such documented analyses should be updated on a periodic 

basis, but minimally, at the point in time when each contract is 

awarded or option renewed.

Management Response

FMS is pursuing two alternative methods for compensating 

financial agents: (1) Congressional approval of a Permanent 

Indefinite Appropriation which will authorize FMS to pay financial 

agent fees directly, and (2) the issuance of Depository 

Compensation Securities (DCS) which will allow Treasury to 

compensate financial agents through the payment of interest 
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earned on these special bonds. If neither of these methods can be 

implemented, FMS will study the legal and financial impacts of 

computing the imputed interest on compensating balances using 

the interest rate on securities with a term that closely matches the 

expected term of the compensating balance.

OIG Evaluation

We believe this recommendation to have a management decision. 

However, final action is pending the outcomes of FMS’ two 

alternative methods identified in their response or the study that 

would be conducted if these methods were not implemented. In its 

response, FMS did not provide a projected date for completing its 

corrective actions.

2. In the FMS’ annual budget justification, provide narratives that 

fully disclose all pertinent cost-benefit information in the use of 

imputing interest on compensating balances to reimburse 

financial agents for banking services provided.

Management Response

FMS will continue to disclose in its annual budget justification to 

Congress the costs of services, the amount of compensating 

balances, and the savings that result in the net interest earnings.

OIG Evaluation

We believe the justification narratives do not fully disclose the 

financial impact of imputing interest on compensating balances. 

For example, the long-standing Treasury practice of using the 3-

month Treasury bill rate, instead of an interest rate that more 

closely matches the expected term of the compensating balance, 

has resulted in millions of dollars of foregone interest. This 

financial gap is not reflected in the budget justification and, 

therefore, decision-makers do not have the full breadth of 

information available in order to make funding commitments. 
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We believe this corrective action is pending the outcome of those 

actions identified in the Management Response to 

Recommendation 1 regarding a possible study to change the 

securities rate. 

3. Future awards or agreement renewals to be paid on a service 

fee basis. Also, consider the option of having the PCN member 

agencies pay for their own respective transaction fees and 

charges.

Management Response

Financial agents currently charge on a service fee basis. FMS will 

evaluate the option of requiring agencies to pay their own 

transaction fees and charges.

OIG Evaluation

We believe this recommendation to have a management decision. 

In its response, FMS did not provide a projected date for 

completing its corrective action.

Finding 2 Management Controls For The Review, Recording, And 

Accounting For PCN Cost Data Need To Be Strengthened

The FMS did not establish complete and effective management 

controls over its administration of the PCN. Weak controls existed 

over critical processes within the Electronic Banking Services 

Division (EBSD) and in the Applied Technology Division’s (ATD) 

review of financial agents’ monthly billing of PCN costs. These 

weaknesses were attributed, in part, by the FMS not establishing 

comprehensive operating procedures for the PCN. As a result, we 

found errors in the calculations of the FMS’ earnings on 

compensating balances and overpayments to financial agents of 

approximately $1 million. In addition, we could not be assured that 

payments to financial agents, made over a 4-year period, of over 

$124 million did not contain overcharges and/or undercharges.
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Inadequate Controls Over Critical Processes Within the EBSD 

Some of the key operational functions of the EBSD did not have 

sufficient management oversight to adequately safeguard the PCN 

assets. This Division is responsible for: (a) calculating and 

recording the imputed earnings on PCN compensating balances; (b) 

recording the PCN charges; and (c) computing the compensating 

balances net position. Because these functions do not receive a 

corroborative external review within FMS, errors in calculating 

earnings or posting of expenses may not be discovered. 

The EBSD transfers compensating balance funds from the Treasury 

to the financial institutions. It also effects, when needed, 

adjustments in those balances that result from increases or 

decreases in PCN expenses or changes in interest rates. 

To perform these functions, the EBSD maintains an Earnings and 

Expenses Worksheet for each compensating balance. Monthly, 

EBSD staff record on each Worksheet: (a) the amount of the 

compensating balance; (b) the earnings credit rate (the 3-month 

Treasury bill rate); (c) total dollars earned on the compensating 

balance (the imputed interest); (d) PCN expenses incurred by the

financial agents; (e) the earnings minus expenses; and (f) a to-date 

net position (accumulated amount owed to either the financial 

agent or the FMS). An EBSD team leader gives an electronic 

version of the Worksheet a cursory review. The EBSD obtains the

PCN expense data from the ATD’s copy of the financial agents’ 

billing statements and the earnings credit rate from the Federal 

Reserve Board website. In the case of the PCN, there were two 

compensating balances; one with the BOA for $2.3 billion and the 

second with Mellon for $500 million for a total of $2.8 billion.

FMS attempts to maintain the compensating balances at a level 

that earn sufficient imputed interest to cover the PCN expenses. If 

the imputed interest amounts are consistently above PCN 

expenses, the balance is lowered, and vice versa.

In this regard, the Earnings and Expenses Worksheet is an 

important management tool. 
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We compared the monthly PCN expense amounts recorded on the 

Earnings and Expenses Worksheet to the financial agents’ billing 

statements for the 4-year period of January 1998 through 

December 2001. We were not able to perform this test for 

October 1998, December 1998, and January 1999 for Mellon 

because neither FMS nor Mellon could locate the related monthly 

billing statements, and Mellon was unable to reproduce the billing 

information. We noted 6 exceptions in our test. In each of these 

instances, the amounts of the PCN expenses recorded on the 

Worksheet exceeded the financial agents’ monthly billing 

statements. These errors resulted in excessive compensation to 

the financial agents for PCN services totaling approximately 

$952,000 during the period. EBSD staff were unable to explain 

why these exceptions occurred. 

In a separate test, we recomputed the monthly-imputed interest 

earnings recorded on the Worksheet for the same 4-year period, 

noting the following exception: in computing the earnings for one 

compensating balance FMS used the incorrect number of days 

(365 instead of 366) resulting in compensating balance earnings 

being overstated by approximately $57,000. When informed of 

this error, the FMS staff stated that an adjustment would be made 

to correct the error. 

Incorrectly calculating the earnings credit amount on its 

compensating balances, or in posting PCN expenses on the 

Earnings and Expenses Worksheet results in either overpaying or 

underpaying the financial agent for program expenses. This is 

particularly important in light of the fact that, for September 2001 

alone, FMS paid over $33 million, of which $3.5 million was for 

the PCN, in expenses for all programs paid via the compensating 

balance method.

Because these critical functions are solely performed in the EBSD 

using PC-based software, any errors in calculating compensating 

balance earnings or recording related monthly expenses will likely 
Additional Control and Oversight Needed to Reduce Costs and Improve 

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go undetected due to a lack of proper management control and 

external verification. 

OMB Circular A-123 requires that management controls provide 

reasonable assurance that assets are safeguarded against waste,

loss, unauthorized use, and misappropriation.

Inadequate Review of Financial Agents’ Monthly Billing Statements 

There were no indications that financial agents’ monthly billing 

statements for PCN fees and charges were being consistently or 

adequately reviewed. Accordingly, fees and charges of over $124 

million may include errors and over/under charges.

We reviewed available BOA and Mellon consolidated billing 

statements for the 4-year period of January 1998 through 

December 2001. During this period, the total amount of PCN fees 

and charges billed by the financial agents was over $124 million.

FMS personnel stated that a staff member in the ATD reviews and 

initials each monthly statement and subsequently provides it to the 

ATD Director who also reviews and initials it. However, we found 

only 3 (6%) BOA statements were initialed as reviewed by both a 

staff member and Director. Similarly, only 6 (13%) Mellon 

statements were initialed as reviewed by both a staff member and 

Director. There were no indications that the remaining statements 

were ever reviewed. All statements that were initialed as 

combined staff/Director-reviewed were for billing dates of May 

2001 or later. 

We also found that those billing statements that the ATD reviewed 

did not ensure that the FMS is charged only the allowed fees and 

charges for each PCN transaction. The financial agents’ monthly 

billing information was provided to the FMS in a summary format. 

It did not allow for verifying either the fees for individual 

transactions are correct or that the consolidated statement of all 

monthly transactions did not include erroneous fees and charges.
Additional Control and Oversight Needed to Reduce Costs and Improve 

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The ATD receives monthly billing statements from BOA and Mellon. 

The transaction fees and other charges are provided in three 

different formats: (1) by individual agency; (2) by retail location 

within each agency; and (3) consolidated for all agencies. Each 

month, a staff member in the ATD compares the fees and charges 

identified on the consolidated statements, and a sample of the 

individual agency statements, to ensure they are identical to those 

stipulated in the agreement. Then, for a sample of transactions, 

the fee/charge rate will be applied against the aggregated 

transaction amounts to ensure the mathematical accuracy of the 

total charges. In addition, on a monthly basis, the ATD staff will 

perform a sample review to mathematically verify that the total 

retail location fees agree with the individual agency fee total. No 

individual transaction fee information is listed on any of the above 

three billing formats. 

Only the FMS can verify transaction fees and charges because the 

financial agents provide the PCN member agencies with only 

collection deposit information. 

Detailed Financial Agents’ Billing Data Was Not Available

The financial agents’ billing data that comprised their respective 

PCN fees and charges were unauditable. They could not provide 

us with all costs associated with our sample of individual PCN 

transactions. Such data were maintained only in summary form by 

fee categories within a group of transactions. FMS did not require 

the financial agents to maintain the fee data on a per transaction 

basis. Therefore, we were unable to audit this data in terms of 

being able to attest to the accuracy of a particular transaction’s 

associated charge/fee.

We requested billing data from both financial agents in a format 

whereby we could identify individual transactions with all its 

associated charges. Although the financial agents have systems 

that compile PCN information in a variety of formats, they were 

unable to provide the data in our requested format. We attempted 

to work with the financial agents to achieve this goal, as explained 
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in Appendix 2 to this report, but to no avail. Accordingly, we 

found the data unauditable for the objective of our test which was 

to determine if PCN charges and fees had an audit trail associated 

with specific transactions. Therefore, we are unable to form an 

opinion as to the accuracy of the transaction fees.

OMB Circular A-123 states, “The documentation for transactions, 

management controls, and other significant events must be clear 

and readily available for examination.” 

In addition, the financial agent agreement, section 12, states that 

“The Financial Institution shall maintain, for a 7-year period, books 

or records sufficient to properly support all claims for compensation 

in the performance of the PCN services and FMS shall have the 

right to inspect and audit such books and records.” We believe 

that FMS should have required the financial agents to maintain fee 

data in a per transaction format so that it can be reviewed. 

Officials of the financial agents told us that FMS never objected to 

the present data format.

The above cited management control deficiencies are due to the 

absence of detailed operating procedures, and to the FMS not 

requiring its two financial agents to structure their monthly billing 

statements in a format that would allow FMS to effectively review 

fees and charges for PCN transactions.

Recommendations 

The Commissioner of FMS should:

1. Ensure that the EBSD staff performs a thorough and detailed 

review of the information received from the FMS program 

areas and that related entries to the Earnings and Expenses 

Worksheet be reviewed and approved by a supervisor.
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Management Response

FMS management has implemented procedures to ensure that 

(1) EBSD staff perform a review of the information received 

from FMS program areas, (2) the Team Leader reviews and 

approves the Earnings and Expenses Worksheet, and (3) the 

Emerging Technology Division Director verifies the accuracy of 

PCN charges before they are submitted to EBSD. 

OIG Evaluation

We believe this recommendation to have a management 

decision. In its response, FMS did not provide the date the 

corrective action was taken.

2. Require the financial agents to maintain and retain their fee 

data that supports the underlying transaction charges in a 

format that would allow the FMS to review for accuracy at 

the transaction level.

Management Response

FMS management will require the financial agents to maintain 

and retain easily retrievable fee data.

OIG Evaluation

We believe this recommendation to have a management 

decision. In its response, FMS did not provide a projected date 

for completing its corrective action. 

3. Ensure that the ATD performs a periodic, statistically based 

sample review of financial agents’ transaction fees. 

Alternatively, FMS should consider requiring on future PCN 

agreements that the financial agents engage an independent 

public accounting firm to conduct periodic audits of the 

internal controls over transaction fees and charges. 
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Management Response

FMS performs monthly sample reviews of financial agents’ 

transaction fees. In the future, FMS will require the financial 

agents to engage an independent public accounting firm to 

conduct periodic audits of the internal controls over transaction 

fees and charges.

OIG Evaluation

We believe this recommendation to have a management 

decision. In its response, FMS did not provide a projected date 

for completing its corrective action. 

4. Ensure that the Director of the ATD documents his/her 

review and approval of each monthly consolidated billing 

statement.

Management Response

Effective July 1, 2002, Emerging Technology Division’s (ETD) 

written procedures (formerly the Applied Technology Division) 

require that the ETD Director, PCN Team Leader and staff 

member review and approve all expenses. 

OIG Evaluation

We believe this recommendation to have a management 

decision with a final action date of July 1, 2002.

Finding 3 Information Technology Security Control Reviews Were 

Not Performed And PCN Systems Were Not Recertified 

Reviews of security controls of the PCN systems at the financial 

agents’ and their subcontractors’ sites were not performed, and 

these systems continued to function without the required 

recertification. Neither the FMS nor the financial agents had 
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standard operating procedures in place to ensure that such reviews 

were performed and in a timely fashion. As a result, the FMS is 

unable to determine that PCN system safeguards remain sufficient 

to counter threats and vulnerabilities. 

In 1998, the FMS initially performed reviews of security controls 

of the financial agents’ and their subcontractors’ systems as part 

of the award process for the PCN. However, FMS has not 

performed such reviews since that time. In addition, FMS did not 

follow-up on exceptions identified in the initial reviews. 

Similarly, the financial agents have not performed security control 

reviews of their own systems. In addition, they neither performed 

such reviews of subcontractors’ systems nor did they require 

subcontractors to have such reviews performed.

The FMS identified the security requirements for the PCN systems 

in its 1997 Invitation for Expressions of Interest in the Plastic Card 

Network. These requirements were later incorporated by reference 

in its agreements with the financial agents known as the Financial 

Agency Agreements. The financial agents made the commitment 

to comply with such requirements as evidenced by their technical 

responses to the Invitation for Expressions of Interest in the Plastic 

Card Network. The Invitation for Expressions of Interest in the 

Plastic Card Network required the selected financial agents to 

ensure that risk analyses (or audits) and certifications of new 

computer facilities, applications systems, or those undergoing 

significant change are completed before production commences 

and that reviews and recertifications shall be performed at least 

once every 3 years.

Further, the Invitation for Expressions of Interest in the Plastic Card 

Network required the financial agents to comply with the Computer 

Security Act of 1987, (Public Law 100-235), and all applicable 

standards and regulations established thereunder, and assure that 

an appropriate level of security is established for the PCN.

In addition, OMB Circular A-130 requires reviews of the security 

controls in each system when significant modifications are made, 
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but at least every 3 years. The scope and frequency of the review 

should be commensurate with the acceptable level of risk for the 

system. 

Since the award of the agreements, more than 4 years have passed 

without system recertifications. Also, both financial agents had 

changes in both operational facilities and subcontractors supporting 

the PCN. Both of these events should have required a review of 

security controls. In addition, the financial agents did not inform 

the FMS when there were changes in subcontractors.

Neither FMS nor the financial agents had standard operating 

procedures requiring that such reviews be performed. 

Nonexistence of the related procedures represents an absence of 

an important control that could ensure that such reviews and 

related recertifications are consistently and timely performed. 

The FMS cannot determine if system safeguards remain sufficient 

to counter changing threats and vulnerabilities without periodic risk 

assessments. Without an independent risk assessment, the FMS 

cannot be assured that information about private citizens, for 

example, bank account or credit card information, is not being 

improperly used or transmitted to a prohibited third party.

These findings were discussed, and agreed to, jointly with FMS 

management and the responsible financial agent representatives at 

the conclusion of the site visits. 

Recommendations

The Commissioner of FMS should ensure that:

1. The ATD develops standard operating procedures for systems 

security control reviews and systems recertifications in 

accordance with applicable laws and regulations.
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Management Response

Effective March 2003, ETD implemented PCN standard operating 

procedures for systems security control reviews, audits, and 

systems (re)certification and accreditation in accordance with both 

the Invitation for Expression of Interest and the requirements 

described in the Entity-wide IT Security Policies and Standards 

Manuals and the FMS Certification and Accreditation Handbook.

OIG Evaluation

 We believe this recommendation to have a management decision 

with a final action date of March 2003.

2. The ATD takes the actions necessary to recertify and accredit 

the PCN at the financial agents’ and subcontractors’ facilities.

Management Response

ETD is in the process of recertifying and accrediting the PCN 

systems at the financial agents including their subcontractors.

OIG Evaluation

We believe this recommendation to have a management decision. 

In its response, FMS did not provide a projected date for 

completing its corrective action. 

3. Each financial agent certifies annually to the FMS that all PCNrelated systems, at financial agent facilities and those of 

subcontractors, do have current certifications.

Management Response

ETD now requires that both financial agents (including their 

contractors) provide to FMS an annual certifying statement.
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These statements will confirm that the PCN-related systems have 

not undergone any changes and/or modifications that invalidate the 

certification and accreditation of the PCN.

OIG Evaluation

We believe this recommendation to have a management decision. 

In its response, FMS did not provide an implementation date for 

completing its corrective action. 

 

* * * * *

Please be advised that we are recording in the Joint Audit 

Management Enterprise System (JAMES), $2.8 billion and $797 

million respectively as funds that could potentially be put to better 

use relating to the recommendations in Finding 1 for more effective 

payment options for reimbursing financial agents for PCN operating 

expenses. These recommendations are identified in Appendix 3 of 

our report. We will also include these amounts in the OIG 

Semiannual Report to the Congress. 

We would like to extend our appreciation to FMS for the 

cooperation and courtesies extended to our staff during the review. 

If you have any questions, please contact me at (202) 927-6512.

/s/

Donald R. Kassel

National Director, Banking and Fiscal Service Audits 
Appendix 1

Objectives, Scope, and Methodology

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The objectives of this audit were to determine how effectively the 

FMS has (1) monitored the performance of the PCN financial 

agents and subcontractors, and (2) controlled PCN costs. 

To accomplish these objectives we: (1) reviewed documentation on 

the PCN such as agreements between the FMS, financial agents, 

and subcontractors; (2) interviewed FMS staff to determine the 

roles, responsibilities and procedures in use for the management of 

the PCN; (3) reviewed policies and procedures on the use of 

compensating balances; (4) interviewed representatives of other 

Federal agencies, as well as corporate officers of entities that 

manage networks similar to the PCN; and (5) obtained feedback on 

PCN performance from member agencies. 

We reviewed PCN transaction data that covered the period January 

1998 through December 2001. We reviewed the cost 

effectiveness of various methods of paying for PCN operating 

costs, as well as the effectiveness of management and information 

technology controls. Our fieldwork included the review of the 

Invitation for Expressions of Interest in the Plastic Card Network

and related technical and pricing proposals; review of financial 

agents’ monthly billing statements; and the procedures for 

calculating and reporting of the imputed interest rate the FMS 

receives on its compensating balances. 

We performed our fieldwork between October 2001 and April 

2002 at the FMS headquarters in Washington, DC. We performed 

onsite work at BOA’s branch office in Washington, DC; Mellon’s 

headquarters in Pittsburgh, PA; and Total Payment System in 

Columbus, Georgia (subcontractor to BOA). We conducted our 

audit in accordance with generally accepted government auditing 

standards.
Appendix 2

Office of Inspector General’s Attempts to Test Transaction Fees

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We could not determine the accuracy of the PCN transaction fees 

because the information contained within financial agents’ systems 

and provided in billing statements is in summary form only. Neither 

financial agent was able to provide us with the requested 

information in a format that allows for an audit trail of fees 

associated with specific transactions.

Our attempts to test this data follow:

Bank of America 

We were able to identify and select a random sample of 273 

individual transactions for review. The sample was selected from a 

12-month period of transactions from March 2001 through 

February 2002. The related universe contained $29.6 million in 

fees assessed on 30.9 million transactions. Projected test results 

from this sample size would have given us a 90% confidence level. 

We extracted the sample transactions using the Bank of America 

Merchant Services System (BAMRS). Because BAMRS does not 

record the interchange fee category, we could not use this system 

to obtain fees assessed on individual transactions. We decided to 

try an alternate method for obtaining the assessed fees. We 

learned that Bank of America receives two summary reports from

the Total Payment System (subcontractor). The first is the Daily 

Merchant Deposit Total Report that lists the specific deposit batch 

and the total interchange categories by card type. The second is 

the Bank of America Merchant Services, Inc. Interchange Summary 

Report that contains summarized debit/credit card type interchange 

fees assessed to merchant activity on a monthly basis. 

We recognized that some of the data contained in the two reports 

was useful. For example, the two reports contained deposit batch 

numbers. We attempted to reconcile the deposit batch number in 

BAMRS to the deposit batch number in the Interchange Summary 

Report. Since BAMRS recorded the deposit batch number and the 

two reports’ total deposits reconciled, we thought that the per 
Appendix 2

Office of Inspector General’s Attempts to Test Transaction Fees

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transaction fees might be included and captured in Total Payment 

System’s report(s). However, additional research confirmed that it 

was not available in a useful format and had to be manually 

assembled by Bank of America personnel on a PC-based 

spreadsheet. Since we could not independently confirm the data 

listed on the spreadsheet, we could not attest to its reliability.

Mellon Bank

Mellon Bank’s system did not allow for the extraction of PCN data 

to the transaction level. We wanted to extract a similar 

statistically based sample of transactions as we did with Bank of 

America. However, we learned that Mellon Bank takes the 

individual data and summarizes the information into spreadsheets, 

which are used for invoice submission to the FMS. The raw data 

Mellon uses to compile the summarized data is only available for 

thirty days after the close of the billing month. It then loses its 

PCN identity and is archived with other customer data. 
Appendix 3

Schedule of Recommendations That Funds Be Put To Better Use

Additional Control and Oversight Needed to Reduce Costs and Improve 

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The term ”recommendation that funds be put to better use” means 

a recommendation that funds could be used more efficiently by the 

Government if management took actions to implement and 

complete the recommendation. The implementation of the 

following recommendations in this report involve funds that could 

be put to better use. The related amounts will be recorded in the 

Joint Audit management Enterprise System (JAMES) and included 

in the statistical reporting in the next OIG Semiannual Report to the 

Congress.

Recommendation Number

Potential Funds That 

Could Be Put To Better 

Use

Finding 1 – Recommendation 1 $2.8 billion

Finding 1 – Recommendation 3 $797 million

 

The funds associated with Recommendation 1 represent the total 

amount of compensating balances maintained at the two PCN 

financial agents at end of 2001 that could be returned to the 

Treasury general fund, and thus available for other Government 

uses, if an appropriation is established to pay financial agents 

directly for the costs of operating the PCN. In this regard, as noted 

in FMS’ management comments, the President’s FY 2004 budget 

requested congressional approval for a permanent, indefinite 

appropriation to pay financial agents directly. It should also be 

noted that as an interim measure, the Department announced on 

July 3, 2003, that it plans to begin issuing non-marketable 

securities, called Depositary Compensation Securities, to 

compensate financial agents for essential banking services provided 

to the Government and phase out compensating balances.

The funds associated with Recommendation 2 represent the 

potential savings that could be realized over the remaining 5 oneyear options of the PCN financial agent agreements if PCN member 

agencies were charged by FMS for their respective transaction fees 

and charges. The estimated amount is based on an assumption 

that PCN costs will continue to grow during the period 2003 
Appendix 3

Schedule of Recommendations That Funds Be Put To Better Use

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Page 34

through 2007 at an annual rate of 31.4 percent, which was the 

average annual growth rate of actual PCN costs during the period 

1999 through 2002. The potential savings is also based on an 

assumption that the PCN member agencies include PCN-related 

charges when pricing goods and services for which credit cards are 

accepted. 
Appendix 4

Management Response

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Appendix 4

Management Response

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Page 36
Appendix 4

Management Response

Additional Control and Oversight Needed to Reduce Costs and Improve 

the Plastic Card Network (OIG-03-088) 

Page 37
Appendix 4

Management Response

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Appendix 5

Major Contributors to the Report

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Office of Audit 

Donald R. Kassel, National Director, Banking and Fiscal Service 

Audits

Michael Sinko, Audit Manager

Ehab Bestawrose, Auditor-in-Charge

Chuck Intrabartolo, Computer Specialist

Muhammad F. Islam, Evaluator/Economist

Edward L. Thomas, Jr., Auditor

Todd Zelnick, Auditor
Appendix 6

Report Distribution

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The Department of the Treasury

Fiscal Assistant Secretary

Office of Strategic Planning and Evaluations

Office of Accounting and Internal Control

Financial Management Service

 Commissioner

Deputy Commissioner

Assistant Commissioner, Federal Finance

Director, Cash Management Directorate

Director, Emerging Technology Division

Director, Electronic Banking Services Division

 Director, Program Integrity Division

Manager, Management Control Branch

Office of Management and Budget

OIG Budget Examiner