GAO/AIMD-00-266R Congressional Award Foundation

United States General Accounting Office

Washington, DC 20548

Accounting and Information

Management Division

B-285870

July 28, 2000

Mr. James F. Manning

National Director

Congressional Award Foundation

Subject: Congressional Award Foundation: Management Action Still Needed to

Establish and Document Control Requirements and Related Procedures

Dear Mr. Manning:

In May 2000, we issued a report1

expressing our opinion on the Congressional Award

Foundation’s fiscal year 1999 financial statements and on management's assertions

regarding the Foundation's system of internal control as of September 30, 1999. We

also reported on the results of our tests of the Foundation’s compliance with selected

provisions of laws and regulations during fiscal year 1999. We conducted our audit

pursuant to the Congressional Award Act, as amended (2 U.S.C. 807), and in

accordance with generally accepted government auditing standards. The purpose of

this management letter is to reemphasize the continuing need for the Foundation’s

management to strengthen internal controls, especially in the five areas previously

reported to you in our July 1999 management letter.2

Results in Brief

In conducting our 1999 audit, we found that the Foundation had made progress at the

organization and system levels in addressing internal control weaknesses.

Specifically, during fiscal year 1999, the Foundation hired a new employee to help

draft control objectives and procedures. Also, the Foundation began implementing a

new accounting system, which among other things has the capability to flag duplicate

facsimile invoices, one area of control weakness previously reported. However,

Foundation management has not yet established and documented internal control

requirements and related procedures as previously suggested for management and

1

Financial Audit: Congressional Award Foundation’s 1999 and 1998 Financial Statements (GAO/

AIMD-00-156, May 15, 2000).

2

Congressional Award Foundation: Management Action Needed to Establish Control Requirements and

Related Procedures (GAO/AIMD-99-224R July 15, 1999).
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staff to follow (1) in the preparation and approval of financial statements and related

adjustments, (2) in following up on reconciliations, and (3) to compensate for

inadequate separation of duties inherent in small organizations, like the Foundation.

Also, Foundation management has not yet documented, as previously suggested,

established internal control requirements and procedures it follows in managing

receivables and monitoring restricted contributions, and in controlling facsimile

invoices. Without established and documented control requirements and related

procedures, the Foundation faces the continuing risk that its processing of

transactions and preparation of financial reports may not be consistently performed,

monitored, and controlled.

In commenting on a draft of this letter, you agreed with our conclusions and

suggestions regarding the need to establish and document internal control

requirements and related procedures and expressed your intention to implement our

suggestions. In this regard, you informed us that the Foundation has hired an

independent public accounting firm to assist in developing and documenting internal

control requirements and procedures and in implementing the new accounting

system. Moreover, you told us that the Foundation’s Board of Directors established

an audit committee as we previously suggested to, among other things, oversee and

monitor management’s progress in establishing, documenting, and implementing

control requirements and related procedures.

Preparation and Approval of Financial Statements

and Related Adjustments

In July 1999, we reported internal control weaknesses related to the Foundation’s

preparation and approval of financial statements and related adjustments. We

suggested that Foundation management establish and document internal control

requirements and procedures to govern (1) the preparation of year-end closing

entries, (2) the development of supporting documentation for all closing/adjusting

entries, and (3) management review and approval. During our fiscal year 1999

financial statement audit, we found that the Foundation had not yet established such

control requirements and related procedures, which in part contributed to errors in

both the year-end closing and statement preparation for fiscal year 1999.

For example, we found that in closing the books for fiscal year 1999, management

had not booked an accounts payable item, which was in dispute, or identified various

errors in year-end adjusting entries and in the preparation of draft financial

statements. Near the end of fiscal year 1999, the Foundation received an invoice

related to fundraising activities for $19,624, which management found to be wrong.

Foundation management had requested a corrected invoice from the vendor but

failed to record the transaction in the Foundation’s accounting records prior to

closing its books because the responsible employee had left the Foundation in the

meantime. As a result, its accounting records at year-end understated its liabilities

and expenses. Upon an inquiry from the vendor, Foundation management realized

that the transaction had not been booked and identified it to us. Internal control

procedures for closing out the Foundation’s books and records could have promptly

alerted Foundation management of the need to record the payable. Also, Foundation
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management failed to identify an $8,386 error in accrued vacation and, similar to

1998, did not detect errors related to its allocation of certain salary expenses needed

for footnote disclosure in the fiscal year 1999 financial statements. The error in

accrued vacation occurred because the bookkeeper used sick leave rather than

vacation leave to compute the accrued expense. The error in computing the proper

allocation of salaries occurred because the accountant used an incorrect percentage

factor and made an incorrect assumption about the role of one of the employees. In

both cases, internal control procedures for the documentation, review, and approval

of adjusting entries could have detected these errors prior to the preparation of the

draft financial statements.

Follow-up on Reconciliations

We reported in July 1999, that although bank reconciliations were performed,

Foundation management had not established and documented requirements and

procedures for (1) following up on outstanding unusual items or (2) reviewing and

approving completed reconciliations. Our review of completed reconciliations in

fiscal year 1998 found that because the Foundation lacked internal controls in this

area, it failed to follow up on a $1,050 check, outstanding for about 8 months. Not

following up on the outstanding check prevented the Foundation from learning that

the check had been voided. While our 1999 audit did not identify new errors related

to reconciliations, we found that Foundation management had not yet established

and/or documented internal control requirements for the prompt follow-up of

unusual outstanding items identified as a result of the bank reconciliations.

Reconciling its cash balance to the bank’s balance monthly is one of the most

important internal control techniques the Foundation can perform to minimize risks

that assets are not properly safeguarded and transactions are not properly recorded

and summarized.

Inadequate Separation of Duties

We discussed in our July 1999 letter that due to its size, the Foundation has inherent

weaknesses in its ability to establish internal control procedures that separate duties,

so that no one person has access to several key aspects of a transaction or event and

the risk of error or fraud is reduced. For example, we noted in our July 1999 letter

that the bookkeeper’s responsibilities, which included recording revenue and

expense transactions in the general ledger and required her to have access to the

Foundation’s checkbook and register to perform reconciliations, represented

inadequate separation of duties. Therefore, we suggested that the Foundation

establish and document requirements and procedures for compensating controls.

During our fiscal year 1999 audit, we found that the Foundation had not yet

established and/or documented compensating controls in this area. Therefore, we

continue to suggest that management establish compensating controls as reported

previously. Such controls could require the National Director to review monthly

bank statements, canceled checks, and the results of the monthly reconciliation

process (also an important control requirement for following up on reconciliations)

and/or require the administrative assistant to review the checkbook before and after
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(1) authorized disbursements have been made and recorded and (2) the periodic

bank reconciliation has been performed.

Managing Receivables and Monitoring Restricted

Contributions and Controlling Facsimile Invoices

In July 1999, we reported that Foundation management had implemented procedures

for (1) managing receivables and monitoring restricted contributions and

(2) controlling facsimile invoices but had not yet documented internal control

requirements and procedures for staff to follow. Specifically, in managing its

receivables and monitoring restricted contributions, the Foundation established

subsidiary databases and used the information in the databases to help follow up on

overdue receivables; assess the collectability of older accounts receivable; and track

the specific nature and extent of donor-imposed restrictions and monitor events

associated with their release. Regarding the processing of facsimile invoices, the

Foundation initiated additional reviews of vendor files and its list of previous

invoices prior to approving facsimile invoices for payment.

While we did not identify any new errors related to managing receivables and

monitoring restricted contributions or identify any facsimile invoices during our 1999

audit, we noted that the Foundation had not yet documented control requirements

and related procedures for Foundation staff to follow in processing accounts

receivable and monitoring restricted contributions and processing invoices received

by fax.

GAO’s Standards for Internal Controls in the Federal Government requires that

internal control, transactions, and other significant events need to be clearly

documented, and the documentation should be readily available for examination.

Such documentation should appear in management directives, administrative

policies, or operating manuals.

Without documented control requirements and related procedures, the Foundation

increases the risk that recorded amounts may not be accurate, properly classified, or

reliably reported. Therefore, we continue to suggest that the Foundation formally

document control requirements and related procedures for processing accounts

receivable, monitoring restricted contributions, and controlling facsimile invoices.

Because of the continuing need to establish and document internal control

requirements and related procedures, we are sending copies of this letter to Thomas

D. Campbell, Chairman, Board of Directors, and Debra Lawrence, Foundation

Treasurer and member of the Board of Directors, and members of Congress.

However, this letter is a matter of public record and as such will be made available to

other interested parties upon request.

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We appreciate the cooperation and assistance Foundation management and staff

provided during our audit of the Foundation’s fiscal year 1999 financial statements. If
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you have any questions regarding this letter, please contact me at (202) 512-9508 or

John Reilly, Assistant Director, at (202) 512-9517. Key contributors to this assignment

were Charles Ego and Ben Smith.

Sincerely yours,

Linda M. Calbom

Director, Corporate Audits

and Standards

(917785)