IG’S

Semiannual Report

to Congress

March 2004
Office of Inspector General

Organization Chart

OIG Points of Contact

Inspector General ................................. (202) 482-4661

Legislative and

Intergovernmental Affairs ...................... (202) 482-3052

Office of Audits ...................................... (202) 482-1934

Office of Compliance and Admin. .......... (202) 482-0231

Office of Counsel................................... (202) 482-5992

Office of Inspections and Program Eval. (202) 482-2754

Office of Investigations .......................... (202) 482-0934

Office of Systems Evaluations .............. (202) 482-6186

Media Inquiries ...................................... (202) 482-5992

REQUESTS FOR REPORTS

Telephone ............................................. (202) 482-5348

TDD Number ......................................... (202) 482-4948

Internet E-Mail ............................... reports@oig.doc.gov

OIG HOTLINE

Telephone ............................................. (202) 482-2495

.......................................................... or (800) 424-5197

Internet E-Mail ................................. hotline@oig.doc.go

OIG Internet Home Page

http://www.oig.doc.gov

Inspector

General

Deputy

Inspector General

Office of

Compliance and

Administration

Office of

Inspections and

Program Evaluations

Office of

Audits

Office of

Counsel

Office of

Systems Evaluation

Office of

Investigations

Audit

Services

Financial Statements

& Accountability

Audits

Regional

Audits

Investigative

Services

Investigative

Field Offices

Investigative

Resident Offices
June 2004

The Honorable Donald L. Evans

Secretary of Commerce

Washington, DC 20230

Dear Mr. Secretary:

I am pleased to provide you with the Inspector General’s Semiannual Report to Congress for the first half of fiscal year 2004.

Section 5 of the Inspector General Act requires that you transmit this report, with any comments you may wish to add, to the

appropriate committees within 30 days of your receiving it.

You and the Department are to be congratulated on the outcome of the FY 2003 consolidated financial statements audit, which

is detailed in this report. Once again, the Department received a clean opinion and made strides in resolving some of the

weaknesses noted in prior-year audits. Overall financial management at Commerce has vastly improved over the years, and

with it, the efficiency of the Department. It is essential that your officials continue to give attention to this area as Commerce

moves to eliminate remaining identified weaknesses and avert others as they emerge.

Likewise, I note that the Department’s standing in OMB’s annual program evaluations improved in FY 2003, as 15 of the 19

programs reviewed were judged “adequate to effective.” While this represents significant progress, further improvements are

required in numerous areas, as indicated by some of the work we report here. We continue, for example, to find performance

deficiencies in a wide range of departmental programs and bureaus of a nature that is often only detectable through in-depth

probes such as the ones we conduct. The emphasis by the President, OMB, and Congress on improved government accountability underscores our resolve to enhance transparency within Commerce programs and operations, and to promote their

improved efficiency and effectiveness. Progress and success in these endeavors require equally deep resolve from Department

officials and staff at all levels.

I am confident that such resolve exists, and my staff and I look forward to assisting the Department in what must be a continuing pursuit of excellence.

Sincerely,

Johnnie E. Frazier

UNITED STATES DEPARTMENT OF COMMERCE

The Inspector General

Washington, D.C. 20230
March 2004/Semiannual Report to Congress

CONTENTS

IG’s Message to Congress ...................................................................................................................................................................... 1

Major Challenges for the Department.................................................................................................................................................. 3

Strengthen Department-Wide Information Security ......................................................................................................................... 3

Effectively Manage Departmental and Bureau Acquisition Processes ............................................................................................. 4

Successfully Operate USPTO as a Performance-Based Organization .............................................................................................. 6

Control the Cost and Improve the Accuracy of Census 2010 ........................................................................................................... 7

Increase the Effectiveness of Marine Resource Management ........................................................................................................... 8

Promote Fair Competition in International Trade ............................................................................................................................. 9

Enhance Export Controls for Dual-Use Commodities .................................................................................................................... 10

Enhance Emergency Preparedness, Safety, and Security of Commerce Facilities and Personnel .................................................. 11

Strengthen Financial Management Controls and Systems .............................................................................................................. 12

Continue to Improve the Department’s Strategic Planning and Performance Measurement in Accordance with GPRA .............. 12

Department of Commerce Organization Chart................................................................................................................................. 13

Agency Overviews

Bureau of Industry and Security...................................................................................................................................................... 14

Economic Development Administration ......................................................................................................................................... 19

Economics and Statistics Administration ........................................................................................................................................ 22

International Trade Administration ................................................................................................................................................. 24

Minority Business Development Agency ........................................................................................................................................ 27

National Oceanic and Atmospheric Administration ........................................................................................................................ 29

Technology Administration ............................................................................................................................................................. 35

United States Patent and Trademark Office .................................................................................................................................... 38

Department-Wide Management ...................................................................................................................................................... 39

Office of Inspector General ................................................................................................................................................................. 42

Highlights of OIG Investigations .................................................................................................................................................... 42

Tables and Statistics ........................................................................................................................................................................ 45

Reporting Requirements .................................................................................................................................................................. 55

Acronyms............................................................................................................................................................................................... 57

Types of OIG Work Products .............................................................................................................................................................. 59
March 2004/Semiannual Report to Congress 1

As federal agencies have moved to implement performancebased budgeting, the demand for increased government

accountability that began in 1990 with passage of the

Chief Financial Officers (CFO) Act has come full circle. This legislation, along with the Government Performance and Results Act

of 1993 and a string of likeminded laws that have followed, established standards for performance against which Congress, OMB,

and others could better assess an agency’s management, financial, and operational soundness. Budget and performance integration has taken the intent of these laws a step further by requiring

agencies to use program outcomes as justification for their requests for and use of federal funds.

Through the years, offices of inspector general have responded to

these initiatives with a broad range of audits, inspections, and evaluations aimed at assessing their respective agency’s compliance with

and performance under them, and reporting their findings to Congress to inform its decision making. At the Department of Commerce, our work has noted steady improvement in management

and financial accountability as well as in program and operational

effectiveness, along with deficiencies whose resolution requires

the Department’s dedicated attention. This semiannual report details some of the improvements and weaknesses identified in our

most recent work, our recommendations for needed enhancements,

and the Department’s actions in response. Among the areas we

assessed during this reporting period are the following:

National Security. Our annual export control review pursuant to

the National Defense Authorization Act looked at whether the Bureau of Industry and Security’s (BIS’) implementation of deemed

export control regulations prevents the transfer of controlled U.S.

technologies and technical information to foreign national researchers or visitors from countries and entities of concern, and

whether U.S. industry, academic institutions, and Commerce research agencies are complying with the regulations. We identified

weaknesses and potential loopholes in the regulations, confusion

over when and to whom they apply, consequent opportunities for

the transfer of prohibited materials, and a need for increased BIS

outreach to industry and research laboratories. (See page 14.)

Noncompliance with Statutory and Departmental Requirements.

Our review of revelations that NOAA Corps was appointing and

promoting officers without obtaining nominations from the PresiIG’s Message to Congress

dent and confirmation by the Senate revealed a long-standing disregard for these legislative requirements dating back at least 2

decades. We also found that NOAA Corps accepted transfers of

officers from other uniformed services without seeking the required concurrence of the Secretary of Commerce. We attributed

this noncompliance with statutory requirements to a long-standing lack of internal controls, guidance, and oversight for the confirmation process, along with the view generally held by the Corps

that the process was pro forma. (See page 29.)

Performance Measurement. As has been our practice in recent

reporting periods, we reviewed the adequacy of performance measurement and reporting at select departmental units—this time

looking at the Census Bureau. Our audit confirmed a pattern noted

in similar reviews of other units: some of the measures, targets,

and discussions presented in the Department’s Performance &

Accountability Report do not accurately or precisely convey the

real basis for the data, and the data can therefore not be trusted as

a reliable tool for congressional decision making. (See page 22.)

Our in-process audit of National Marine Fisheries Service measures is uncovering many of these same problems as well.

Similarly, evaluations of three export assistance centers operated

by the U.S. Commercial Service found that each center—though

generally well run—had overstated its export success data. Commercial Service factors this data into the performance it reports

under GPRA. (See page 24.)

Financial Soundness and Accountability. Audits of the Department’s FY 2003 consolidated financial statements and of USPTO

and NTIS gave unqualified opinions to all. The latter two agencies fully complied with laws and regulations, while the Department substantially complied with the Federal Financial Management Improvement Act (FFMIA) but remains noncompliant with

OMB financial requirements. Audits of IT controls identified new

weaknesses at NTIS and USPTO and some unresolved from last

year at both units as well as at the Department. (See pages 36, 38,

and 39.)

Our audits of EDA and NIST financial assistance recipients

identified $6,906,613 in questioned costs and recommended that

$6,603,432 be put to better use. (See pages 19 and 35, respectively.)
2 March 2004/Semiannual Report to Congress

REVISITING OUR AGENDA

With the fast approach of fiscal year 2005, we are in the process

of developing a work plan to guide us through the next 2 years.

Some of the areas that will demand our increased scrutiny are

obvious—preparations for the 2010 decennial census will be a

major focus throughout the decade. And as Commerce’s role in

advancing national, departmental, and personnel security will

likely grow more pressing and complex, its activities in these areas will be priorities for us as well.

In an effort to fine-tune our broad agenda into specific work products, we are conducting a series of summits, each focusing on a

specific issue—the upcoming decennial, departmental procurement processes, USPTO operations, and trade, to name a few—

and plan to meet with senior Commerce officials as well as congressional members and staff in the coming months. I am pleased

with the process that is emerging thus far: it promises to produce

a plan that is forward looking and thorough, and above all, well

suited to assessing the Department’s performance in all key areas,

offering recommendations for improvement, and informing Congress of the results.

I look forward to sharing our completed plan with you.

IG’s Message to Congress
March 2004/Semiannual Report to Congress 3

The Office of Inspector General, in assessing its work at the close

of each semiannual period, develops the Top 10 Management

Challenges the Department faces. Each challenge meets one or

more of the following criteria: (1) it is important to the

Department’s mission or the nation’s well-being, (2) it is complex, (3) it involves sizable expenditures, or (4) it requires significant management improvements. Because of the diverse nature of

Commerce activities, many of these criteria cut across bureau and

program lines. We believe that by addressing these challenges the

Department can enhance program efficiency and effectiveness;

eliminate serious operational problems; decrease fraud, waste, and

abuse; and achieve substantial savings.

CHALLENGE 1

STRENGTHEN DEPARTMENT-WIDE

INFORMATION SECURITY

Many of Commerce’s information technology systems and the

data they contain have national significance: the Bureau of Industry and Security’s (BIS’) export license data helps control the

release of dual-use commodities to countries and entities of concern; the National Oceanic and Atmospheric Administration’s

(NOAA’s) satellite, radar, and weather forecasting data and systems provide information used to protect lives and property; the

Economics and Statistics Administration’s (ESA’s) economic indicators have policymaking implications that can affect the movement of global commodity and financial markets; and the U.S.

Patent and Trademark Office’s (USPTO’s) patent and trademark

information is essential to administering patent and trademark

law, promoting industrial and technical progress, and strengthening the national economy. Loss of or serious damage to any of

the critical systems containing this data could have devastating

impacts. Therefore, identifying weaknesses in these systems and

recommending solutions is a continuing top priority for the Office of Inspector General.

The Federal Information Security Management Act (FISMA),

signed into law on December 17, 2002, provides a comprehensive

framework for ensuring that information resources supporting federal operations and assets employ effective security controls.

FISMA requires OIGs to perform independent security evaluations of their agencies annually.

As we reported in our last semiannual (see September 2003 Semiannual Report, page 37), the Department’s chief information officer (CIO), with the support of the Deputy Secretary, has worked

hard to improve information security Department-wide, and noteworthy progress has been made. Considerable challenges persist,

however, in ensuring adequate security on the hundreds of Commerce systems. This effort requires (1) assessing risk and determining appropriate security controls, (2) testing and evaluating

these controls, (3) certifying and accrediting systems,1 and (4)

ensuring that personnel with specialized information security responsibilities receive the necessary training.

MAJOR CHALLENGES

FOR THE DEPARTMENT

MAJOR CHALLENGES

FOR THE DEPARTMENT

1. Strengthen Department-wide information security.

2. Effectively manage departmental and bureau

acquisition processes.

3. Successfully operate USPTO as a performancebased organization.

4. Control the cost and improve the accuracy of

Census 2010.

5. Increase the effectiveness of marine resource

management.

6. Promote fair competition in international trade.

7. Enhance export controls for dual-use commodities.

8. Enhance emergency preparedness, safety, and

security of Commerce facilities and personnel.

9. Strengthen financial management controls and

systems.

10. Continue to improve the Department’s strategic

planning and performance measurement in

accordance with GPRA.

1 Certification is the formal testing and evaluation of the security safeguards on a computer system to determine whether they meet applicable

requirements and specifications. Accreditation is the formal authorization by management for system operation, including an explicit acceptance of risk.
4 March 2004/Semiannual Report to Congress

As we advised in our FISMA reports, the Department has reported

information security as a Federal Management Financial Integrity Act (FMFIA) material weakness in its Performance & Accountability Report for the past 3 fiscal years. Similarly, USPTO,

which submits its Performance & Accountability Report separately,

reported information security as an FMFIA material weakness the

past 2 fiscal years. The Department, including USPTO, had set a

goal of certifying and accrediting all systems that are part of the

critical infrastructure or mission critical by the end of FY 2003.

Although 97 percent of the Department’s systems were reported

as certified and accredited by that milestone, our FY 2003 FISMA

evaluation revealed that many systems reported as certified and

accredited contained significant deficiencies in their risk assessments, security plans, and contingency plans—i.e., certification

and accreditation materials. Most also lacked evidence that security controls had been tested. Using a disciplined certification and

accreditation process, USPTO planned to have its mission-critical systems and its classified system certified and accredited by

the end of FY 2003, but was not able to accomplish this goal.

USPTO reports that all of these systems were certified and accredited by March 29, 2004. The Department is now working to

complete all system certifications and accreditations and improve

their quality in FY 2004.

Our ongoing FISMA evaluation for this fiscal year includes reviews of the Census Bureau’s information security program and

the Department’s computer incident response capability, as well

as assessments of the quality and content of system certifications

and accreditations and plans of action and milestones (POA&Ms).2

CONTRACT SECURITY WEAKNESSES

We noted in our last semiannual (see September 2003 Semiannual Report, page 37) that inadequate security provisions in Commerce IT service contracts also place systems at risk. The Department continued to rely heavily on contractors to provide IT services in FY 2003, spending 65 percent of its IT contract dollars

on this area. Our FY 2003 FISMA evaluation found that while

progress had been made in incorporating security provisions into

recent IT service contracts,3 provisions for controlling contractor

access to Department systems and networks were generally absent, and there was little evidence of contract oversight or of coordination among contracting, technical, and information security

personnel in developing appropriate contract security. We summarized these findings in our September 2003 FISMA report,

noting that the Department was finalizing standard contract clauses

for safeguarding information resources. We are currently preparing a report that provides additional discussion of these findings

as well as recommendations to further ensure that information

and information systems are adequately secure when contractorprovided services are used. This report notes that the contract

clauses were issued in November 2003. We are recommending

that the Department take steps to ensure that its service contracts

contain the new security clauses and that appropriate contract

oversight occurs.

CHALLENGE 2

EFFECTIVELY MANAGE

DEPARTMENTAL AND BUREAU

ACQUISITION PROCESSES

Federal acquisition legislation in the 1990s mandated sweeping

changes in the way federal agencies buy goods and services. The

intent was to reduce the time and money spent on purchasing, and

improve the efficiency of the process. The latest legislative effort

to streamline acquisition is the Services Acquisition Reform Act

of 2003, whose provisions further push for performance-based

service contracting: the act provides that service contracts under

$25,000 may be treated as “commercial” if certain performancebased criteria are met and thereby be eligible for simplified acquisition procedures. As the Department’s reliance on contractor-provided services increases, so does the challenge to understand and

effectively manage the new acquisition processes these initiatives

fostered. At the same time, Commerce must be careful to ensure

that taxpayer dollars are wisely spent and laws and regulations

followed when using streamlined procedures.

This balance is best maintained by adhering to basic acquisition

principles: careful planning, promotion of competition, prudent

review of competitive bids, adept contract negotiations, well-structured contracts, and effective contract management and oversight.

These are essential to ensuring that sound contracting decisions

are made and contracts successfully executed. Problems we have

identified with service contracting in the past include failure to

use performance-based task orders where they would be beneficial; inadequate training in the use of performance-based service

contracting; insufficient planning for contract administration and

monitoring; and failure to ensure that adequate security provisions are included and enforced in IT service contracts.

We are currently monitoring certain major acquisitions related to

the 2010 decennial census and intend to review the acquisition

management process, from planning through contract closeout, at

selected bureaus. The use of performance-based service contracting, where applicable, will be a key focus of our acquisition reviews.

2 OMB guidance directs agencies to develop POA&Ms to correct program- and system-level IT security weaknesses and track each deficiency

until it is corrected.

3 The term “contract” includes task orders and delivery orders issued under multiple award contracts and government-wide agency contracts

(GWACs).

Major Challenges for the Department
March 2004/Semiannual Report to Congress 5

DEPARTMENTAL INITIATIVES

The Department agrees that acquisition planning and management

need greater emphasis, and notes that its Office of Acquisition

Management (OAM) is pursuing improvements. Among other

things, OAM has established a review board to oversee all major

acquisitions. Additionally, it is (1) evaluating Commerce’s delegation and warrant program, with the goal of realigning contracting authorities to increase overall effectiveness and accountability; (2) revising the certification program for contracting

officer’s technical representatives (COTRs) to require expanded

competencies and knowledge and to improve accountability, and

changing the name of this function to “contracting officer’s representative” to reflect its broader responsibilities; and (3) emphasizing the need for increased use of performance-based service

contracting. It is assessing the effectiveness of these various initiatives as well.

Finally, in response to increased scrutiny from our office, Congress, and OMB, and in light of Commerce’s increasing use of

purchase cards, OAM is implementing a purchase card improvement plan that includes mandatory refresher training for all

cardholders and approving officials. Under the auspices of the

Chief Financial Officer and Assistant Secretary for Administration, an intradepartmental, cross-functional team was formed to

evaluate options to further strengthen the Department’s purchase,

travel, and fleet card programs.

These actions address significant problems that we have identified in our acquisition-related reviews; we will determine their

effectiveness as we conduct our acquisition review program.

NOAA/NWS Contract Modification. In this semiannual period,

we continued monitoring NOAA’s actions to correct the systemic

deficiencies identified in our review of a major modification to a

NOAA/National Weather Service (NWS) contract for a transition

power source (TPS) for the NEXRAD weather radar. In our last

semiannual, we reported that NOAA’s Acquisition and Grants

Office and NWS executed the modification without adequate negotiation or appropriate review and oversight of the contract, its

management, or technical issues, and that NWS paid for defective equipment. These deficiencies resulted in an estimated increase in contract costs of $4.5 million and purchase of a product

that may not have been the best choice for NEXRAD. (See September 2003 Semiannual Report, page 25.)

NIST Acquisition Management. We recently began a review of

NIST’s acquisition management process. As we reported in our

last semiannual (see September 2003 Semiannual Report, page

32), our review of a NIST contract using the simplified acquisition procedures test program for soliciting and evaluating commercial items revealed that an error in citing the relevant procurement law caused some confusion and, if applied, could have resulted in unfair penalties being assessed to certain offerors. Also,

an incomplete explanation in the solicitation document denied

offerors full information about the rules governing the procurement. In response to our review, NIST officials agreed to improve

their internal quality assurance program for procurement actions,

develop supplemental policy and guidance, and provide training

to their acquisition workforce.

MAJOR CONSTRUCTION AND

RENOVATION PROJECTS

Contracts for large, costly, and complex capital improvement and

construction projects carry numerous inherent risks. This is an

area of particular vulnerability for the Department, given the many

construction and/or renovation projects it has planned or under

way for Commerce facilities. Departmental leadership and OIG

oversight are needed to maximize Commerce’s return on its investment in these projects. Detecting and addressing potential problems during the developmental stages rather than after a project is

begun or completed saves time and money. For this reason, we

continue to monitor the progress of the Department’s current and

planned construction projects.

At present we are reviewing USPTO’s progress in completing,

furnishing, and occupying its new headquarters complex in northern Virginia (see Challenge 3, page 6). Over time, we will also

Artist’s rendering of the new Census headquarters complex in

Suitland, Maryland, estimated to cost $331 million and be ready

for occupancy in 2008—at the height of the bureau’s preparation

for Census 2010.

Source: Census Bureau

Major Challenges for the Department
6 March 2004/Semiannual Report to Congress

assess several of the Department’s other major4 renovation and

construction projects, which include the following:

■ NOAA. According to NOAA, 21 projects are currently

scheduled or in process including construction of a

Pacific Region Center in Hawaii, projected to cost

$210-$230 million; a fisheries research facility in Juneau,

Alaska; and a Center for Weather and Climate Prediction

in College Park, Maryland.

■ NIST. The bureau continues its multimillion-dollar

program to upgrade existing laboratories in Gaithersburg,

Maryland, and Boulder, Colorado: it has begun occupying its new Advanced Measurement Laboratory in

Gaithersburg and constructing a central utilities plant in

Boulder.

■ Census. Two buildings will be constructed at the

bureau’s Suitland, Maryland, headquarters. Construction

drawings are nearly completed.

■ Commerce Headquarters (Herbert C. Hoover Building). The Department is planning the modernization of

its headquarters in Washington, D.C., and has established

a Renovation Program Office to oversee and monitor this

multiyear, multiphase project through completion.

CHALLENGE 3

SUCCESSFULLY OPERATE THE U.S.

PATENT AND TRADEMARK OFFICE

AS A PERFORMANCE-BASED

ORGANIZATION

USPTO’s operation as a performance-based organization continues to warrant special attention. According to USPTO, the efficiency with which it issues patents has a huge impact on the pace

of technological advancement worldwide. The prompt registration of trademarks protects commercial investment, informs consumer choices, and promotes the availability of new goods and

services.

Though USPTO has assumed responsibility for certain operational

functions that were once controlled or monitored at the departmental level, it is essential that the bureau effectively use its expanded authority over budget allocations and expenditures, personnel decisions and processes, procurement, and information

technology operations to process patent and trademarks in a highquality and timely manner.

In June 2002, USPTO issued its 21st Century Strategic Plan. The

5-year plan was intended to help the agency overcome the challenges accompanying its transition to performance-based

operations; successfully develop necessary personnel policies;

establish procurement and administrative policies as well as

performance-oriented processes and standards for evaluating costeffectiveness; and, simultaneously, meet its performance goals

under the Government Performance and Results Act (GPRA) and

the timeliness goals of the American Inventors Protection Act.

In February 2003, USPTO revised this plan. According to the

agency, it is now more aggressive and far-reaching and provides a

roadmap for major changes in patent and trademark processes.

These include steps to (1) improve and maintain patent and trademark quality, (2) move to a paperless environment and promote egovernment, (3) enhance employee development, and (4) explore

competitive sourcing. The plan also calls for the agency to work

with international intellectual property offices to create a global

framework for enforcing intellectual property rights.

Our office is currently reviewing aspects of USPTO’s Office of

Human Resources in response to complaints of noncompliance

with merit system principles and a subsequent request for review

from the agency’s chief financial officer/chief administrative officer. In addition, we are auditing selected aspects of USPTO’s

trademark review process and evaluating certain efforts to increase

productivity and reduce the time it takes to process trademark applications. The review covers fiscal years 1999 through 2003. Similarly, we are evaluating patent examiner production goals, awards,

and performance appraisal plans to determine their effect on production.

We are also reviewing progress on construction of the agency’s

new, state-of-the-art headquarters complex in Alexandria, Virginia,

and its plans for relocating to these facilities. This project is one

of the federal government’s largest real estate ventures. When

completed in 2005, the five-building complex will bring together

the majority of USPTO employees and contractors, who are currently scattered among 18 buildings in Crystal City, Virginia.

USPTO has occupied two of the new buildings earlier than anticipated and is working with the General Services Administration to

ensure the project stays on schedule.

Our current focus is USPTO’s management of the project—we

are looking at the agency’s handling of issues we identified during the project’s planning and design phases, such as relocation

strategies and actual versus estimated costs and completion schedules. Accomplishing the relocation with minimal disruptions to

operations is critical to minimizing adverse impacts on costs,

employees, and services to patent and trademark applicants and

the public.

4 According to the U.S. Department of Commerce’s Office of Real Estate

Policy and Major Programs, “major” projects are those costing $2.3 million or more.

Major Challenges for the Department
March 2004/Semiannual Report to Congress 7

CHALLENGE 4

CONTROL THE COST AND

IMPROVE THE ACCURACY OF

CENSUS 2010

Few Commerce activities have more ambitious goals, higher costs,

or more intensive resource requirements than the constitutionally

mandated decennial census, and with each decade, this undertaking becomes more costly, complex, and challenging. Costs of $1

billion in 1980, for instance, rose to $2.6 billion in 1990, and to

$6.5 billion in 2000. For 2010, Census estimates the cost will be

OIG RECOMMENDATIONS FOR

IMPROVING THE DECENNIAL CENSUS

1. Reach early consensus on the 2010 design to facilitate effective planning and obtain sufficient funding. Delays in finalizing the Census 2000 design and obtaining needed funding left insufficient planning,

development, and testing time for many key components.

2. Produce accurate, complete address lists and maps. The bureau’s master address file (MAF) and associated mapping system (Topologically Integrated Geographic Encoding and Referencing, or TIGER) contained a

higher-than-acceptable level of unreliability, which meant too many forms and too many enumerators could not

reach the intended households.

3. Conduct a carefully targeted and aggressive public awareness campaign. The bureau’s efforts to increase public awareness of and participation in Census 2000 were successful, enabling the bureau to achieve

a response rate of 67 percent—6 percentage points beyond the projected rate of 61 percent. Census needs to

further refine its public outreach program to achieve even higher rates in 2010.

4. Strengthen quality control of nonresponse follow-up. Instances of falsified and questionable data in

Census 2000 required costly reenumeration and undermined confidence in the overall census results.

5. Implement clear policies and guidance for managing temporary staff. The logistics of hiring, training, and

supervising nearly 1 million temporary workers require strong management policies and procedures.

6. Determine whether sampling has a role beyond measuring coverage. Sampling has been a contentious

issue in the past two decennials, and initial plans to use it to improve coverage were ultimately overruled.

7. Implement rigorous system and software development processes and effective information security

measures. The bureau’s approach to systems and software development for Census 2000 provided inadequate

controls, insufficient testing, and poor or no documentation, all of which led to inefficiency and disruptive errors.

8. Upgrade and maintain contracting and program management expertise. The bureau lacked adequate inhouse management skills to oversee decennial contracts and contractor-operated programs.

9. Generate timely and accurate management and operational information. The bureau lacked procedures

for evaluating operations and thus failed to identify improprieties in a timely manner. Nor did it have expeditious methods for collecting and disseminating information to stakeholders.

10. Mitigate potential disruptions and distractions to the work environment and workforce. The bureau

must have plans to counter the potentially negative impacts of two major events: the possible retirement of

roughly half of the bureau’s decennial staff during this decade, and the anticipated move to new facilities in

2008—the year of the dress rehearsal for Census 2010.

Source: Improving Our Measure of America: What Census 2000 Can Teach Us in Planning for 2010. U.S. Department of

Commerce Office of Inspector General. Report No. OIG-14431, Spring 2002.

between $10 billion and $12 billion. (Note: Dollar amounts are

not adjusted for inflation.)

Much has changed in the methods and technologies used for

decennial census taking over the past 3 decades. And during that

time, the nation’s population has increased and diversified dramatically. But the primary weaknesses we have noted in monitoring the 1980, 1990, and 2000 decennials have remained the

same and are at least partially responsible for the ballooning

costs: insufficient planning and lack of upfront funding for an

operation that by its very nature requires long-term vision and

development, as well as continued testing at key points along

the way.

Major Challenges for the Department
8 March 2004/Semiannual Report to Congress

Our work on the 2010 decennial began when we issued Improving Our Measure of America: What Census 2000 Can Teach Us in

Planning for 2010. Using our recommendations from that report,

we have established a comprehensive agenda for monitoring a

broad range of critical decennial activities from their planning

through execution. Our goal, as always, is to support and enhance

the bureau’s readiness by identifying problems early, offering solutions, and informing the key decision-makers—departmental

officials, Congress, and the administration.

The Census Bureau has taken numerous steps toward improving

2010 operations and controlling costs. In September 2002 it adopted

a reengineered framework for conducting the decennial: an American Community Survey to collect and tabulate long-form data

throughout the decade; an enhanced address list and geographic

information database; and a program of early planning, development, and testing for a short-form-only census. The three-pronged

strategy is aggressive and intended to capitalize on the latest technology, such as handheld computers for nonresponse follow-up data

collection, which will incorporate a global positioning system to

register the correct geographic location of households. In addition,

the Department is seeking an increased level of upfront funding.

We have assessed Census’s progress in modernizing its MAF/TIGER processing system thus far (see September 2003 Semiannual Report, page 19), and are concerned that the bureau’s late

start in establishing a strong project management structure and its

lack of a plan for accelerating its software improvement process

may delay completion of the new system, preventing it from being thoroughly tested before the dress rehearsal in 2008. The successful redesign of this system is crucial to improving Census

2010 operations, and it must be ready to support the dress rehearsal. We are closely monitoring this and other aspects of systems and software acquisition and development, as well as the

bureau’s actions to ameliorate any problems we identify.

We are also focused on the bureau’s 2004 testing of new approaches

to staffing census operations and improving data quality and coverage. Specifically, we will evaluate (1) enumerator hiring, training,

and quality control processes; (2) new methods for improving coverage of population and housing, including procedures to minimize

address duplication; (3) the effectiveness of improved definitions

and methods for distinguishing between group quarters and housing units; (4) the impact of handheld computers and associated systems on enumerator performance; and (5) the efficiency and effectiveness of support functions at 2004 local census office test sites.

CHALLENGE 5

INCREASE THE EFFECTIVENESS OF

MARINE RESOURCE

MANAGEMENT

The National Marine Fisheries Service (NMFS) must balance two

competing interests: (1) promoting commercial and recreational

fishing as vital elements of our national economy and (2) preserving populations of fish and other marine life. Eight regional fishery management councils, along with NMFS, are responsible for

developing plans for governing domestic fisheries in federal waters. Their combined goal is to prevent overfishing, rebuild overfished stocks, and protect, restore, and promote the long-term

health and stability of U.S. fisheries.

Developing conservation and management measures requires collecting, analyzing, and reporting demographic information about

fish populations via stock assessments. These reports are a key

element of the fishery management process; they are used to determine whether additional regulations are necessary to rebuild

fish stocks or whether greater fishing opportunities can be allowed.

Because of their potential impact on commercial and recreational

fishing, these assessments are often controversial, and the methods used to create the estimates typically undergo intense scrutiny by fishers and conservation groups.

Following on our recent assessments of data collection processes

and equipment used by an NMFS science center to survey New

England groundfish (see September 2003 Semiannual Report, page

30) and enforcement of fishing regulations by NMFS’ Office for

CENSUS 2010 REVIEW AGENDA

In addition to work already completed or under way,

OIG plans a series of targeted reviews over the coming months and years on key aspects of the following

areas:

■ The plan for the 2010 census—its completeness, as well as coordination and integration

of its elements.

■ Systems and software design, acquisition,

development, testing, and security.

■ Corrections to address and map information.

■ Field tests planned for 2004 and 2006.

■ Conduct of the American Community Survey.

■ Approach to measuring data quality.

■ Conduct of the 2008 dress rehearsal.

■ Impact of construction and occupancy of

Census’ new headquarters on decennial

scheduling.

■ Implementation of decennial operations

beginning in 2009.

Major Challenges for the Department
March 2004/Semiannual Report to Congress 9

Law Enforcement (see March 2003 Semiannual Report, page 25),

we reviewed the agency’s observer program. Observers deployed

on U.S. commercial fishing vessels collect catch statistics, monitor

bycatch and protected species interactions, and perform biological

sampling to obtain information that NMFS, industry, and academic

researchers use to supplement their own work and to aid in the management of living resources. We reviewed seven programs to determine how NMFS ensures data quality, and whether the data is meeting research and fishery management needs. Although we found a

number of best practices that may lend themselves to replication

across all observer programs, we noted several problematic issues:

procedures for choosing observers’ vessel assignments were improperly designed and/or implemented in ways that could potentially

introduce bias; retaining qualified observer staff is difficult; and

NMFS did not adequately monitor the performance of the programs

or of contractors hired to provide observers. We made recommendations to address each of these issues (see page 30), and also suggested that—to foster better industry cooperation with the observer

program—NMFS’ National Observer Program office and the regional science centers do more outreach to the fishing industry.

Also during this semiannual period, we concluded an audit of

NMFS’ acquisition of services to secure fishery research support

(see page 33). This review was prompted by our audit of an NMFS

financial assistance recipient conducting biological sampling and

data collection for Pacific salmon, which turned up information

suggesting that NMFS may have inappropriately used cooperative agreements to acquire the services. Our follow-up assessment

revealed that these services were for work that directly benefited

the federal government, and as such, should have been secured by

contracts, not cooperative agreements.

CHALLENGE 6

PROMOTE FAIR COMPETITION IN

INTERNATIONAL TRADE

To compete effectively in today’s global marketplace, many U.S.

companies need help identifying and taking advantage of new or

expanded export market opportunities as well as addressing unfair trade practices, trade disputes with foreign firms, noncompliance with or violations of trade agreements, inadequate intellectual property protection, and other impediments to fair trade. Commerce must ensure that its export promotion assistance and trade

compliance and market access efforts adequately serve U.S. exporters and its enforcement of U.S. trade laws helps eliminate unfair competition from imports priced at less than fair market value

or subsidized by foreign governments.

To help meet the challenges in highly competitive world markets,

Commerce and its International Trade Administration (ITA) work

with the Office of the U.S. Trade Representative, the Departments

of State and Agriculture, and numerous other federal agencies to

monitor and enforce trade agreements. The number and complexity of those agreements have increased substantially in recent years,

and the Secretary of Commerce has made monitoring and enforcing trade agreements a top priority for ITA and the Department as

a whole. Over the years, Commerce has received additional funding for trade compliance activities, such as placing compliance

officers overseas in several key markets. Our work has shown that

the increased funding enabled ITA to attract needed staff for its

Market Access and Compliance unit without having to request

special hiring authority or offer recruitment incentives (see March

2003 Semiannual Report, page 20).

Commerce has numerous mechanisms to monitor and help enforce U.S. trade agreements and review trade complaints. When

warranted, its Trade Compliance Center forms teams to follow up

on complaints and bring them to satisfactory conclusion. In addition, ITA’s overseas offices, operated by the U.S. and Foreign

Commercial Service (US&FCS), as well as its other operating

units perform a substantial amount of market access and trade

compliance work. Overall, ITA’s approach to trade compliance

and market access is to engage the issue at the working level wherever possible, thus avoiding formal dispute settlement structures

such as the World Trade Organization, which can take years to

resolve trade disagreements. The Department and ITA pursue

important matters of policy—such as intellectual property rights

protection, standards development, trading rights, and distribution services—in government-to-government negotiations.

Commerce’s many overseas US&FCS offices and domestic U.S.

Export Assistance Centers (USEACs) help U.S. companies identify specific export market opportunities or trade leads and offer

other trade promotion and export finance counseling services, especially to small and medium-size firms that are new to exporting

or looking to expand their overseas markets. During this semiannual period, we reviewed three USEAC networks—Chicago, Pacific Northwest, and Philadelphia—assessing their management,

operations, and performance; their ability to provide value-added

export counseling to U.S. companies; and their success at developing relationships with federal and nonfederal trade promotion partners (see page 24). In all three cases, we found that client satisfaction was high, strong relationships generally existed with local partners, and financial and administrative operations were generally

sound. However, in all three networks, we found some inconsistencies in reporting and oversight that led to overstated export success dollar values—one key barometer of performance—for the

periods we reviewed. When presented with these issues, ITA demonstrated that it was aware of and was taking systematic organization-wide steps to address some of these reporting problems.

We are currently analyzing the crosscutting, systemic issues we

identified in these three reviews. One such issue is that US&FCS

is not recovering the full costs for some of its fee-based products

Major Challenges for the Department
10 March 2004/Semiannual Report to Congress

and services. OMB Circular A-25 requires federal agencies to recover the full costs of goods and services they provide to customers when such resources convey benefits beyond those enjoyed by

the general public. In addition, US&FCS’ own fee policy conflicts

with OMB’s in that it requires recovery of direct costs only. ITA

has asked OMB to waive the requirement and is awaiting a decision. In requesting the waiver, ITA contends that it is not able to

comply with Circular A-25 because compliance would jeopardize

its congressionally mandated mission to increase U.S. exports.

Our USEAC findings mirror those of our recent reviews of overseas operations. Inspections of US&FCS posts in Greece and Turkey revealed that, again, most customers were satisfied with the

products and services they received, but both posts had overstated

the value of their export successes. (For more detail on Greece,

see September 2003 Semiannual Report, page 22. For Turkey, see

the March 2003 issue, page 19.) As noted earlier, however, we

learned during follow-up discussions with ITA management that

ITA was addressing this issue organization-wide to ensure that

US&FCS staff consistently adhere to reporting guidelines.

We will continue our oversight of the Department’s promotion of

U.S. exports and also look at Commerce’s efforts to track, detect,

and combat unfair competition to U.S. industry in domestic markets.

CHALLENGE 7

ENHANCE EXPORT CONTROLS

FOR DUAL-USE COMMODITIES

In today’s political climate, hostile countries and terrorist groups

seeking weapons of mass destruction and the systems to deliver

them pose new threats to global security and U.S. foreign policy

goals. In this environment, advancing U.S. national and economic

security interests through export controls has become an evergreater challenge for the agencies that share this responsibility, particularly for Commerce’s Bureau of Industry and Security, which

oversees the federal government’s export licensing and enforcement system for goods and technologies that have both civilian

and military uses (“dual-use commodities”). Strengthening dualuse export licensing and enforcement requires new, comprehensive legislative authority to replace the expired Export Administration Act of 1979 and appropriately address current export control

needs and realities. Passed during the Cold War, the act sought to

prevent the export of critical goods and technologies to Communist bloc countries. Legislation is needed to address the new threats

posed by terrorism as well as to bolster BIS’ regulatory authority,

strengthen penalties for violations, and maintain strong export controls while encouraging other countries to do the same.

Given the importance of export controls to national security, we

devote considerable attention to the challenges facing BIS. The

National Defense Authorization Act (NDAA) for Fiscal Year 2000,

as amended, directed the inspectors general of the Departments

of Commerce, Defense, Energy, and State, in consultation with

the directors of the Central Intelligence Agency and the Federal

Bureau of Investigation, to report to Congress by March 30, 2000,

and annually until the year 2007, on the adequacy of export controls and counterintelligence measures to prevent the acquisition

of sensitive U.S. technology and technical information by countries and entities of concern. In addition, NDAA for FY 2001 requires the IGs to discuss in their annual interagency report the

status or disposition of recommendations made in earlier reports

submitted in accordance with the act. To date, we have completed

five reviews of export controls in compliance with the act as well

as four separate follow-up reports. Together with the other IGs,

we have also issued five interagency reports on export controls

for dual-use items and munitions.

REVIEW OF DEEMED EXPORT CONTROLS

To comply with the NDAA’s FY 2004 requirement, we sought to

assess (1) the effectiveness of the dual-use deemed export regulations and policies,5 including their implementation by BIS, and (2)

compliance with the regulations by U.S. industry and academic institutions. We also followed up on prior OIG findings and recommendations from our March 2000 report, Improvements Are Needed in

Programs Designed to Protect Against the Transfer of Sensitive Technologies to Countries of Concern (IPE-12454-1), as appropriate.

Our report highlights some areas that are working well, such as

certain aspects of BIS’ deemed export outreach program. However, we identified problems that hamper the efforts of both BIS

and the U.S. government to more effectively prevent the transfer

of sensitive technology to foreign nationals from countries or entities of concern while they are in the United States. To address

these issues, we recommended that BIS (1) modify or clarify some

of the dual-use deemed export licensing regulations and policies,

(2) expand its efforts to raise awareness of deemed export control

regulations by refocusing its outreach and periodically updating

its deemed export guidance, and (3) institute a deemed export

compliance program. We also encouraged BIS to work with Congress and the National Security Council to reexamine the broadly

applied licensing exemptions contained in the Export Administration Regulations that allow foreign nationals access to otherwise controlled technology. (See page 14.)

In addition to our assessment of Commerce-administered deemed

export regulations and policies, the interagency OIG review team

Major Challenges for the Department

5

 According to the Export Administration Regulations, any release to a

foreign national of technology or software subject to the regulations is

deemed to be an export to the home country of the foreign national. These

exports are commonly referred to as “deemed exports,” and may involve

the transfer of sensitive technology to foreign visitors or workers at U.S.

research laboratories and private companies.
March 2004/Semiannual Report to Congress 11

(Commerce, Defense, Energy, State, and the CIA) and the Department of Homeland Security’s OIG6 completed a crosscutting

review of the adequacy and effectiveness of government-wide

deemed export control laws and regulations to determine if they

protect against the transfer of controlled U.S. technologies and

technical information. The interagency OIG report will be discussed in detail in our September 2004 report to Congress.

FOCUSED PRIORITIES

While BIS, the administration, and Congress work to (1) target

federal licensing and enforcement efforts on exports that present

the greatest proliferation and national security risks and (2) streamline or eliminate controls that hamper trade and are not necessary

to address national security or foreign policy concerns, congressional enactment of a new Export Administration Act is vital to

the success of the U.S. government’s efforts to enhance export

controls. We will continue to monitor BIS’ efforts to improve dualuse export controls through the annual reviews required by the

National Defense Authorization Act.

CHALLENGE 8

ENHANCE EMERGENCY

PREPAREDNESS, SAFETY, AND

SECURITY OF COMMERCE

FACILITIES AND PERSONNEL

Since our March 2002 report on the status of emergency preparedness and security programs at a cross-section of Commerce facilities, the Department has made significant improvements, but the challenge

remains. Heightened security requires

a variety of measures: infrastructure

risk assessments, emergency backup

sites, upgraded physical security, and

employee awareness and training, to

name a few. The Department has made

significant progress in these areas, but

it will need to regularly revisit that

progress to ensure it adequately provides for the safety and security of employees and operations, and must make

modifications as needed.

Commerce has taken a number of actions to enhance security thus far this

year. This includes its completion of a

new draft policy on security and a new

chapter in its security manual, both of which relate to foreign national visitors and guest researchers in Commerce facilities. The

draft policy is currently being coordinated with Commerce bureaus. The Department also is developing a counterespionage risk

assessment program, using an emergency operations center to

oversee crisis management response during and after an emergency, updating its continuity of operations and emergency operations plans, and providing regular information and training on

emergency preparedness to Commerce employees.

Given the size of its workforce and the geographical spread of its

hundreds of facilities nationwide and at more than 150 overseas

locations, complying with recent security-related guidance is a

complex, resource-intensive undertaking for Commerce. Our inspections of overseas posts and domestic U.S. Export Assistance

Centers operated by the U.S. and Foreign Commercial Service

identified the need for more timely security upgrades, improved

oversight of security operations, and in some cases, specific security improvements.

Security of U.S. embassies throughout the world remains an important priority. The Department has requested an appropriations

increase of $4.5 million in FY 2005 to help fund ITA’s share of

the State Department’s Capital Security Cost Sharing Program,

which proposes to build more than 150 high-security embassies

and consulates during the coming years, at a total cost of more

than $15 billion. Under the cost-sharing program, all agencies represented in U.S. embassies and consulates will be charged on a

worldwide per capita basis.

We believe Commerce is making progress on many emergency

preparedness, safety, and security fronts, but the challenge is massive. We will continue to monitor its efforts and report our findings accordingly.

Major Challenges for the Department

Status of Application

Number of

Applications

2000 2001 2002 2003

1000

800

600

400

200

0

Approved Rejected Returned Without

Action

866

334 9

826

592

777

99

196

110 60

NUMBER OF DEEMED EXPORT LICENSE APPLICATIONS

PROCESSED IN FYS 2000-2003

Source: Export Administration, Bureau of Industry and Security

6 Homeland Security participated in this year’s assessment because of the

nature of the review topic.
12 March 2004/Semiannual Report to Congress

CHALLENGE 9

STRENGTHEN FINANCIAL

MANAGEMENT CONTROLS AND

SYSTEMS

The Chief Financial Officers Act of 1990, the Government Performance and Results Act of 1993, the Government Management

Reform Act of 1994, and the Federal Financial Management Improvement Act of 1996 require that agencies prepare information

needed by Congress, agency executives, and the public to assess

the management of federal programs and operations. Also required

are audits of an entity’s financial statements to determine whether

its financial position and results of operations are presented fairly

and whether its financial management systems comply with federal requirements.

The Department as a whole has made substantial improvements in

financial management, and received an unqualified (clean) opinion

on its FY 2003 consolidated financial statements—the fifth consecutive year for this accomplishment. The Department resolved

the weaknesses in its accounting for personal property and made

noteworthy improvements in its financial management systems (both

problems noted in the previous year’s audit). One reportable condition related to financial management systems was identified (which

had in prior years been a material weakness7 ) as well as two repeat

findings of noncompliance with laws and regulations (see page 39).

In FY 2003, the Department substantially complied with the Federal Financial Management Improvement Act and OMB Circular

A-127 requirements for a single, integrated financial management

system, by having completed implementation of the Commerce

Administrative Management System (CAMS)8 at all but one bureau, and using it in conjunction with a Commerce-wide database

for consolidated financial reporting. Ten departmental entities, including the Bureau of the Census and NOAA, used CAMS as

their financial system of record in fiscal year 2003. In addition,

CAMS was deployed at NIST at the beginning of FY 2004, thus

replacing the only remaining system not in compliance with federal requirements.

Despite these accomplishments, maintaining a clean audit opinion remains a major challenge under the accelerated financial reporting dates mandated by the Office of Management and Budget

(OMB) for fiscal year 2004. The Department must now have its

FY 2004 consolidated financial statements prepared and audited

within 45 days of fiscal year-end.

CHALLENGE 10

CONTINUE TO IMPROVE THE

DEPARTMENT’S STRATEGIC

PLANNING AND PERFORMANCE

MEASUREMENT IN ACCORDANCE

WITH THE GOVERNMENT

PERFORMANCE AND RESULTS ACT

Congress and agency managers require relevant performance

measures and credible performance data to effectively oversee

federal programs. The Government Performance and Results Act

of 1993 was designed to ensure the availability of such data by

mandating that agencies set goals for program performance and

report outcomes measured against them. The validity of reported

performance results is essential in order for government agencies

to develop integrated budget and performance information and

use performance data to make funding decisions.

Over the past several years, we have reviewed the collection and

reporting of performance data by 6 of Commerce’s 14 operating

units. Our audits have identified the need for (1) stronger internal

controls to ensure that reported data is accurate and (2) improved

explanations and disclosures of results to clarify and enhance the

usefulness of the results. In every case we offered recommendations to address these problems.

During this past semiannual period, these same issues emerged in

our audit of performance measures at the Bureau of the Census.

We found that the reliability and usefulness of reported information is undercut by (1) imprecise measures and related targets, (2)

incorrect descriptions of verification procedures, and (3) conflicting and incomplete disclosures. (See page 22.) An in-progress audit

at NOAA is finding similar issues, suggesting a possible systemic

weakness in these areas.

The operating units for which we have completed audits have been

responsive to our recommendations: they have generally developed action plans to address identified deficiencies and have revised previously reported performance information accordingly.

As each unit takes such steps, we are more confident that performance data will become increasingly reliable and useful, and thus

better serve the purpose and intent of GPRA.

Major Challenges for the Department

7 Material weaknesses are serious flaws in the design or operation of an

internal control component that increase the risk that errors, fraud, or

noncompliance in material amounts may occur and not be readily detected. Reportable conditions are significant deficiencies in the design or

operation of an internal control component that could adversely affect

the organization’s ability to record, process, summarize, and report financial statement data.

8 CAMS is a software package based on a commercial off-the-shelf accounting system application that was extensively modified and substantially augmented with capabilities to support both departmental accounting and financial management needs as well as individual Commerce unit requirements.
Department of Commerce Organization Chart
14 March 2004/Semiannual Report to Congress

The

 Bureau of

 Industry and Security is

primarily responsible for administering and enforcing the nation’s

system for controlling exports of sensitive

dual-use goods and technologies. BIS’ major

functions include formulating and implementing export control policy; processing export

license applications; conducting various policy,

technical, and economic analyses; promulgating

regulations; conducting industry outreach; and

enforcing the Export Administration Act and regulations. BIS’ activities also include promoting federal

initiatives and public-private partnerships across industry

sectors to protect the nation’s critical infrastructures. BIS

is divided into two units:

Export Administration implements U.S. export control

and nonproliferation laws and policies through export

licensing, commodity classifications, and advisory

opinions; technical, economic, foreign availability, and

policy analyses; promulgation of regulations; and

industry outreach. It also conducts various defense

industry activities and enforces industry compliance

with arms control treaties.

Export Enforcement participates in reviews of

export license applications and conducts criminal

and administrative investigations relating to the

export control portions of the Export Administration Act and regulations. It also

administers and enforces the antiboycott

provisions of the act and regulations.

BUREAU OF INDUSTRY

AND SECURITY

DEEMED EXPORT CONTROLS MAY NOT STOP

THE TRANSFER OF SENSITIVE TECHNOLOGY

TO FOREIGN NATIONALS IN THE U.S.

To meet the fifth-year requirement of the National Defense Authorization Act for

Fiscal Year 2000, the inspectors general of the Departments of Commerce, Defense, Energy, Homeland Security, and State,9 and the Central Intelligence Agency

conducted an interagency review to determine whether deemed export control

laws and regulations prevent the transfer of controlled U.S. technologies and

technical information to foreign nationals from countries and entities of

concern. Within Commerce, we assessed how effectively the dual-use

deemed export regulations and policies, as implemented by BIS, prevent

such transfer, and whether U.S. industry and academic institutions are

complying with the regulations. Our specific observations follow.

REGULATIONS AND POLICIES COULD

ENABLE FOREIGN NATIONALS FROM

COUNTRIES AND ENTITIES OF CONCERN

TO ACCESS OTHERWISE CONTROLLED

TECHNOLOGY

Some of the deemed export licensing exemptions in the Export Administration Regulations (EAR) as well as BIS’ deemed export licensing policies may inadvertently affect national security, and require further examination.

Export controls for technical data apply to a wide variety of

information, including technology related to the design,

development, and use of certain products such as computers, semiconductors, integrated circuits, lasers, and sensors. According to the Export Administration Regulations,

any release to a foreign national of technology or software

subject to the regulations is deemed to be an export to the

foreign national’s home country. These deemed exports

may involve the transfer of sensitive technology to foreign

visitors or workers at U.S. private, public, or government

research laboratories and private companies. In FY 2003

BIS processed 12,443 export license applications; approximately 846 (7 percent) were for deemed exports.

9 NDAA mandates that the IGs, in consultation with the directors of Central Intelligence and the FBI, assess the adequacy of export controls and

counterintelligence measures for preventing countries and entities of concern from acquiring sensitive U.S. technology and technical information. The

act further mandates that the IGs report their findings to Congress no later than March 30 of each year, until 2007.
March 2004/Semiannual Report to Congress 15

EAR exemptions eliminate a large number of foreign nationals

from dual-use export controls. As we noted in 199910 and 2000,11

the EAR does not require licenses for foreign nationals working

with publicly available technology and software that (1) are already or will be published, (2) arise during or result from fundamental research, (3) are educational, or (4) are included in certain

patent applications. As such, many foreign students or researchers

at U.S. academic institutions and federal research facilities are exempt from the regulations, as are foreign nationals who are permanent U.S. residents. We previously recommended that BIS work

with the National Security Council and Congress to ensure that

deemed export control policies and regulations are clear and devoid of loopholes that would permit countries or entities of concern to obtain protected U.S. equipment or technology. BIS raised

this issue with the council in 2000, but no action has been taken.

Confusion exists over the “use” of controlled equipment. Confusion over the definition and implementation of controls associated with the “use” of EAR-controlled equipment by foreign nationals creates opportunities for inappropriate transfers. The EAR

defines “use” as “operation, installation (including on-site installation), maintenance (checking), repair, overhaul, and refurbishing,” and some BIS licensing officials maintain that all these activities must occur to constitute “use.” While BIS normally grants

approval for a foreign entity to operate, install, maintain, repair,

overhaul, and refurbish a piece of controlled equipment exported

from the United States in order to permit the full range of uses for

an export, the same definition of use does not seem to apply to

foreign nationals “using” the equipment in the United States. It is

unlikely that one individual would accomplish all these tasks in

most situations. In addition, two of the four multilateral control

regimes12 define the term either with an “or,” or without any connector word (i.e., a bullet listing of the activities). The Defense

Technology Security Administration notes each of the listed activities with the compound conjunction “and/or.”

This difference in interpretation is critical in determining how to

enforce EAR’s deemed export provisions. For instance, the U.S.

academic and federal research community generally uses EAR’s

fundamental research exemption for most of its research. However, when controlled equipment is used by foreign nationals at a

U.S. university or federal research facility, it is most likely accompanied by a transfer of technology. Some academics believe

such equipment use is exempt from export licensing requirements

if the use occurs when working on fundamental research. But according to BIS, the technology for the “use” of controlled equipment is subject to the deemed export provisions regardless of

whether the associated research is fundamental. This means that

academic and federal laboratories might need to seek deemed export licenses for some foreign nationals working with controlled

equipment or otherwise restrict their access to it. BIS needs to

clarify the definition of “use” accordingly and ensure that the U.S.

academic, federal, and industrial research community understands

and complies with licensing requirements.

Citizenship/residency requirements could permit unintended

access. The bureau’s deemed export licensing policy only recognizes a foreign national’s most recent citizenship or permanent residency, and thus allows foreign nationals originally from countries

of concern to obtain access to controlled dual-use technology if

their current citizenship or permanent resident status is with a country not subject to controls. We recommended that BIS amend its

current policy to require U.S. entities to apply for a deemed export

license for foreign national employees or visitors who will have

such access to controlled technology if they were born in a country

where the technology is subject to EAR controls, though their current citizenship or residency may be in a country that is not.

BIS stated that it is prepared to consider modifying its current

policy of only recognizing a foreign national’s most recent country of permanent residency or citizenship for purposes of determining deemed export license requirements. However, the bureau

noted that (1) its policy reflects the traditional understanding of

citizenship as denoting a substantial personal connection to a given

country, and (2) its current licensing practice includes a thorough

review of the foreign national’s contacts (personal, professional,

financial, and employment related). The bureau further stated that

it would work with the Office of Chief Counsel for Industry and

Security to identify any potential legal impediments or inappropriate policy outcomes that should be considered if BIS were to

modify its current policy on the matter.

BIS’ approval of licenses is inconsistent with EAR policies.

BIS approved 78 of 107 deemed export license applications (73

percent) involving foreign nationals from Iran (76) and Iraq (2)

between FYs 2000-2003, citing as justification a 1997 legal opinion by the agency’s former deputy chief counsel. The opinion states

that deemed export licenses are permissible for foreign nationals

from Iran and Iraq because the laws prohibiting “exports” to those

two countries did not apply to their respective nationals. However, the EAR states that the release of controlled technology to a

foreign national “is deemed to be an export to the home country

or countries of the foreign national.” BIS should reevaluate its

10 Improvements Are Needed to Meet the Export Licensing Requirements

of the 21st Century, U.S. Department of Commerce Office of Inspector

General, IPE-11488, June 1999.

11 Improvements Are Needed in Programs Designed to Protect Against

the Transfer of Sensitive Technologies to Countries of Concern, U.S. Department of Commerce Office of Inspector General, IPE-12454-1, March

2000.

12 The United States is a member of several multilateral regimes concerned

with the export of dual-use and munitions items to countries of concern.

Those organizations include the Australia Group (concerned with the proliferation of chemical and biological weapons), the Missile Technology

Control Regime (concerned with the proliferation of missiles capable of

delivering weapons of mass destruction), the Nuclear Suppliers Group (concerned with nuclear weapons proliferation), and the Wassenaar Arrangement (concerned mainly with the transfer of conventional weapons).

Bureau of Industry and Security
16 March 2004/Semiannual Report to Congress

approval of deemed export licenses for foreign nationals from Iran

and Iraq to ensure they are consistent with current law and deemed

export control licensing policies and procedures.

BIS stated that it has the discretion to approve deemed export

license applications to Iraqi or Iranian nationals when there is no

knowledge that the individuals will actually “export” the technology back to Iraq or Iran. While we acknowledge that BIS has the

authority, with the concurrence of the other reviewing Departments,

to approve deemed export license applications involving Iraqi and

Iranian nationals, we reminded the bureau that, according to EAR,

export applications to these countries are subject to a general policy

of denial.

BIS COULD FURTHER RAISE AWARENESS

OF DEEMED EXPORT CONTROL

REGULATIONS BY REFOCUSING

OUTREACH AND CLARIFYING WEB SITE

INFORMATION

BIS has greatly expanded its efforts to raise awareness of deemed

export controls since our March 2000 report. But expanded activities in FY 2003 mainly focused on companies and industry

sectors that already apply for deemed export licenses rather than

on those that do not. BIS needs a strategic outreach plan that targets priority industries, federal agencies, and academic institutions not currently applying for licenses. The bureau also needs to

clarify and periodically update some of the EAR information available on its web site to help exporters better evaluate applicability

of the regulations to their particular situation.

BIS NEEDS A DEEMED EXPORT

COMPLIANCE PROGRAM

The EAR allows BIS to limit a transaction authorized under an

export license by placing conditions on the license itself. For instance, deemed export license conditions might state “no exposure to [Defense] contracts will be allowed” or “use of computers

[above a certain threshold] must be controlled and monitored to

ensure that only job-related work is performed.” Placing conditions on a license provides the bureau with an additional means of

monitoring certain transactions. However, BIS stated previously

that it lacks the resources needed to adequately monitor compliance. Monitoring license conditions is an important component

of ensuring that licenses are used as authorized in the interagency

review process. A company’s failure to comply with license conditions should be a factor in the interagency review of future license applications for that company.

In response to prior OIG recommendations concerning compliance with license conditions, BIS plans to develop a “license condition enforcement program” in FY 2005. BIS needs a compliance program that effectively evaluates license holders’ compliance with conditions and deemed export regulations, to include

on-site monitoring. BIS has stated that it will initiate a pilot program to conduct pre-license checks and post-shipment verifications for deemed exports. We believe this end-use check program

for deemed exports—when implemented—will meet the intent of

our recommendations.

DEEMED EXPORT CONTROL COMPLIANCE

BY COMMERCE BUREAUS IS MIXED

As part of our review, we followed up on recommendations made

to NIST and NOAA in FY 2000 regarding their compliance with

deemed export control licensing for foreign national visitors to

their facilities.

NIST had instituted a policy to regulate foreign national access to

controlled technologies after our March 2000 review, and provided deemed export control training to employees. Though NIST

maintained that the majority of its research is fundamental and

therefore exempt from deemed export controls, we learned that

agency officials were unaware that technology for the “use” of

controlled equipment during the conduct of fundamental research

by foreign nationals is still subject to the EAR.

During our current survey work, we identified at least one EARcontrolled commodity at a NIST facility that may be accessible to

foreign nationals. Because NIST is unsure of what other EARcontrolled equipment may be housed at its facilities, it should review its equipment on hand in the labs to identify any that is EARcontrolled; interview managers of labs that have controlled equipment to establish which foreign nationals (if any) use or have access to the equipment; and work with BIS to develop an effective

means for identifying when a deemed export license may be required. In addition, NIST should provide periodic training on

deemed export requirements to employees who work with EARcontrolled technology or equipment.

NOAA lacks a policy for effectively monitoring foreign national

access to controlled technology despite our March 2000 recommendations and subsequent follow-up in this area. NOAA believed

that deemed export controls for the most part did not apply to the

work of its line offices because their research was primarily fundamental. Like their counterparts at NIST, however, NOAA officials were generally unaware that the technology for the “use” of

controlled equipment during the conduct of fundamental research

by foreign nationals is subject to the EAR, and the agency has

since indicated that some NOAA facilities might contain controlled

equipment accessible to foreign visitors or guest researchers.

In response to our past and present concerns, NOAA is developing deemed export control policies and procedures. Like NIST,

NOAA should also (1) review its equipment inventory to identify

commodities that are EAR-controlled, (2) identify foreign nationals

who have access to them, and (3) work with BIS to develop any

needed controls and determine when a deemed export license may

Bureau of Industry and Security
March 2004/Semiannual Report to Congress 17

be required. Finally, NOAA should review the research it conducts or sponsors to determine whether it is subject to deemed

export controls.

Given the potential security vulnerabilities identified at NIST and

NOAA, we also recommended that the Department’s Office of

Security enforce its security policies (including that for conducting periodic on-site security reviews) related to foreign national

visitors or guest researchers in Commerce facilities and hold the

bureaus accountable for compliance.

BUREAU RESPONSES

BIS, NIST, NOAA, and the Department’s Chief Financial Officer

and Assistant Secretary for Administration generally agreed with

our recommendations and reported that responsive action is

planned or under way. For example, the Department’s Office of

Security was working with both NIST and NOAA to help

strengthen their security procedures, had developed a chapter in

its security manual and drafted a new departmental policy related

to foreign national visitors and guest researchers, and was working more closely with other federal agencies on visa and counterintelligence matters that impact Commerce security. The Department is also developing a new risk assessment program that includes on-site evaluations to mitigate the risks associated with

espionage. However, NIST’s response did take issue with a number of our observations and conclusions, which we address as appropriate, in the body of the report. (Office of Inspections and

Program Evaluations: IPE-16176)

ANNUAL EXPORT CONTROL

FOLLOW-UP REVIEW

IDENTIFIES OPEN

RECOMMENDATIONS FROM

FISCAL YEARS 2001

THROUGH 2003

Our NDAA-mandated follow-up of export control recommendations from the four prior annual reviews we have completed since

the act’s implementation13 noted closure of all outstanding issues

from 2000, but numerous items from subsequent years are still open.

MARCH 2003 REPORT

Last year’s review of export control enforcement yielded 55 recommendations to BIS and 4 to ITA regarding deficiencies in investigative processes, license determinations and oversight, outreach to U.S. exporters, and end-use checks. BIS has resolved or

taken appropriate action on 36 recommendations, but has yet to

adequately address the remaining 19. These deal with the need to

improve administrative and criminal case processing and outcomes,

enhance interagency enforcement relationships, adequately monitor licenses with reporting conditions, foster greater industry understanding of and compliance with export controls, improve information sharing among U.S. government agencies, and institute

internal controls in its automated licensing system to strengthen

its pre-license check process.

ITA has adequately addressed all four of our recommendations

for helping US&FCS conduct end-use checks more effectively.

FEBRUARY 2002 REPORT

This review focused on BIS’ plans for and progress toward modernizing its Export Control Automated Support System (ECASS)

for dual-use export licensing. Five of our 13 recommendations

remain open. They deal with the critically important needs to identify and secure adequate funding for the project, validate requirements for the licensing subsystem, document security requirements, revise and approve the project management plan, complete

the target architecture, and select a location to house the system.

We were particularly troubled by the fact that during the prior

year, estimated costs for the redesign jumped from $7.5 million to

$24.5 million, and the projected completion date pushed out from

FY 2006 to FY 2008. Additionally, BIS—as the federal agency

charged with administering the dual-use controls process—is still

not effectively coordinating the ECASS modernization with the

interagency export licensing community.

In response to the issues raised, BIS has taken the critical step of

halting the ECASS redesign project until a new chief information

officer has been hired and a new requirements study has been completed.

MARCH 2001 REPORT

Three of 14 recommendations remain open from our review of

BIS policies and procedures for designing and administering the

Commerce Control List (CCL), which specifies the technologies

and commodities subject to Export Administration Regulations.

Specifically, BIS still needs to make the CCL more user friendly;

work with the National Security Council to review and possibly

revise commodity classification guidance; and provide State with

copies of the final determinations on commodity classifications

that it reviews.

Bureau of Industry and Security

13 March 2000: Improvements Are Needed in Programs Designed to Protect Against the Transfer of Sensitive Technologies to Countries of Concern; March 2001: Management of the Commerce Control List and Related Processes Should Be Improved; February 2002: BXA Needs to

Strengthen Its ECASS Modernization Efforts to Ensure Long-Term Success of the Project; March 2003: Improvements Are Needed to Better

Enforce Dual-Use Export Control Laws.
18 March 2004/Semiannual Report to Congress

MARCH 2000 REPORT

In our FY 2004 NDAA report on deemed exports (see page 14),

we address a number of open issues we first raised in our March

2000 report. As a result, we closed the five recommendations that

we identified as still open in FY 2000—four of which pertained

to BIS and one to NOAA. (Office of Inspections and Evaluations:

IPE-16178)

BIS TAKES PROMPT ACTION

TO CORRECT WEAKNESSES

IN ITS TRAVEL CARD

PROGRAM

An audit survey of the BIS travel card program concluded that

overall, the program is currently administratively sound. However, this has not always been the case. Prior to fiscal year 2003,

our audit survey showed that BIS personnel did not, as required

by departmental policy, generally conduct any monthly review of

charges made to the cards, consistently track and follow-up on all

card delinquencies, or notify supervisors of problem accounts. In

an effort to identify any abuse of the travel card program by its

employees, at the beginning of fiscal year 2003 BIS conducted an

internal review of all travel card transactions for the preceding

fiscal year. As a result of the review BIS discovered that 19 of its

312 cardholders had used their cards for inappropriate personal

use and began to take remedial action.

Having determined that BIS’ internal review was both comprehensive and reliable, we found no need to conduct a full-scale

audit, but suggested a number of ways that BIS could further

enhance the administration of the program: (1) review monthly

transactions for all BIS employees; (2) develop a plan for consistent follow-up of problem accounts; (3) improve controls over

credit limits and number of cards issued; (4) reinforce travel card

requirements (e.g., ensure that cardholders take required training and periodically update their Employee Acknowledgment

forms); and (5) implement a disciplinary plan for travel card

misuse.

BIS took prompt action to implement our suggestions, and we

thus closed out our review. (Office of Audits: BTD-15771)

Bureau of Industry and Security
March 2004/Semiannual Report to Congress 19

T he

Economic

Development

Administration was established

by the Public Works and Economic

Development Act of 1965 to generate

new jobs, help retain existing jobs, and

stimulate commercial and industrial growth

in economically distressed areas of the United

States. EDA continues to fulfill this mission

under the authority of the Economic Development

Administration Reform Act of 1998, which

introduced the concept of Comprehensive Economic

Development Strategies, a local planning process

designed to guide the economic growth of an area.

Based on these locally and regionally developed

strategies, EDA works in partnership with state and

local governments, regional economic development

districts, public and private nonprofit organizations,

and Indian tribes to help distressed communities

address problems associated with long-term economic

deterioration and recent, severe economic

dislocations, including recovery from the economic

impact of natural disasters, the closure of military

installations and other federal facilities, changes in

trade patterns, and the depletion of natural

resources. EDA provides eligible recipients

with technical assistance, as well as grants for

public works and economic development,

planning, training and research, and

economic adjustment.

REVOLVING LOAN FUNDS

EDA’s Economic Adjustment Program provides, among other things, grants to capitalize

revolving loan funds (RLFs). Currently more than 600 RLFs are operating throughout

the country, with a total capital base of about $1 billion. This includes EDA’s share

of the initial investment and matching funds contributed by state and local governments, nonprofit organizations, and other eligible recipients that operate

RLFs. The program focuses on communities and regions that have experienced or are threatened by serious structural damage to their underlying

economic base. The purpose of an RLF is to leverage other public and

private investment in key sectors of the local economy and to stimulate

employment for the local workforce. RLFs offer loans to local businesses that otherwise cannot secure sufficient private financing, providing a continuous infusion of economic development funds into

the affected community.

Because RLFs manage cash and other liquid assets, they are particularly susceptible to fraud, waste, and abuse if not adequately

managed and monitored. Recognizing the sizable federal investment in these funds, we have worked cooperatively with EDA over

the past several years to identify high-risk investments, and have

conducted a series of RLF audits targeting projects on the basis of

a variety of factors that typically suggest heightened vulnerability.

Such factors include minimal use of grant funds, large uncommitted cash balances, and lack of single audit coverage. Our audits have

identified several recurring issues, the most serious of which are

■ unneeded funds from recapitalization grants,

■ excessive cash reserves,

■ inappropriate loans,

■ inadequate accounting for RLF assets (cash and loans), and

■ inadequate audit coverage.

Based on findings in individual audits, we have made recommendations, as appropriate, to recoup unused grant funds, remedy fiscal and administrative deficiencies, and

ensure compliance with applicable laws and program requirements. In all cases, EDA has

required grant recipients to take prompt action to correct deficiencies, and has either sought

immediate repayment of unused funds or allowed recipients additional time to generate new loan

activity.

Summarized below are the results of the three RLF audits we conducted this semiannual period, which include recommendations that

more than $2.3 million of revolving loan funds be put to better use. EDA is reviewing the audit findings and recommendations to

develop corrective action plans.

ECONOMIC DEVELOPMENT

ADMINISTRATION
20 March 2004/Semiannual Report to Congress

TERMINATION OF MISMANAGED

WASHINGTON, D.C., RLF RECOMMENDED

In September 1980, EDA awarded a $750,000 Long-Term Economic Deterioration grant to the District of Columbia to establish

a revolving loan fund. The RLF—intended to stimulate economic

development and revitalize neighborhoods—is administered by

the city’s housing and community development department.

Our May 2003 audit disclosed a history of poor financial management and noncompliance with EDA grant requirements: among

other things, the authority had understated RLF income by almost

$590,000; maintained inadequate documentation for borrowers

and loan balances; had not pursued collection of defaulted loans

in 2 years; and had no support for $113,000 in administrative expenses. Additionally, the authority had submitted inaccurate, incomplete, and untimely semiannual status reports; and was operating the fund without an approved RLF plan.

We recommended that EDA’s Philadelphia regional director terminate the grant for cause, recover the projected RLF balance of

$1,772,666, and transfer administration of $331,967 in outstanding loans to another district agency. (Atlanta Regional Office of

Audits: ATL-15984)

AUDIT FINDS SIGNIFICANT

NONCOMPLIANCE AT NEW

HAMPSHIRE RLF

We audited an RLF established in 1994 as part of a $1 million

Sudden and Severe Economic Dislocation grant awarded to a New

Hampshire state port authority. The RLF was intended to create

jobs and promote business and financial opportunities for unemployed fishing industry workers in two counties. EDA provided

$810,000 to capitalize the fund and initially required a $270,000

match. As of September 30, 2003, the authority had 23 outstanding loans totaling $603,296.

Our audit of the fund’s administration for the past 3 fiscal years

disclosed excess cash of $146,123 as of September 30, 2003—the

result of inadequate loan activity. Additionally, the authority did

not comply with numerous EDA requirements: it did not have an

approved RLF plan and failed to provide annual plan certifications; its single audit did not properly include the RLF, as required

by OMB Circular A-133; semiannual status reports were incomplete; and loan files did not document the eligibility of borrowers.

To resolve the excess funds finding, we recommended that EDA’s

Philadelphia regional director require the authority to (1) deposit

the $146,123 in excess funds into a separate interest-bearing account and remit the monthly interest to the U.S. Treasury; (2) use

the excess funds within 6 months to make loans in accordance

with RLF program objectives; and (3) remit EDA’s share of any

unused excess funds remaining in the account after 6 months to

the U.S. Treasury.

We further recommended requiring the authority to provide an

RLF plan for EDA’s approval; submit annual plan certifications

and complete semiannual status reports; document in the loan files

that applicants have no other sources of credit available; and ensure that the RLF program is properly accounted for in annual

single audits. (Atlanta Regional Office of Audits: ATL-16544)

PENNSYLVANIA GRANTEE MUST REPAY

MATCHING FUNDS TO RLF

EDA awarded $500,000 to a Pennsylvania development commission in 1984 for an RLF intended to promote business development in six north central counties in the state. The required matching share of $166,667 brought total capitalization to $666,667. A

subsequent amendment increased the award to $800,000 and the

match to $266,667, for total capitalization of $1,066,667. City

and county organizations were to provide the matching funds.

Our financial and compliance audit, covering October 1, 2000,

through September 30, 2003, disclosed that the commission never

fully controlled the matching funds: as loans were repaid, the contributing organizations reclaimed their portions of the match rather

than leaving them in the fund for subsequent lending. As a result,

the commission owes the RLF a total of $409,606—which includes the $266,667 match plus $142,939 in earned interest returned to the contributors.

Additionally, the commission did not submit timely and accurate

semiannual reports, properly document borrower eligibility in loan

files, or properly include the RLF in its annual single audits.

We recommended that the EDA Philadelphia regional director

require the commission to (1) suspend RLF lending activity until

it reimburses the fund for $409,606, (2) submit timely and accurate semiannual reports, (3) provide required eligibility documentation in borrowers’ files; and (4) ensure that the RLF program is

properly accounted for in annual single audits. (Atlanta Regional

Office of Audits: ATL-16512)

PUBLIC WORKS PROGRAM

The Public Works Program empowers distressed communities in

economic decline to revitalize, expand, and upgrade their physical infrastructure to attract new industry, encourage business expansion, diversify local economies, and generate or retain longterm, private sector jobs and investment. In many cases, Public

Works Program projects are used to upgrade or expand an area’s

economic infrastructure to support the next generation of indusEconomic Development Administration
March 2004/Semiannual Report to Congress 21

try or commerce. Whenever possible, this program seeks to redevelop existing facilities and industrial/commercial locations. EDA

encourages such redevelopment projects because they promote

sustainable economic development by taking advantage of readily

available infrastructure and markets. During this reporting period

we audited one public works grant.

AUDIT FINDS NO IMPROPRIETY IN TEXAS

PROJECT’S LOCATION SWITCH

In January 2003, the U.S. Department of Housing and Urban Development OIG referred to our office a complaint it received alleging improprieties in the conduct of an EDA-funded construction project by a Texas redevelopment authority.

The authority had received a public works grant in July 1997 to

convert a college facility it had purchased from the city into a

business incubator for area entrepreneurs. The initial grant had

total estimated costs through February 1999 of $1.85 million, with

the federal government’s share not to exceed $1.11 million.

The recipient subsequently requested EDA approval for renovating a different site and extending the completion deadline. EDA

agreed, and in September 2002 amended the grant to provide an

additional $2.58 million. Estimated project costs thus increased

to $4.43 million, with the federal share not to exceed $2.61 million. At the time of our audit (May through December 2003) the

grantee had claimed costs totaling $1.11 million for the period

July 1997 through January 2002.

The complainant alleged that the authority misled EDA to obtain

the grant award by promising to redevelop the original building,

when its intention was to use the funds to develop a different building.

We determined that the authority acted appropriately in switching

the site of the development project because substantial hidden

defects were discovered in the original building only as renovation proceeded. Thus, claimed costs for this work were justifiable, as was EDA’s decision to provide supplementary funding

and additional time to complete the project at the new location.

However, the authority did violate EDA grant terms by failing to

obtain competitive bids for asbestos removal services and by

awarding a prohibited cost-plus-percentage-of-cost contract to the

engineering firm selected for the job. As a result, we questioned

$188,316 in fees paid to the engineering firm and recommended

that the EDA Austin regional director recover the agency’s share

of that amount—$107,273. (Denver Regional Office of Audits:

DEN-15908)

Economic Development Administration
22 March 2004/Semiannual Report to Congress

The

Economics

and Statistics

Administration analyzes

economic developments,

formulates policy options, and

produces a major share of U.S.

government economic and demographic

statistics. The Chief Economist monitors

and analyzes economic developments and

directs studies that have a bearing on the

formulation of economic policy. ESA has two

principal agencies:

Bureau of the Census is the country’s

preeminent statistical collection and

dissemination agency. It publishes a wide variety

of statistical data about the nation’s people and

economy, conducting approximately 200 annual

surveys, in addition to the decennial census of

the U.S. population and the decennial census of

industry.

Bureau of Economic Analysis

prepares, develops, and interprets

the national income and product

accounts (summarized by the

gross domestic product), as

well as aggregate measures

of international, regional,

and state economic

activity.

AUDIT OF CENSUS PERFORMANCE REPORTING

FINDS PROBLEMS NOTED AT OTHER

BUREAUS

We continued our scrutiny of Commerce performance reporting in this semiannual period, this time assessing the measures and data Census provided in support of its

three performance goals presented in the Department’s FY 2001 Performance &

Accountability Report.

Our audit revealed the same problems in collecting, verifying, and presenting

information that we have often noted in our performance measurement audits of other bureaus: some measures, collection and verification techniques,

explanations, and disclosures were inaccurate or inadequate, and the reliability of reported data was thus compromised. At Census, we found that

the reliability and usefulness of reported information was undercut by (1)

imprecise measures and related targets, (2) incorrect descriptions of verification procedures, and (3) conflicting and incomplete disclosures.

Imprecise measures and targets. The wording of measures and targets

in some instances either inaccurately reflected what was being assessed

or did not capture the full range of activities. For example, the goal 1

measure “percentage of household surveys attaining specified reliability

measurements” contained data for two nonhousehold demographic surveys. Likewise, Census reported having met its targets for goal 2 and goal

3 measures. In the case of goal 2, the target was different from the measure

in that Census only included in its target the release of decennial census

products. Because this was not explained, the reader was left to assume that

all three census products mentioned in the measure were included in the target

as well. For goal 3, the target for the MAF/TIGER measure implied that Census

would have the plan and systems supporting housing unit coverage of the master

address file in place by the end of FY 2002. In fact, the bureau measured and reported its progress only toward developing the plan and identifying the required systems.

Inaccurately described verification procedures. Census’s verification methodology for the

goal 2 measure—comparing actual data dissemination dates against projections—was used for only

two of the three products. For the American Community Survey measure under goal 3, Census reported

that it verified data by comparing actual product release dates against scheduled completion, but in reality it

compared actual and projected dates for data collection.

Conflicting and incomplete disclosures. For goal 1, “improving current measures of the U.S. population, economy, and governments,”

explanations for two of the four measures contained inconsistent, noncomparable, and incomplete information. The household response

rate measure explains at one point that Census met the stated target for obtaining response rates “better than 90%.” Later in the text, the

target is reported as a “90 percent or better response rate.” Under the first guideline, the bureau did not fully meet the measure, as the

response rate for the American Housing Survey (AHS) was exactly 90 percent in FY 2001. Under the second guideline—the correct

ECONOMICS AND STATISTICS

ADMINISTRATION
March 2004/Semiannual Report to Congress 23

one—it did. The reader, however, had no way of knowing which

target was correct and whether one or both were met.

Among other things, Census also improperly included response

rates for the American Community Survey (ACS) in its discussion of household response rates; inaccurately reported having

met the target for all surveys in FY 2001—it did not meet that

target for the Survey of Income and Program Participation; and

did not provide an FY 2001 or FY 2002 target for this survey,

while it did for all others. And finally, the discussion of the release data products measure under goal 1 suggests that reported

data is comparable across the years, when in fact it is not. Data for

FY 1999 is based on two surveys; data for FY 2000 through 2002

is based on only one. Such omissions and inconsistencies undermine the credibility of reported results because readers do not

have full and accurate information with which to assess them.

We recommended that the Census Bureau revise measures and

targets to accurately convey the results it is evaluating; restate

unclear or incorrect results in future Accountability Reports; and

provide complete explanations of the measures, data, and verification procedures. We note that the bureau has already taken corrective actions in response to our findings. (Financial Statements

Audits Division: FSD-15990)

CENSUS GOALS AND RELATED MEASURES

GOALS

1. Provide and Improve Current Measures of the U.S.

Population, Economy, and Governments that Meet the

Needs of Policy Makers, Businesses, and the Public.

2. Provide the Statistical Foundation and Benchmark

Measures of the Population, Economy, and the Government that Meet the Needs of Policy Makers, Federal, State, and Local Government Agencies, Businesses, and the Public.

3. Reengineer the 2010 Decennial Census to be More

Efficient and Cost Effective, Provide Richer Data, Improve Coverage, and Reduce Risk in Meeting Constitutional and Legislative Mandates.

MEASURES

■ Percentage of household surveys attaining

specified reliability measurements.

■ Household response rate for Current Population

Survey, National Crime Victimization Survey, and

American Housing Survey. Response rate for the

National Health Interview Survey. Household

Response Rate for the Survey of Income and

Program Participation.

■ Release data products from Survey of Income

and Program Participation (SIPP) and Survey of

Program Dynamics (SPD).

■ Release principal economic indicators.

■ Release Decennial Census, Census of Governments, and Economic Census products.

■ Implement Master Address File (MAF)/ Topologically Integrated Geographic Encoding and Referencing (TIGER) Modernization.

■ Implement American Community Survey (ACS).

Economics and Statistics Administration

Source: U.S. Department of Commerce, FY 2001 Performance & Accountability Report
24 March 2004/Semiannual Report to Congress

The

International

Trade Administration

is responsible for trade promotion and

policy issues associated with most

nonagricultural goods and services. ITA

works with the Office of the U.S. Trade

Representative to coordinate U.S. trade policy.

ITA has four principal units:

Market Access and Compliance develops and

implements international economic policies of a bilateral,

multilateral, or regional nature. Its main objectives are to

obtain market access for American firms and workers and

to ensure full compliance by foreign nations with trade

agreements signed with the United States.

Trade Development advises on international trade and

investment policies pertaining to U.S. industrial sectors,

carries out programs to strengthen domestic export competitiveness, and promotes U.S. industry’s increased

participation in international markets.

Import Administration defends American industry

against injurious and unfair trade practices by administering the antidumping and countervailing duty laws of the

United States and enforcing other trade laws and

agreements negotiated to address such trade practices.

U.S. and Foreign Commercial Service

promotes the export of U.S. products and

helps small and medium-sized businesses

market their goods and services

abroad. It has 105 domestic

offices and 157 overseas

posts in 84 countries.

U.S. EXPORT ASSISTANCE CENTERS

The International Trade Administration plays a major role in leading the federal

government’s efforts to increase U.S. exports. ITA’s U.S. Commercial Service,14 as

the Department’s key export promotion agency, works closely with U.S. businesses

and federal, state, and local trade partners to promote export awareness, protect

U.S. business interests, and increase U.S. sales abroad.

Founded in 1980, the Commercial Service (CS) focuses its assistance primarily on small and medium-sized businesses that are beginning to export or are interested in expanding sales to new export markets. CS also

provides assistance to traditionally underserved sectors such as womenand minority-owned companies and rural concerns. To this end, it

operates more than 100 U.S. export assistance centers (USEACs),

grouped geographically into 12 networks across the United States.

Many of the centers bring together federal and nonfederal traderelated agencies into one-stop shops to provide firms with information about various export promotion and financing opportunities. In each network, one USEAC serves as the hub office supporting the activities of several satellite offices.

SOUND OPERATIONS NOTED

AT THREE USEACS REVIEWED

During this past semiannual period, we evaluated the management,

program, and financial and administrative operations of three USEAC

networks—Chicago, Pacific Northwest, and Philadelphia. We found

for the most part that the networks have strong and collaborative relationships with trade partners; and that network offices and staff are innoINTERNATIONAL TRADE

ADMINISTRATION

14 Commercial Service is also known as the U.S. and Foreign Commercial Service.

The Export Enhancement Act of 1992 directed the Commerce

Department to take the lead in setting up “one-stop shops,”

working primarily with the Export-Import Bank and Small

Business Administration to assist U.S. exporters. The resulting

organizations—U.S. Export Assistance Centers—seek to

collocate federal, state, and local trade partners, where possible, and provide U.S. exporters with assistance, counseling,

and information on all export-related promotion and finance

opportunities.
March 2004/Semiannual Report to Congress 25

vative and highly regarded for their services by clients and partners alike. Financial and administrative functions are generally

well managed, though a few need improvement, as does each

network’s export success reporting. The specific weaknesses we

noted in these areas are detailed below.

CHICAGO

Export Successes Need Better Management Review. We reviewed the export success records approved during the period October 1, 2002, to July 9, 2003, and found some that were inaccurately reported or of poor quality: problems ranged from overstated

values (totaling approximately $4.3 million of the $42.1 million

reported for our review period) to poorly demonstrated links between the assistance rendered and the reported outcome. For these

cases, the network did not comply with Commercial Service’s export success reporting guidelines.

To its credit and to

help eliminate the

problems we identified, Commercial

Service has updated its export

success reporting

guidance, designated a senior official to oversee and

ensure consistent

application of the

revised guidelines,

and increased

manager and staff

training.

Lease Payments

Are Not Promptly Collected. Commercial Service had failed to

collect accumulated lease payments totaling $16,088 and dating

back to 2000 from a nonfederal trade partner collocated in Chicago, as well as in Houston and Newport Beach. After we brought

this issue to its attention, CS invoiced the partner and received

payment. Commercial Service also initiated action to ensure that

it consistently tracks, bills for, and collects payments due from its

nonfederal trade partners.

PACIFIC NORTHWEST

Reported Export Success Values Were Overstated, and Assistance to New Exporters Appears Low. Based on a 20 percent

sample, we concluded that the Pacific Northwest USEAC network

overstated its fiscal year 2003 reported export success values by

at least 60 percent ($156 million of the $263 million reported),

and claimed $6 million of exports that did not occur. Further, three

USEACs in the network did not report any export successes for

new-to-export companies—another important CS performance

measure. We are concerned that some trade specialists may not be

adequately reaching out to inexperienced exporters, preferring

instead to help existing clients and thus more easily reach their

export success goals.

User Fees Are Not Consistently Collected and Do Not Recover

Full Costs. Pacific Northwest USEAC offices do not consistently

charge international buyers for Gold Key USA services provided,

nor do their fees appear to fully cover their associated costs. OMB

Circular A-25 requires federal agencies to recover the full costs of

goods and services they provide to customers when such resources

convey benefits beyond those enjoyed by the general public. The

Commercial Service’s fee policy conflicts with OMB’s in that it

requires recovery of direct costs only. Further, CS has not consistently enforced its own fee collection policy—especially for Gold

Key USA services executed by USEACs—so trade specialists

sometimes forgo charging clients even for direct costs. ITA has

requested a waiver from OMB’s full cost recovery requirement,

and is awaiting an answer. In the absence of a waiver, we recommended that Commercial Service take steps to ensure the

USEACs—and all CS components—consistently and fully recover

their costs. ITA is taking steps to address this recommendation,

such as reviewing and analyzing a study on pricing, and developing proposals for full cost recovery. We will be following up on

this issue in our upcoming crosscutting report on USEACs.

Purchase Card Program, Time and Attendance Record Keeping Need Better Oversight. We found that some purchase

cardholders exceeded the $2,500 annual per card limit for cell

Pacific Northwest USEAC Network

Chicago USEAC Network

International Trade Administration
26 March 2004/Semiannual Report to Congress

phone services, and some made advance payments for monthly

recurring cell phone charges, which is prohibited. Also, one

USEAC office failed to deduct leave to cover 200 hours in absences taken by an employee, because the employee did not submit leave slips. Appropriate time and attendance adjustments have

been made.

PHILADELPHIA

Gaps in Leadership Undercut Trade Partner Relations and

Office Operations. We found a number of strong, mutually beneficial working relationships between the Philadelphia USEAC

network and a diverse mix of trade partners at the federal, state,

and local levels. However, turnover in the director’s position at

peat clients, which may lead to the neglect of inexperienced but

ready-to-export companies.

Inadequate Oversight of Network Travel Has Permitted Questionable Practices and Reimbursements. We identified a number of questionable practices, weak internal controls, lack of accountability, and potentially unnecessary expenses with regard to

USEAC staff travel: travel vouchers were sometimes signed by

persons other than the traveler and the appropriate authorizing/

approving official; the purpose of some trips was not documented;

voucher information did not match receipts; and rental cars were

used excessively. We discovered that CS management did not review the travel vouchers, question the necessity of trips, or determine whether the chosen mode of transportation was practicable

and commensurate with the nature and purpose of the traveler’s

duties.

Purchase Card Program Needs Better Oversight.Again, as with

the Pacific Northwest network, we found that some Philadelphia

purchase cardholders exceeded the $2,500 annual spending limit

for cell phone charges, and that some inappropriately prepaid for

cell phone service. Further, we could find no evidence that Philadelphia network employees consistently reviewed their cell phone

bills and reimbursed the government for personal calls. We also

noted that one cardholder shared the card with another employee

and paid sales tax on tax-exempt purchases.

AGENCY RESPONSE

ITA welcomed the insights provided in the three USEAC reports.

During the course of our review, the Commercial Service worked

to cooperatively address the issues we identified. It indicated that

it intends to assess internal controls associated with many of the

management, financial, and administrative matters we raised. ITA

also indicated that it intends to strengthen the reporting and verification of export successes and other performance data by (1) revising performance measure guidance, (2) ensuring that management understands and complies with the new guidance, (3) improving training on performance measures, and (4) designating a

headquarters senior official to review export success reporting

worldwide. However, the agency did not agree with our finding

that the Pacific Northwest USEAC network had overstated the value

of its reported export successes by $156 million, asserting that the

overstatement totaled only $6 million. We thoroughly evaluated

ITA’s position and provided a discussion in our final report of why

we continue to conclude that the overstated amount of the export

successes we reviewed was $156 million. (Office of Inspections

and Program Evaluations: IPE-16136, 16507, and 16402)

three of the six network offices in recent years has caused office

priorities and expectations to shift, and has thus adversely impacted long-term planning, services, and collaboration with some

trade partners.

Export Successes Were Inflated and Client Records Inadequately Maintained. As with the other two networks, we found

Philadelphia’s export success reporting to be overstated. Our review of 20 percent of FY 2003 approved successes identified duplicate export success stories and use of estimated rather than actual sales, which resulted in a minimum overstatement of $14.46

million (10 percent) of the network’s $145.13 million export value

for the year, and an overcount of the number of successes by at

least 30 (6 percent of the 489 total). Client records were poorly

maintained for several export successes, and often failed to clearly

document the USEAC assistance that led to the success. Also, as

with the Pacific Northwest network, we are concerned that

Philadelphia’s trade specialists may be focusing too much on rePhiladelphia USEAC Network

International Trade Administration
March 2004/Semiannual Report to Congress 27

The

Minority

Business

Development Agency

was created to help

minority-owned and operated

businesses achieve effective and

equal participation in the

American free enterprise system,

and overcome the social and

economic disadvantages that have

limited their participation in the

past. MBDA provides management

and technical assistance to minority

firms upon request, primarily

through a network of business

development centers. It also

promotes and coordinates

the efforts of other federal

agencies in assisting

or providing market

opportunities for

minority businesses.

MBDA’S NATIVE AMERICAN BUSINESS

DEVELOPMENT CENTER PROGRAM

Established in 1982, the Native American Business Development Center (NABDC) program funds

a network of centers whose professional business consultants provide one-on-one technical

assistance and commercial development services to Native American entrepreneurs. Consultants assist with business plan formulation, marketing, management, financial planning,

and a variety of specialized services to help firms secure adequate financing.

During this past semiannual period, we audited the California, Northwest, and Arizona

Indian business development centers, all of which are funded by MBDA cooperative

agreements with the same Native American nonprofit organization. The recipient has

used MBDA funding to operate the California center since 1972, the Arizona center

since 1986, and the Northwest center since 1990. In each case, we performed a financial and compliance audit of two budget periods—calendar years 2001 and 2002—

funded under 3-year cooperative agreements that extended through 2003. We sought

to determine whether the recipient was performing in accordance with award objectives; claiming project costs that were reasonable, allowable, and allocable; and maintaining required administrative, financial, and program controls. We found varying degrees of noncompliance with MBDA performance guidance and inadequate management controls for ensuring that claimed performance is documented completely and within

the specified deadline.

CALIFORNIA CENTER’S PERFORMANCE CLAIMS AND INKIND CONTRIBUTIONS NOT SUPPORTED

This project had total estimated costs of $681,477 for the 2-year period covered by our audit, with the

federal share not to exceed $575,000. We found that though the recipient generally complied with program

and award objectives, its claims for two of four performance measures we considered for 2001—dollar value

of transactions and client service hours—were in some instances inaccurate or poorly supported: for the first measure we did not accept the recipient’s largest claimed transaction; for the second, we found that the center either was late in

obtaining required documentation for service hours or did not obtain it at all.

The recipient also did not comply with uniform administrative requirements and federal cost principles for in-kind contributions in

either calendar year. We therefore questioned claimed costs of $29,700 and recommended that the MBDA grants officer disallow these

costs, recover the federal share of $25,089, and require the recipient to establish procedures for properly claiming in-kind contributions.

The recipient disagreed with the questioned costs but provided no information to cause us to modify our finding. (Seattle Regional

Office of Audits: STL-15885-4-0003)

DEFICIENCIES AND NONCOMPLIANCE FOUND IN ARIZONA CENTER OPERATIONS

The Arizona center had total estimated costs for the 2-year audit period of $437,142, with the federal share not to exceed $360,000. For

both years, we found the recipient’s performance substantially deficient in that its claims for three critical performance measures—

dollar value of transactions, client service hours, and strategic partnerships—were inaccurate in some instances and inadequately supMINORITY BUSINESS

DEVELOPMENT AGENCY
28 March 2004/Semiannual Report to Congress

ported in others. We thus determined its overall performance should

have been rated unsatisfactory (MBDA had rated it satisfactory in

2001 and good in 2002). We also found that the recipient had

failed to comply with uniform administrative requirements and

federal cost principles, which caused us to question costs of

$10,425 and recommend repayment to the federal government of

$8,557. Though the recipient subsequently submitted additional

documentation for some questioned transactions and revised performance claims downward, neither action changed the findings

in our audit. (Seattle Office of Audits: STL-15885-4-0001)

NORTHWEST CENTER EXCELS IN

MEETING MBDA PERFORMANCE GOALS

This center serves the states of Idaho, Oregon, and Washington.

Its total estimated costs for the 2-year period of our audit were

$498,367, with the federal share not to exceed $380,000. Its performance was rated “excellent” by MBDA in both 2001 and 2002.

Our audit disclosed only minor discrepancies in claimed performance for dollar value of transactions in calendar year 2001 along

with an inconsistent track record for obtaining required documentation for client service hours. For calendar year 2002, we

questioned one claimed strategic partnership, but this would not

have been significant enough to impact the center’s performance

rating.

Though the recipient substantially complied with uniform administrative requirements and federal cost principles for both budget

periods, it could not produce the required support for 2002 inkind contributions, which caused us to question $4,385 in claimed

costs and recommend the government recover $2,428 in federal

funds. As with California, we recommended that the grants officer disallow questioned costs, recover the federal share, and require the recipient to establish procedures to properly claim inkind contributions. (Seattle Regional Office of Audits: STL-15885-

4-0002)

Minority Business Development Agency
March 2004/Semiannual Report to Congress 29

The

National Oceanic

and Atmospheric

Administration studies climate

and global change; ensures the protection of coastal oceans and the management of marine resources; provides

weather services; and manages worldwide

environmental data. NOAA does this through the

following organizations:

National Weather Service reports the weather of the

United States and provides weather forecasts and

warnings to the general public.

National Ocean Service issues nautical charts; performs

geodetic surveys; conducts research; and develops

policies on ocean mining and energy.

National Marine Fisheries Service conducts a program

of management, research, and services related to the

protection and rational use of living marine resources.

National Environmental Satellite, Data, and Information Service observes the environment by operating a

national satellite system.

Office of Oceanic and Atmospheric Research

conducts research related to the oceans and inland

waters, the lower and upper atmosphere, space

environment, and the Earth.

Office of Marine and Aviation Operations

operates NOAA’s ships and aircraft and

provides NOAA programs with

trained technical and management

personnel from the nation’s

seventh uniformed

service.

NOAA CORPS DID NOT FOLLOW SENATE

CONFIRMATION PROCESS FOR AT LEAST

2 DECADES

NOAA Corps—the smallest of the seven U.S. uniformed services—consists of

approximately 260 commissioned officers led by a rear admiral. Established in

1970, the Corps serves all five NOAA line offices and various other federal

agencies.

Like other uniformed services, NOAA Corps is required by statute to

obtain Senate confirmation15 for officer appointments and promotions.

However, it came to light in early 2003 that the Corps had been appointing and promoting officers before and in some cases without

ever receiving the requisite approvals. NOAA’s General Counsel

examined appointments and promotions made during 1999 through

April 2003, and issued a report on May 1, 2003, that examined the

process of appointments and promotions from the mid-1990s onward. The Department’s Office of General Counsel (OGC) developed a list of unconfirmed appointments and promotions for the

period of October 1999 through February 2003.

Subsequent to these actions, we received House and Senate requests

to conduct an independent review of NOAA Corps’ confirmation

process. In summary, we found a culture of management indifference toward statutory and procedural detail at NOAA Corps that dated

back to at least the mid-1980s, which is as far back as we went in our

review. Our specific findings are as follows:

NOAA Corps Has Failed to Consistently Seek and Obtain Senate Confirmation for Appointments and Promotions Since at Least 1986.Thirtyone percent (137 of 435) of original appointments to NOAA Corps between

1986 and 2003 were never confirmed by the Senate. In addition, 65 (24 percent) of 270 appointments were confirmed after the statutory deadline for confirmation. The law requires that when the deadline passes, unconfirmed temporary

appointments be terminated.

Neither did the Corps obtain proper Senate confirmation for 705 of 938 promotions (75 percent)

made between 1986 and the present. Of that total, 454 were confirmed after promotion to a permanent

position had been conferred, and 251 were never confirmed at all.

We found no discernable pattern in the Corps’ timing of nominee submissions for confirmation—sometimes it was within required

deadlines, many times it was not. But we noted several factors that contributed to the Corps’ noncompliance with statutory requireNATIONAL OCEANIC

AND ATMOSPHERIC

ADMINISTRATION

15 Including nomination of candidates by the President.
30 March 2004/Semiannual Report to Congress

ments: (1) responsible Corps officials apparently viewed the confirmation process as pro forma and did not take it seriously; (2) no

internal controls were in place to prevent unconfirmed candidates

from being appointed or promoted to permanent positions and no

operations manual existed to help ensure compliance with the statute; and (3) neither NOAA management nor the Department provided the necessary oversight to ensure that the Corps complied

with statutory mandates.

NOAA Corps Exceeded its Authority for Appointing Temporary Ensigns, Reappointing Former Corps Officers, and Accepting Interservice Transfers. Since 1986, the Corps has appointed 390 new recruits to temporary positions as ensigns without required Secretarial approval; (2) reinstated former Corps officers at ranks higher than permitted; and (3) allowed officers from

other U.S. uniformed services to transfer to the Corps (“interservice

transfers”) without the necessary action by the Secretary of Commerce and approval from the President.

RECOMMENDATIONS AND AGENCY

RESPONSE

We made several recommendations designed to establish accountability among appropriate officials for ensuring that Corps appointments and promotions are handled in accordance with statutory requirements and internal regulations and procedures. NOAA

concurred with our recommendations, and in implementing them,

will bolster the corrective actions we noted in process at the time

of our review: for instance, OGC has been working closely with

the Corps to bring its internal regulations in line with statutory

requirements and develop a procedures manual. In addition, the

Department’s Office of Human Resources Management plans to

more actively monitor NOAA Corps’ human resources function,

review and approve future personnel policies and procedures, and

clear all NOAA Corps appointments and promotions. (Office of

Inspections and Program Evaluations: IPE-16138)

National Oceanic and Atmospheric Administration

Unconfirmed

promotions identified

by OIG over and

above those identified

by Commerce OGC

and certified by the

NOAA Corps

Unconfirmed

promotions

identified by

Commerce OGC

and certified by

the NOAA Corps

40

35

30

25

20

15

10

5

0

1986 1988 1990 1992 1994 1996 1998 2000 2002

NOAA CORPS PROMOTIONS THAT DID NOT RECEIVE

SENATE CONFIRMATION (1986–2003)

BETTER DATA QUALITY,

PERFORMANCE

MONITORING, AND

OUTREACH NEEDED FROM

NMFS OBSERVER PROGRAMS

In fulfilling its responsibilities for protecting and managing marine resources, the National Marine Fisheries Service (NMFS) has

since the 1970s placed “observers” on fishing vessels to collect

catch and bycatch data, as well as information on marine mammal interactions and a variety of other areas. Over the years, the

practice evolved into a loose network of observer programs developed by regional agency components to meet local scientific

and resource management needs. All but one of the programs uses

observers supplied by private entities under contract to NMFS.

More than 500 observers are currently deployed in 14 observer

programs, most of which are administered through NMFS’ regional fisheries science centers (FSCs).

To promote coordination among the programs, NMFS established

the National Observer Program Office in 1999 to support their

activities and increase their usefulness to the agency’s overall goals.

We reviewed seven observer programs (see box) to determine

whether they are meeting users’ data collection needs, how NMFS

ensures data quality, and how well the program’s missions and

objectives are communicated to stakeholders.

FINDINGS AND RECOMMENDATIONS

Best practices for improving data quality should be shared.

Many practices at work in individual programs may be applicable

to the other observer programs. For example, some programs use

at-sea communications systems and portable computers to capture

and communicate observer data more quickly, efficiently, and accurately. Some have added data fraud detection and prevention

capabilities to their observer debriefing and data quality assurance
March 2004/Semiannual Report to Congress 31

ships that have willingly accepted them in the past, rather than

approaching new ships and thus obtaining a more representative

sample of data.

NMFS needs to take actions to keep an experienced corps of

observers. Observer programs worldwide report that maintaining a qualified observer corps is key to collecting quality data.

But building a qualified corps takes time, as observers learn their

duties and adapt to the rigors of a hazardous work environment.

High turnover rates in NMFS observer programs impede efforts

to develop an experienced observer corps, increase training costs,

and adversely affect data quality and reliability. NMFS is reviewing its recruitment practices, a step in the right direction, but needs

to take action to improve retention, perhaps by enhancing training

and advancement opportunities.

Program-wide performance measurement would improve regional accountability.The regional programs we reviewed lacked

comprehensive, consistent performance measures, and thus accountability for outcomes. Accountability is further compromised

by NMFS’ overall organizational structure for these programs,

which supports independent regional operations and lacks clear

reporting relationships with headquarters. Although creation of

the National Observer Program and a National Observer Program

Advisory Team improved communications between headquarters

and the regions, national priorities and performance measures for

observer programs would ensure better regional accountability.

NMFS needs to develop program-wide performance measures as

well as a reporting mechanism to facilitate monitoring, enhance

program outcomes, and ensure accountability for and dissemination of program results.

NMFS should also restructure contracts with observer providers

to make them performance based and include objective criteria

for assessing outcomes, where feasible. The Southeast and Northeast science centers have taken steps to incorporate some performance-based elements. The remaining centers should do the same.

NMFS’ 14 REGIONAL

OBSERVER PROGRAMS

Alaska Regional Office, Juneau, AK

1. Alaska Marine Mammal

Alaska FSC, Seattle, WA

2. North Pacific and Bering Sea Groundfish Trawl

and Fixed Gear Fishery*

Northwest FSC, Seattle, WA

3. At-sea Pacific Hake

4. West Coast Groundfish*

Pacific Islands FSC, Honolulu, HI

5. Hawaii Swordfish-Tuna Longline

Southwest FSC, Long Beach, CA

6. California/Oregon Drift Gillnet

7. West Coast Pelagic Longline

Southeast FSC lab, Galveston, TX

8. Southeastern Shrimp Otter Trawl Fishery

Southeast FSC, Miami, FL

9. Southeastern FSC Pelagic Longline*

Southeast FSC lab, Panama City, FL

10. Southeastern FSC Shark Drift Gillnet

Northeast FSC, Woods Hole, MA

11. New England Groundfish*

12. New England and Mid-Atlantic Gillnet Fisheries*

13. Atlantic Sea Scallop Dredge Fishery/Georges

Bank*

Highly Migratory Species Division,

Silver Spring, MD

14. Atlantic and Gulf of Mexico Shark Bottom

Longline*

Source: NMFS

*Programs reviewed by OIG.

National Oceanic and Atmospheric Administration

processes. NMFS should explore the feasibility of adopting these

practices nationwide to improve data quality and program efficiency.

Improved oversight is needed to ensure that processes for assigning observers to ships result in unbiased, representative

data. Each observer program has a process for placing observers

on vessels that is supposed to ensure collection of a representative

data sample. Most of the programs we reviewed lacked internal

controls to ensure their sampling design was implemented correctly, and they all had problems that could bias the data. For example, in two programs run by the Northeast Science Center, observers—not the center—are responsible for finding and informing vessel captains that they are required to take an observer on

board, with the result that some observers repeatedly board those

Observer aboard fishing vessel examines catch.

Source: North Pacific Fisheries Observer Training Center
32 March 2004/Semiannual Report to Congress

A national outreach strategy is needed to better communicate

the mission and goals of the observer program to industry.

NMFS fisheries management activities have come under increasing criticism from Congress, agency advisory groups, environmentalists, and the fishing industry in recent years. Some attribute

these problems to NMFS’ failure to share information and effectively interact with public constituents and stakeholders. These

problems—and the lack of understanding among industry that may

have resulted—could be at the root of industry antipathy toward

the observer program and the reason why some refuse to cooperate. NMFS needs to develop a consistent and unified national outreach strategy that informs and educates, provides opportunities

for personal contacts with fishing industry representatives, and

establishes a forum for stakeholders to voice their concerns about

the program and be heard.

AGENCY RESPONSE

NMFS and NOAA concurred with our recommendations, but expressed concern about their applicability across all observer programs. We believe that, regardless of regional or program differences, our recommendations may be generally applicable to all.

(Office of Inspections and Program Evaluations: IPE-15721)

$3.6 MILLION DISCREPANCY

IN NOAA’S ACCOUNTING OF

PERSONAL PROPERTY AT

RADAR OPERATIONS CENTER

The Radar Operations Center (ROC), a component of NOAA’s

National Weather Service, supports the operation of 166 weather

surveillance radars (WSR-88D) deployed by the Departments of

Commerce, Defense, and Transportation. The ROC’s fiscal year

2002 budget was nearly $13 million, half of which was provided

by Commerce.

Our audit of the ROC’s property management records for FY 2002

was prompted by (1) weaknesses in NOAA’s accounting for personal property noted in the Department’s financial statements audit, and (2) an anonymous complainant’s charge that the center’s

electronic maintenance team was missing equipment worth approximately $100,000. Although we were able to confirm that the

team had asked staff at radar sites to search for and return any

equipment left by center technicians, we could not prove or disprove the $100,000 loss of property because the anonymous complainant did not specify what property was missing. We did, however, find numerous weaknesses both in the ROC’s and NOAA’s

procedures and record keeping for personal property. In addition

to NOAA’s agencywide personal property system, the ROC maintains its own supplemental property accounting system. Our findings were as follows:

Comparison of property records maintained by NOAA and

the ROC revealed 442 records that did not match. The table

below shows our comparison of NOAA’s and the ROC’s property

databases. The ROC’s property data in its in-house integrated property management system (IPM) contained 1,699 records, while

NOAA’s personal property system (PPS) and its replacement Sunflower system16 contained 1,399. We found that 442 records appeared in only one or the other database, and that the total acquisition cost of the inventory in IPM exceeded that of PPS by nearly

$3.6 million.

In addition, we could only match 51 percent of the total records in

both systems (3,098) by serial number, identified 62 records that

had no serial numbers and 6 with duplicate numbers, and found

discrepancies in asset valuation for 598 records.

Personal Property Database Differences

Records in IPM but not PPS 371

Records in PPS but not IPM 71

Total unmatched records 442

Net unmatched records (1,699 – 1,399) 300

Physical inventory confirms data unreliability. During our check

of 133 ROC accountable property items shown in IPM, we only

found 101 items, or 76 percent, at locations noted in the data system. We initially could not find the remaining 32 items, but subsequently determined that 18 of them had been moved to off-site

storage or were donated to local schools. We could not determine

National Oceanic and Atmospheric Administration

16 The Sunflower system replaced PPS in November 2002.

Defense

23%

($3,369,900)

Transportation

26%

($2,899,900)

Commerce

51%

($6,479,600)

RADAR OPERATIONS CENTER FY 2002

BUDGET: $12.7M
March 2004/Semiannual Report to Congress 33

whether the other 14 were lost, stolen, or otherwise disposed of

because the ROC maintained no supporting documentation.

Inadequate internal controls over the ROC’s property management function increase risk of property loss.We found weaknesses in the ROC’s internal controls for property management,

some of which are noted below, that in some cases reflected ineffective departmental or NOAA policies and in other cases, the

ROC’s failure to follow appropriate procedures.

■ Separation of duties for property purchase, custody, and

management. NOAA guidance for property-related

duties encourage that they be handled by the property

custodian, a practice that makes it more difficult to

readily detect a loss. The ROC gave its property custodian responsibility for procuring, receiving, preparing

accounting documents, and certifying annual inventories.

■ Physical security. The ROC facilities had no secure

space for shipping and receiving; one storage facility

stored unused computers in an area that was fully visible

to passers-by. The NOAA handbook requires the property

accountability officer to safeguard items from misuse or

theft, however neither handbook provides specific

security guidance.

■ Procedures for lending and taking property off-site.

ROC technicians routinely take center tools and equipment

off-site to repair NOAA radars, but in some cases, the

center did not maintain checkout and check-in records for

the equipment. One branch kept such records, but did not

verify the condition or even the actual return of an item

when a user reported bringing it back; one branch did not

follow up on the status of equipment and tools that had

been checked out for more than a year. The Department’s

property management manual does not address procedures

for off-site property use. The NOAA handbook only

requires property custodians to ensure that loaned items

are returned when due; and neither the NOAA handbook

nor the handbook of the Mountain Administrative Support

Center (MASC) sufficiently addresses procedures for

increasing internal controls over an operation, like the

center, that routinely uses equipment off-site.

■ Documentation of transactions. Both the Department’s

manual and the NOAA handbook stipulate how the

receipt of personal property must be documented.

However, the ROC did not provide the required documentation, but simply noted the date of receipt on the

item’s purchase order.

■ Recording changes in PPS. The Department’s manual

requires that additions, transfers, and removals of

accountable personal property be noted in PPS in a

timely manner. Only staff from NOAA’s MASC and

Finance and Administration office can make such entries.

The average lag time for entry of the ROC’s property

transactions in FY 2002 was 98 days, reportedly because

of a backlog created by the high volume of transactions

from all entities for which MASC inputs data.

■ Property board review of missing items. NOAA’s

handbook requires property officers to convene a

property review board to determine the circumstances of

the loss, theft, or damage of an item. We found that

NOAA did not follow its own guidelines for appointing

members of this board.

RECOMMENDATIONS AND

AGENCY RESPONSE

We made numerous recommendations to resolve the weaknesses

we identified, including that the ROC submit accurate inventory

records to NOAA to correct the information currently in the Sunflower system, and that NOAA record the ROC’s personal property transactions in a timely manner.

NOAA generally concurred with our recommendations. (Seattle

Office of Audits: STL-15720)

NOAA’S USE OF

COOPERATIVE AGREEMENTS

TO SECURE SUPPORT

SERVICES WAS IMPROPER

In April 1998 and again in April 2001, NOAA awarded cooperative agreements to a nonprofit fisheries research organization that

together totaled $5.1 million; and in an intervening year—May

2000—it entered into a $3 million contract with the same organization. In each case, NOAA sought similar support services. We

conducted an audit to determine whether the use of both a cooperative agreement and a contract for what appeared to be essentially the same services was appropriate.

Federal law states that a procurement contract, not a cooperative

agreement, should be used by federal agencies when acquiring property or services that directly benefit the government. Our audit determined that the support services NOAA sought under both agreements directly benefited its own in-house research. Further, we

observed that NOAA appeared to treat the organization’s workers

as federal employees during the performance of both agreements.

For example, NOAA managers directed the work of organization

staff, and recommended them for monetary awards, raises, and

promotions. NOAA officials reported that the May 2000 contract

was similarly managed. We cautioned NOAA to take the necessary steps to (1) ensure the use of appropriate funding instruments

for all services provided by outside sources, and (2) administer all

such arrangements in a manner that avoids any appearance of a

personal services contract. (Seattle Office of Audits: STL-15753)

National Oceanic and Atmospheric Administration
34 March 2004/Semiannual Report to Congress

NONREPORT ACTIVITY

NATIONAL SCIENCE FOUNDATION AND

COMMERCE OIGS CONDUCT JOINT

AUDIT SURVEY OF NONPROFIT’S RISK

ASSESSMENT

The National Science Foundation (NSF) and Commerce OIGs

collaborated in reviewing the Internal Audit Risk Assessment &

Audit Plan Development prepared by nonfederal auditors for the

University Corporation for Atmospheric Research (UCAR)—a

nonprofit firm that operates a federally funded research and development center, predominately with NSF funding. Commerce’s

National Oceanic and Atmospheric Administration is UCAR’s

second largest federal contributor.

National Oceanic and Atmospheric Administration

The risk assessment and audit plan was designed to enable UCAR

to establish a continual process for gauging the vulnerability of

44 business functions that are critical to its sound administrative

and financial performance. The OIGs reviewed the plan and its

implementation to determine whether it (1) provided assurance

that UCAR was adequately managing federal programs and dollars, and (2) can be used as a model for other organizations operating federally funded research centers.

We jointly determined that the plan did not fully address UCAR’s

risks related to managing federal awards. Consequently, it does

not assure the adequacy of UCAR’s federal grants management

capabilities. Further, the plan does not develop a management structure necessary to implement the assessment process or to fully act

on its results.

The plan’s primary benefit was that it raised awareness of risk

management throughout UCAR, prioritized the risks facing the

organization, and determined the likelihood and impact of their

occurrence.

UCAR reviewed our survey findings, to which it responded that

risk assessment is an ongoing activity for the organization. UCAR

noted that it intends to conduct another assessment within the next

18 months and will use the audit survey to help shape and improve this next one.

The nonprofit University Corporation for Atmospheric

Research was formed in 1959 by a consortium of research universities that have doctoral programs in the

atmospheric and related sciences. UCAR operates the

National Center for Atmospheric Research—a federally

funded research and development center sponsored

and primarily funded by NSF. Commerce (through

NOAA), the Federal Aviation Administration, and NASA

also contribute significant funding.
March 2004/Semiannual Report to Congress 35

The

Technology

Administration

serves the needs of technology-based

industry, advocates federal actions and

policies to speed the transfer of technology

from the laboratory to the marketplace, and

removes barriers for commercializing new

technologies. It includes three major organizations:

Office of Technology Policy works to raise national

awareness of the competitive challenge, promotes

industry/government/ university partnerships, fosters

quick commercialization of research results, promotes

dedication to quality, increases industry’s access to and

participation in foreign research and development, and

encourages adoption of global standards.

National Institute of Standards and Technology

promotes U.S. economic growth by working to develop

and apply technology, measurements, and standards.

NIST manages four programs: the Advanced Technology

Program, the Manufacturing Extension Partnership

program, the Baldridge National Quality Program,

and NIST Laboratories.

National Technical Information Service is a

self-supporting agency that promotes the

nation’s economic growth and job creation

by providing access to information that

stimulates innovation and discovery. NTIS

accomplishes this mission through

information collection and dissemination

to the public and through information

and production services to

federal agencies.

UNDOCUMENTED PATENT LICENSE

AGREEMENT PROCESS MAY LEAVE

INTERESTS OF NIST UNPROTECTED

In March 2003, the National Institute of Standards and Technology asked OIG to

audit a license agreement between itself and a private sector firm. The original

agreement had been negotiated in 1988 by the National Technical Information Service—which at the time had authority to negotiate and administer

all such agreements on behalf of the federal government. NIST assumed

responsibility for its own agreements in 1995.

We initiated a two-part review: first looking at NIST’s patent licensing agreement process to understand how the agency manages these

agreements and to assess its internal controls on the process; then

looking at the specific agreement and associated records. We detailed our findings regarding the agreement in a July 2003 memo

to NIST officials, and in a full report, presented the following

findings regarding the overall process:

Key steps in the patent licensing process are not documented.

Although NIST’s administrative manual provides written guidance for issuing patent license agreements, there are no written

policies and procedures to explain how the agreements are to be

monitored once they have been negotiated and signed. As a result,

there is a general lack of understanding of and accountability for

the monitoring process among NIST personnel, and thus no assurance that licensees are complying with an agreement’s terms and

conditions or that patented technology is being protected.

Reporting requirements are not met by licensees or enforced by

NIST. In the case of the specific agreement at issue, we found instances

in which the company was late in remitting required royalty and maintenance payments, submitted incomplete and untimely activity reports, and sometimes submitted no reports at all. Yet NIST officials did not contact the licensee

in a timely manner regarding missing payments, information, or reports. We found

evidence of these problems with other agreements in the files we reviewed, and noted

that NIST officials do not routinely read submitted reports and are therefore unaware of

any inadequacies or the need for follow-up.

License agreement language undermines NIST’s oversight authority. We found that the standard

terms and conditions in license agreements lack specificity and hinder NIST’s ability to oversee licensee compliance and collect proper fees. For example, the agreement that prompted the complaint requires the licensee to file semiannual reports

detailing product development, sales information, and maintenance and royalty fees due, and to submit these payments with the reports.

However, there is no requirement that the licensee certify the report’s accuracy—a key step in establishing accountability. In addition,

the licensee has the right to approve NIST’s choice of accountants to inspect report- and payment-related records, and need only retain

TECHNOLOGY

ADMINISTRATION
36 March 2004/Semiannual Report to Congress

such records for 2 years. We noted that NIST could have changed

these terms, which were part of the original 1988 agreement, when

it modified the agreement in 1997.

RECOMMENDATIONS

To address the deficiencies we identified in the licensing agreement process, we recommended that NIST

■ develop and document formal policies and procedures

that outline the purpose, objectives, roles, responsibilities, and key milestones for the patent license agreement

process;

■ review and update, as necessary, the standard clauses in

its license agreement template to ensure full protection of

NIST and inventor interests;

■ when modifying existing patent license agreements,

examine the entire document to ensure that the interests

of both NIST and the inventor are protected throughout,

and revise any portions that do not do so.

NIST officials concurred with our recommendations and are taking action to implement them. (Office of Audits: STD-16009)

QUESTIONED COSTS OF

$852,869 RESULT FROM

GRANTEE’S INADEQUATE

FINANCIAL MANAGEMENT

SYSTEMS

In September 2001, NIST awarded a $2 million ATP cooperative agreement to a Utah firm for development of a prototype

digital electric motor to increase the efficiency and range of vehicles powered by electricity. Total costs for the 2-year project

are $2.6 million, with the federal share not to exceed $1,999,447

of eligible costs. As of March 31, 2003, the recipient had claimed

project costs of $1,873,678 and requested reimbursement of

$1,683,080.

Our interim financial and compliance audit of the project’s initial

18 months (October 2001 through March 2003) found that the

recipient’s accounting and financial management system failed to

meet federal requirements in that it could not provide details of

project expenditures by line item or document claimed costs. We

were only able to verify salaries and a portion of fringe benefit

costs from records provided by the recipient’s payroll processing

contractor, totaling $1,020,809, and therefore questioned the remaining claims for $852,869.

As a result, we recommended that NIST disallow the questioned

amount and recover $746,181 in excess federal disbursements.

(Denver Regional Office of Audits: DEN-16157)

AUDIT OF NTIS’ FY 2003

FINANCIAL STATEMENTS

NTIS’ track record of strong financial management continued in

FY 2003, as the agency again received an unqualified opinion on

its financial statements, showed no material weaknesses, and fully

complied with related financial management laws and regulations.

ASSESSMENT OF IT CONTROLS

The related assessment of information technology controls supporting NTIS’ financial management systems found that the agency

had fully resolved 12 of 14 weaknesses identified in FY 2002,

while 2 remained open. These were in areas of security planning

and change control. The auditors also identified a new weakness

in access controls as well as one in service continuity. (Financial

Statements and Audits Division: FSD-16073 and 16074)

AUDITS UNRESOLVED FOR

MORE THAN 6 MONTHS

MASSACHUSETTS MEP

Our September 2003 Semiannual Report (page 34) detailed our

audit of the costs claimed by a nonprofit recipient under an MEP

cooperative agreement for the period of March 17, 2000, through

June 30, 2001. We recommended that NIST disallow questioned

costs of $8,177,606, recover the federal share of $1,599,349, and

require the recipient to implement improvements to its financial

reporting system.

We are currently reviewing the audit resolution proposal submitted by NIST.

TEXAS MEP

Also in our September 2003 issue (page 34) we reported the findings of our interim audit of an MEP cooperative agreement with a

Texas engineering service that is a component of a state university. We recommended that NIST (1) disallow the questioned costs

of $1,954,279 and seek recovery of the resulting $771,555 in excess federal disbursements; (2) require the recipient to adjust subTechnology Administration
March 2004/Semiannual Report to Congress 37

sequent financial reports to eliminate these questionable items,

and (3) direct the recipient to prepare financial analyses by award

budget categories and obtain required approvals for award budget

deviations. Implementation of our recommendations will result

in $3,360,000 in funds being put to better use during the remainder of the cooperative agreement.

We are currently evaluating NIST’s audit resolution proposal.

APELON, INC., CONNECTICUT

An OIG desk review of this NIST ATP program-specific audit

(September 2003 issue, page 55) questioned a total of $25,417,

based on the recipient exceeding a line-item budget allowance

without approval from the NIST grants officer. In addition, we

found that the recipient received excess funds from NIST amounting to $36,928, and identified these as funds to be put to better

use. We are engaged in ongoing discussions with the recipient,

the auditor, and NIST to resolve the audit.

Technology Administration
38 March 2004/Semiannual Report to Congress

The

United

States Patent

and Trademark Office

administers the nation’s

patent and trademark laws.

Patents are granted and

trademarks registered under a

system intended to provide

incentives to invent, invest in

research, commercialize new

technology, and draw attention

to inventions that would

otherwise go unnoticed.

USPTO also collects,

assembles, publishes, and

disseminates technological

information disclosed

in patents.

AUDIT OF USPTO’S FY 2003 FINANCIAL

STATEMENTS

USPTO received an unqualified opinion on its FY 2003 financial statements—the 11th consecutive year for this accomplishment. The audit determined the agency’s internal control over

financial reporting was free of defect and in full compliance with laws and regulations.

ASSESSMENT OF IT CONTROLS

The auditors reviewed USPTO’s IT controls against the six criteria outlined in GAO’s

Federal Information System Controls Audit Manual (FISCAM)—entitywide security program planning and management; access controls; application software development and

change control; system software; segregation of duties; and service continuity. USPTO

had fully resolved 10 of 11 weaknesses identified in last year’s audit. The remaining

weakness is in the area of service continuity. The FY 2003 audit reported four deficiencies in access control and five in entitywide security program planning and management.

(Financial Statements and Audits Division: FSD-16075 and 16076)

UNITED STATES PATENT AND

TRADEMARK OFFICE
March 2004/Semiannual Report to Congress 39

The

United States

Department of

Commerce promotes job

creation and improved living

standards for all Americans by

creating infrastructure that fosters

economic growth, technological

competitiveness, and sustainable

growth. The Department has three

strategic goals:

Goal 1: Provide for information and

the framework to enable the economy to

operate efficiently and equitably.

Goal 2: Provide infrastructure for

innovation to enhance American

competitiveness.

Goal 3: Observe and manage the

Earth’s environment to promote

sustainable growth.

The Department has also established

a Management Integration Goal that

is equally important to all bureaus:

Strengthen management

at all levels.

AUDIT OF DEPARTMENT’S FY 2003

CONSOLIDATED FINANCIAL STATEMENTS

The Department received an unqualified opinion on its consolidated statements for

FY 2003 and resolved many of the weaknesses reported in the FY 2002 audit: last

year, the independent auditors noted problems in the Department’s internal control over financial reporting that together constituted a material weakness: (1)

general IT controls were deficient in all six FISCAM areas; (2) automated

budgetary controls were not in place on legacy systems operated by NOAA

and NIST; and (3) Commerce still did not comply with OMB’s requirement for a single, integrated financial management system. This year,

the auditors noted significant progress in these three areas and determined that remaining deficiencies—though still constituting a reportable condition17—were not serious enough to be considered a material weakness.

IT controls. The auditors found IT controls in all six FISCAM

areas had improved, but noted lingering weaknesses throughout

the Department in entitywide security, and deficiencies at select

bureaus in the following areas: access controls, application software development and change control, system software, segregation of duties, and service continuity.

Automated budgetary controls. Lack of these controls was noted

at both NOAA and NIST last year. In FY 2003, NOAA used CAMS

as its system of record, and CAMS provides automated budgetary

controls. NIST implemented CAMS at the beginning of FY 2004 and

thus can utilize the automated budgetary control feature for FY 2004.

Integrated financial management. NOAA and NIST were also responsible for the Department’s FY 2002 noncompliance with OMB’s requirement for a single, integrated financial management system. NOAA and the

one bureau whose financial transactions it processes account for 59 percent of

the Department’s consolidated assets. NIST and the bureaus it processes account

for 13 percent. With NOAA’s conversion to CAMS, the Department became substantially compliant with the OMB requirement.

FY 2002 reportable condition. Commerce also resolved the FY 2002 reportable condition

pertaining to NOAA’s personal property accounting. While the auditors noted some minor remaining issues, they found that NOAA had either fully rectified or substantially improved processes for hanDEPARTMENT-WIDE

MANAGEMENT

17 Material weaknesses are serious flaws in the design or operation of an internal control component that increase the risk that errors, fraud, or noncompliance in material amounts may occur and not be readily detected. Reportable conditions are significant deficiencies in the design or operation of an

internal control component that could adversely affect the organization’s ability to record, process, summarize, and report financial statement data.
40 March 2004/Semiannual Report to Congress

dling construction work in progress, procedures for reconciling

personal property balances with the general ledger, and controls

over accounting for personal property leases.

COMPLIANCE WITH LAWS AND

REGULATIONS

Compliance testing of the Department’s financial management

procedures and systems showed improvement in one area and remaining deficiencies in two others:

Federal Financial Management Improvement Act (FFMIA)

of 1996. Because the auditors determined that a material weakness in internal control over financial reporting no longer existed,

the Department for the first time had no instances in which its

financial management systems did not substantially comply with

FFMIA.

OMB Circular A-11, Preparation, Submission, and Execution

of Budget. The Department was noncompliant with the circular

on two counts: (1) as in prior years, NOAA did not fully fund

capital leases, which means that its FY 2002 budget did not allow

for sufficient funding to cover present value for capital lease payments and purchases; (2) NIST’s legacy accounting system did

not include budgetary control features to prevent the overobligation

of funds. (As noted earlier, NIST implemented CAMS at the beginning of FY 2004 and therefore now has such budgetary controls.)

OMB Circular A-25, User Charges. Also as in prior years, ITA

did not recover the full cost of the goods and services it provided

to customers. (See discussion of ITA user fee issue on page 25.)

(Financial Statements and Audits Division: FSD-16071 and 16072)

PREAWARD FINANCIAL

ASSISTANCE SCREENING

As part of our ongoing emphasis on prevention of fraud, waste,

and abuse, we continue to work with the Office of Acquisition

Management, NOAA and NIST grant offices, and EDA program

offices to screen the Department’s proposed grants and cooperative agreements before they are awarded. Our screening serves

two functions: it provides information on whether the applicant

has unresolved audit findings and recommendations on earlier

awards, and it identifies any negative financial or investigative

history on individuals or organizations connected with a proposed

award.

On January 1, 2004, we implemented new policies and procedures for our preaward screening process. OIG and the Department determined that there are several categories of recipients for

whom the costs and administrative burden of the screening process may well outweigh the government’s risk of financial loss.

Our new policies exempt from review recipients who (1) receive

awards in amounts of $100,000 or less; (2) have received financial assistance from the Department for 3 or more consecutive

years without any adverse program or audit findings; or (3) are

units of a state or local government.

During this period we screened 347 proposed awards. For 41 of

the awards, we found major deficiencies that could affect the ability of the prospective recipients to maintain proper control over

federal funds. On the basis of the information we provided, the

Department delayed 16 awards and established special award conditions for 25 awards. (Office of Audits)

PREAWARD SCREENING RESULTS

Award

Results Number Amount

Awards delayed to resolve concerns 16 $14,232,050

Special award conditions established 25 $27,521,389

NONFEDERAL AUDIT

ACTIVITIES

In addition to undergoing OIG-performed audits, certain recipients of Commerce financial assistance are periodically examined

by state and local government auditors and by independent public

accountants. OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, sets forth the audit requirements for most of these audits. For-profit organizations that

receive Advanced Technology Program funds from NIST are audited in accordance with Government Auditing Standards and NIST

Program-Specific Audit Guidelines for ATP Cooperative Agreements, issued by the Department.

We examined 216 audit reports during this semiannual period to

determine whether they contained any audit findings related to

Department programs. For 151 of these reports the Department

acts as oversight agency and monitors the audited entity’s compliance with OMB Circular A-133 or NIST’s program-specific reporting requirements. The other 65 reports are from entities for

Department-Wide Management
March 2004/Semiannual Report to Congress 41

which other federal agencies have oversight responsibility. We

identified 28 reports with findings related to the Department of

Commerce.

ATP

OMB ProgramA-133 Specific

Report Category Audits Audits Total

Pending (October 1, 2003) 24 59 83

Received 120 91 211

Examined 127 89 216

Pending (March 31, 2004) 17 61 78

The following table shows a breakdown, by bureau, of the nearly

$389 million in Commerce funds audited.

Bureau Funds

EDA $71,869,630

MBDA 346,307

NIST* 194,352,078

NOAA 16,863,007

NTIA 1,174,676

Multiagency 103,916,293

Agency not identified 156,704

Total $388,678,695

* Includes $168,214,873 in ATP program-specific audits.

We identified a total of $5,973,883 in questioned costs and

$4,275,037 in funds to be put to better use. In most reports the

subject programs were not considered major programs; thus the

audits involved limited transaction and compliance testing against

laws, regulations, and grant terms and conditions. The 28 reports

with Commerce findings are listed in Appendix B-1. (Atlanta and

Denver Regional Offices of Audits)

Department-Wide Management
42 March 2004/Semiannual Report to Congress

The

mission of the

Office of

Inspector General is to

promote economy, efficiency,

and effectiveness and detect and

prevent waste, fraud, abuse, and

mismanagement in the programs and

operations of the U.S. Department of

Commerce. Through its audits,

inspections, performance evaluations,

and investigations, OIG proposes

innovative ideas and constructive solutions

that lead to positive changes for the

Department. By providing timely, useful,

and reliable information and advice to

departmental officials, the administration,

and Congress, OIG’s work helps

improve Commerce management and

operations as well as its delivery of

services to the public.

OIG AUDIT OPERATIONS RECEIVE HIGH MARKS

FOR COMPLIANCE WITH STANDARDS

Every 3 years the quality controls over our audit function are evaluated by a colleague OIG

to determine whether they ensure that our work products conform with audit standards

issued by the Comptroller General of the United States. We in turn review the quality

control system of one of our peers.

During this semiannual period, the Federal Deposit Insurance Corporation’s OIG

conducted such a review of our Office of Audits, giving its quality control system

an unqualified opinion—the highest rating possible.

In forming its opinion, the FDIC team reviewed a number of completed performance and financial assistance audit reports, our financial statements audit

and monitoring activities, and operations at our headquarters and regional

offices.

OIG CONDUCTS QUALITY CONTROL REVIEW OF

USAID OFFICE OF INSPECTOR GENERAL

Our quality control review of the U.S. Agency for International Development’s

OIG, also conducted during this past reporting period, found that office’s audit

work and operations in material compliance with professional auditing standards

as well, and deserving of an unqualified opinion. We based our findings on an evaluation of audits (performance and financial) performed by both OIG and contract auditors, as well as the office’s financial statements audit and monitoring activities. We assessed operations at the OIG’s headquarters and two overseas offices. (Office of Audits:

DEN-16303)

HIGHLIGHTS OF OIG INVESTIGATIONS

OFFICE OF INVESTIGATIONS

The Office of Investigations (OI) consists of criminal investigators and technical support

personnel deployed at various Commerce OIG locations. OI criminal investigators investigate allegations of misconduct by employees, contractors, or grantees that may involve fraud, waste, abuse, or mismanagement in

the programs or operations of the Department. These investigations may result in criminal, civil, or administrative sanctions against

violators of federal law, Department regulations, or employee standards of conduct.

On December 8, 2003, the provisions of the Homeland Security Act of 2002 became fully effective and thus invested OI criminal

investigators with statutory law enforcement authority. Our investigators now have independent authority to carry firearms, make arrests, and execute search warrants.

OFFICE OF

INSPECTOR GENERAL
March 2004/Semiannual Report to Congress 43

During the first half of fiscal year 2004, OI established an investigative presence in Seattle, Washington, and Arlington, Virginia.

These offices have already produced significant investigative results and are expected to further expand their results and extend

their reach.

OI has initiated an aggressive program to police the criminal misuse of Department of Commerce computer and information technology resources. The rapid pace of change in IT equipment and

applications constantly creates new vulnerabilities in departmental resources and an extremely challenging environment for law

enforcement professionals in the areas of securing, retrieving, seizing, and examining evidence stored on computer systems.

SIGNIFICANT INVESTIGATIVE

ACTIVITIES DURING THIS

SEMIANNUAL PERIOD

This section details some of the outcomes of investigations and

resulting legal proceedings that occurred during this past semiannual period. These reflect a variety of cases—employee theft and

fraud, use of government equipment to access child pornography,

violations of departmental standards of conduct, to name a few—

as well as examples of our successful collaboration with Commerce officials, operating units, and law enforcement agencies to

ensure the integrity of Commerce programs and operations, protect Commerce personnel, and facilitate administrative remedies.

SENIOR OFFICIAL’S ACTIONS CREATED

THE APPEARANCE OF CONFLICT OF

INTEREST

OIG investigated allegations that a senior departmental official

had improperly used his position to direct a $1.4 million grant to

fund a major business and technology development project at a

university located in his hometown. The purported motive was to

enhance his position as a candidate for the university’s presidency,

as the funds allegedly provided personal benefit to a selection

committee member who sponsored the official’s nomination.

Our investigation disclosed no evidence that the official had used

his position to facilitate or otherwise affect the award of the grant

to the university. However, he did sign letters announcing the grant

award to the university president and to other interested parties, in

violation of his previous recusal from matters involving his hometown. He also authorized the presidential search committee to

consider his candidacy shortly after the grant was awarded. These

activities created the appearance of a conflict of interest in violation of the Standards of Ethical Conduct.

As a result of our investigation, the official was instructed by the

Deputy Secretary to meet with the Department’s ethics counsel to

review his responsibilities under the Standards of Conduct to avoid

matters that might create even the appearance of impropriety. In

addition, the agency was directed to ensure that its regional officials were made aware of the terms of the official’s recusal, and

are notified of all relevant disqualifications of headquarters officials. (Washington Field Office)

RLF ADMINISTRATORS PLEAD GUILTY TO

ILLEGAL DIVERSION OF EDA GRANT

FUNDS

In our March 2003 Semiannual Report (page 39), we reported

that four local officials in Massachusetts were indicted for misuse

of EDA and other federal grant funds administered by a municipal economic development organization. Among other things, the

organization operated an EDA-funded revolving loan fund and a

Small Business Administration loan program. The organization

had been established to administer a low-interest loan fund to promote additional capital investment and job creation in the municipality. On March 22, 2004, two of the four administrators pleaded

guilty in U.S. District Court for the District of Massachusetts to

multiple counts of the indictment, including program fraud, conspiracy, and money laundering. Sentencing is scheduled for June

and July 2004. Trial for the remaining two defendants commenced

in March 2004. (Washington Field Office)

OFFICE OF THE SECRETARY TIMEKEEPER

INDICTED FOR CLAIMING AND

RECEIVING UNEARNED OVERTIME PAY

In our September 2003 Semiannual Report (page 44) we reported

the results of our investigation into alleged fraud by a timekeeper

in the Office of the Secretary (O/S): the employee was arrested

after we determined that she had obtained approximately $3,300

by claiming overtime hours she never worked. In January 2004,

she was indicted in the Superior Court for the District of Columbia on one felony count of theft and one felony count of fraud.

Trial is scheduled for May 2004. As a result of this investigation,

O/S issued a new time and attendance policy that requires additional supervisory review to prevent similar future misconduct.

(Washington Field Office)

PHONY PAYROLL ACCOUNT RESULTS IN

INDICTMENT OF FORMER CENSUS

ASSISTANT FIELD MANAGER

An OIG investigation disclosed that a former Census assistant field

manager had created a payroll account in the name of another

former employee and had $12,268 in paychecks to the employee

sent to her own post office box. The manager forged endorsements on the checks and deposited them into her personal bank

account. In February 2004, the former assistant manager was indicted for theft in U.S. District Court for the Western District of

Michigan. (Arlington Resident Office)

Office of Inspector General
44 March 2004/Semiannual Report to Congress

FORMER CENSUS PAYROLL SUPERVISOR

SENTENCED FOR ISSUING AND CASHING

FRAUDULENT PAYCHECKS

As reported in our September 2003 Semiannual Report (page 44),

a former Census payroll supervisor pleaded guilty to one count of

theft of government property in U.S. District Court for the Middle

District of North Carolina, after an OIG investigation disclosed

that she had issued fraudulent paychecks in the names of other

former Census employees and deposited them into bank accounts

belonging to her and her husband. In December 2003, she was

sentenced to 36 months’ probation, a $1,100 fine, and ordered to

make restitution to the Department in the amount of $1,617. (Silver Spring Resident Office)

FORMER INTERN INDICTED FOR

THREATENING NOAA EMPLOYEE

A former NOAA intern was indicted in U.S. District Court for the

District of South Carolina on one count of interstate communication of a threat, after a joint OIG-FBI investigation disclosed that he

had sent an e-mail from Virginia to a NOAA employee in South

Carolina, in which he threatened the employee with bodily harm.

The former intern contended that he sent the threatening message

because the NOAA employee had treated him abusively and was

responsible for termination of the internship. (Atlanta Field Office)

NIST SCIENTIST RESIGNS AMID

CHARGES OF ACCESSING

PORNOGRAPHY ON GOVERNMENT

COMPUTERS

Computer forensics were key to our investigation into allegations

that a NIST research scientist had used government computers to

access child pornography. The employee admitted misusing government equipment, but denied accessing child pornography. He

was immediately placed on administrative leave by NIST, pending the outcome of our investigation, which is ongoing. He subsequently resigned from federal service. (Washington Field Office)

USPTO EMPLOYEE TERMINATED

FOLLOWING FRAUD CONVICTION

Our September 2003 issue (page 44) detailed an OIG investigation that resulted in the conviction of a former USPTO employee

for fraudulent use of a fellow employee’s social security number

to illegally obtain several credit cards. In October 2003, the individual was officially terminated from his position at USPTO. (Silver Spring Resident Office)

INVESTIGATIVE STATISTICAL

HIGHLIGHTS FOR THIS PERIOD

Criminal Investigative Activities

Arrests 1

Indictments and informations 3

Convictions 2

Personnel actions 6

Fines, restitutions, judgments, and

other civil and administrative recoveries $2,803

Allegations Processed

Accepted for investigation 31

Referred to operating units 55

Evaluated but not accepted for investigation or referral 11

TOTAL 97

Office of Inspector General
March 2004/Semiannual Report to Congress 45

STATISTICAL OVERVIEW

TABLES PAGE

1. Audit Resolution Follow-Up ....................................................................................................................................................... 45

2. Audit and Inspection Statistical Highlights for this Period ......................................................................................................... 46

3. Audits with Questioned Costs ..................................................................................................................................................... 46

4. Audits with Recommendations that Funds Be Put to Better Use................................................................................................ 47

APPENDIXES

A. Report Types this Period ............................................................................................................................................................ 47

A-1. Performance Audits ......................................................................................................................................................... 48

A-2. Financial Assistance Audits ............................................................................................................................................ 49

A-3. Financial Statements Audits ............................................................................................................................................ 50

A-4. Inspections and Systems Evaluations .............................................................................................................................. 51

B. Processed Audit Reports ............................................................................................................................................................ 52

B-1. Processed Reports with Audit Findings ........................................................................................................................... 53

TABLES AND STATISTICS

AUDIT RESOLUTION AND

FOLLOW-UP

The Inspector General Act Amendments of 1988 require us to

present in this report those audits issued before the beginning of

the reporting period (October 1, 2003) for which no management

decision had been made by the end of the period (March 31, 2004).

Three NIST audit reports remain unresolved for this reporting

period (see page 45).

Department Administrative Order 213-5, Audit Resolution and

Follow-up, provides procedures for management to request a modification to an approved audit action plan or for a financial assistance recipient to appeal an audit resolution determination. The

following table summarizes modification and appeal activity during the reporting period.

TABLE 1. AUDIT RESOLUTION FOLLOW-UP

Report Category Modifications Appeals

Actions pending

(October 1, 2003) 0 21

Submissions 0 4

Decisions 0 16

Actions pending

(March 31, 2004) 0 9
Office of Inspector General

46 March 2004/Semiannual Report to Congress

TABLE 2. AUDIT AND INSPECTION

STATISTICAL HIGHLIGHTS FOR THIS

PERIOD

Questioned costs $6,906,613

Value of audit recommendations that

funds be put to better use 6,603,432

Value of audit recommendations

agreed to by management 6,260,532

Value of inspection recommendations

that funds be put to better use 16,088

DEFINITIONS OF TERMS USED IN THE

TABLES

Questioned cost: a cost questioned by OIG because of (1) an

alleged violation of a provision of a law, regulation, contract, grant,

cooperative agreement, or other agreement or document governing the expenditure of funds; (2) a finding that, at the time of the

audit, such cost is not supported by adequate documentation; or

(3) a finding that an expenditure of funds for the intended purpose

is unnecessary or unreasonable.

Unsupported cost: a cost that, at the time of the audit, is not

supported by adequate documentation. Questioned costs include

unsupported costs.

Recommendation that funds be put to better use: an OIG recommendation that funds could be used more efficiently if Commerce management took action to implement and complete the

recommendation, including (1) reductions in outlays; (2)

deobligation of funds from programs or operations; (3) withdrawal

of interest subsidy costs on loans or loan guarantees, insurance,

or bonds; (4) costs not incurred by implementing recommended

improvements related to Commerce, a contractor, or a grantee;

(5) avoidance of unnecessary expenditures identified in preaward

reviews of contracts or grant agreements; or (6) any other savings

specifically identified.

Management decision: management’s evaluation of the findings

and recommendations included in the audit report and the issuance of a final decision by management concerning its response.

TABLE 3. AUDITS WITH QUESTIONED COSTS

Report Category Number Questioned Costs Unsupported Costs

A. Reports for which no management decision had been

made by the beginning of the reporting period 19 $9,091,850 $1,610,513

B. Reports issued during the reporting period 30 6,906,613 3,599,467

Total reports (A+B) requiring a management decision

during the reporting period1 49 15,998,463 5,209,980

C. Reports for which a management decision was made

during the reporting period2 18 5,596,480 1,604,573

i. Value of disallowed costs 3,257,107 817,280

ii. Value of costs not disallowed 2,364,388 813,435

D. Reports for which no management decision had been

made by the end of the reporting period 31 10,401,983 3,605,407

1 Seven audit reports included in this table are also included among reports with recommendations that funds be put to better use (see table 4). However,

the dollar amounts do not overlap.

2

In Category C, lines i and ii do not always equal the total on line C because resolution may result in values greater than the original recommendations.
Office of Inspector General

March 2004/Semiannual Report to Congress 47

TABLE 4. AUDITS WITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

Report Category Number Value

A. Reports for which no management decision had been made by the

beginning of the reporting period 8 $13,675,585

B. Reports issued during the reporting period 8 6,603,432

Total reports (A+B) requiring a management decision during the reporting period1 16 20,279,017

C. Reports for which a management decision was made during the reporting period2 6 10,278,657

i. Value of recommendations agreed to by management 3,003,425

ii. Value of recommendations not agreed to by management 7,275,232

D. Reports for which no management decision had been made by the

end of the reporting period 10 10,000,360

1

Seven audit reports included in this table are also included in the reports with questioned cost (see table 3). However, the dollar amounts do not overlap.

2

In Category C, lines i and ii do not always equal the total on line C because resolution may result in values greater than the original recommendations.

APPENDIX A. REPORT TYPES THIS

PERIOD

Number of Appendix

Type Reports Number

Performance audits 4 A-1

Financial assistance audits 8 A-2

Financial statements audits 6 A-3

Inspections and systems evaluations 7 A-4

Total 25
Office of Inspector General

48 March 2004/Semiannual Report to Congress

APPENDIX A-1. PERFORMANCE AUDITS

Funds to

Be Put to

Report Title Report Number Date Issued Better Use

 Economic and Statistics Administration

Improvements Needed in the Reporting of

Performance Measures by the U.S. Census Bureau FSD-15990-4-0001 03/29/04 —

National Institute of Standards and Technology

NIST’s Patent License Agreement Process Needs Improvement STD-16009-4-0001 12/18/03 —

National Oceanic and Atmospheric Administration

NOAA Needs to Use Appropriate Funding Instruments to Acquire

Support Services for the Northwest Fisheries Science Center STL-15753-4-0001 01/12/04 —

Property Controls at the National Weather Service Radar

Operations Center Need Improvement STL-15720-4-0001 03/31/04
Office of Inspector General

March 2004/Semiannual Report to Congress 49

APPENDIX A-2. FINANCIAL ASSISTANCE AUDITS

Value of

Funds to Federal Federal

Date Be Put to Amount Amount

Report Title Report Number Issued Better Use Questioned Unsupported

Economic Development Administration

The Government of the District of

Columbia’s Department of Housing

and Community Development ATL-15984-4-0001 12/23/03 $1,772,666

City of Houston/Midtown

Redevelopment Authority, TX DEN-15908-4-0001 02/27/04 $112,990

Pease Development Authority, NH ATL-16544-4-0001 03/26/04 146,123

North Central Pennsylvania

Regional Planning & Development

Commission ATL-16512-4-0001 03/31/04 409,606

Minority Business Development Agency

Arizona Statewide Native

American Business Development

Center, Operated by the National

Center for Native American

Enterprise Development STL-15885-4-0001 12/22/03 8,579

California Statewide Native

American Business Development

Center, Operated by the National

Center for Native American

Enterprise Development STL-15885-4-0003 03/11/04 25,061

Northwest Native American

Business Development Center, WA,

Operated by the National Center for

Native American Enterprise

Development STL-15885-4-0002 3/26/04 3,337 3,337

National Institute of Standards and Technology

XiDEM, Inc., UT DEN-16157-4-0001 3/30/04 782,763 782,763
Office of Inspector General

50 March 2004/Semiannual Report to Congress

APPENDIX A-3. FINANCIAL STATEMENTS AUDITS

Report Title Report Number Date Issued

National Technical Information Service

Financial Statements Fiscal Year 2003 FSD-16073-4-0001 12/12/03

Assessment of Information Technology Controls Supporting NTIS’

Financial Management Systems FY 2003 Financial Statement Audit FSD-16074-4-0001 12/12/03

Office of the Secretary

Consolidated Financial Statements Fiscal Year 2003 FSD-16071-4-0001 12/11/03

Assessment of Information Technology Controls Supporting DOC’s

Financial Management Systems FY 2003 Financial Statement Audit FSD-16072-4-0001 12/15/03

United States Patent and Trademark Office

Financial Statements Fiscal Year 2003 FSD-16075-4-0001 12/01/03

Assessment of Information Technology Controls Supporting USPTO’s

Financial Management Systems FY 2003 Financial Statement Audit FSD-16076-4-0001 12/12/03
Office of Inspector General

March 2004/Semiannual Report to Congress 51

APPENDIX A-4. INSPECTIONS AND SYSTEM EVALUATIONS

Funds to Be

Put to

Report Title Report Number Date Issued Better Use

Bureau of Industry and Security

Deemed Export Controls May Not Stop the Transfer of

Sensitive Technology to Foreign Nationals in the U.S. IPE-16176 3/31/04 —

Annual Follow-Up Report on Previous Export Control

Recommendations, as Mandated by the National Defense

Authorization Act for Fiscal Year 2000 IPE-16178 3/31/04 —

International Trade Administration

Chicago USEAC Network is Generally Operating Well

But Needs to Improve Its Export Success Reporting IPE-16136 2/20/04 $16,088

Pacific Northwest USEAC Network Generally Operates Well,

But Export Success Reports Need More Management Scrutiny IPE-16507 3/31/04 —

Philadelphia USEAC Network Provides Good Service to Clients,

but Oversight and Export Success Reporting Need to be Improved IPE-16402 3/31/04 —

National Oceanic and Atmospheric Administration

NOAA Corps Has Improperly Handled Confirmation of Officer

Appointments and Promotions IPE-16138 2/27/04 —

NMFS Observer Programs Should Improve Data Quality,

Performance Monitoring, and Outreach Efforts IPE-15721 3/31/04 —
Office of Inspector General

52 March 2004/Semiannual Report to Congress

APPENDIX B. PROCESSED AUDIT REPORTS

The Office of Inspector General reviewed and accepted 216 audit reports prepared by independent public accountants and local,

state, and other federal auditors. The reports processed with questioned costs, recommendations that funds be put to better use, and/

or nonfinancial recommendations are listed in Appendix B-1.

Agency Audits

Economic Development Administration .......................................................................................................................................... 62

Minority Business Development Agency .......................................................................................................................................... 2

National Institute of Standards and Technology* .......................................................................................................................... 101

National Oceanic and Atmospheric Administration ........................................................................................................................ 20

National Telecommunications Information Administration .............................................................................................................. 4

Multiagency ..................................................................................................................................................................................... 18

Agency not identified ......................................................................................................................................................................... 9

Total ............................................................................................................................................................................................... 216

*Includes 89 ATP program-specific audits.
Office of Inspector General

March 2004/Semiannual Report to Congress 53

APPENDIX B 1. PROCESSED REPORTS WITH AUDIT FINDINGS

Value of

Funds to Federal Federal

Date Be Put to Amount Amount

Report Title Report Number Issued Better Use Questioned Unsupported

Economic Development Administration

Regional Development Funding

Corporation, PA ATL-09999-4-1659 02/18/04

State of Rhode Island ATL-09999-4-1746 03/18/04 $3,486,000

Operation Hope, Inc., CA ATL-09999-4-1714 03/31/04 $159,624

City of Hutchinson, KS ATL-09999-4-1748 03/31/04 4,860

Alabama State Port Authority ATL-09999-4-1802 03/31/04 696,000

National Institute of Standards and Technology

Cell Based Delivery, Inc., RI ATL-09999-3-1584 11/06/03 6,512 6,512

CIIMPLEX Consortium, c/o

IBM Corporation, NY DEN-09999-4-1414 12/03/03 190,874

BlueLeaf, Inc., CA DEN-09999-4-1244 12/11/03 268,086 249,855

MTI MicroFuel Cells, Inc., NY DEN-09999-4-1313 12/12/03 12,478

Merix Corporation, OR ATL-09999-4-1619 12/17/03 14,819 137,330

Planar Systems, Inc., OR DEN-09999-4-0984 12/22/03 336,484

Titan Technologies, CA DEN-09999-4-1488 01/08/04 41,199 37,183

Honeywell International, Inc., MN DEN-09999-4-1489 01/15/04 42,353

Asyst Technologies, Inc., CA DEN-09999-4-1491 01/22/04 75,587 4,934

Maxygen, Inc., CA DEN-09999-4-1399 01/27/04 31,988

Plug Power, Inc., NY DEN-09999-4-1493 01/29/04 97,114

StrikoDynarad Corporation, MI DEN-09999-4-1494 01/29/04 7,721

Asyst Technologies, Inc., CA DEN-09999-4-1492 01/30/04 19,153 47,421 30,795

Varian Medical System’s Ginzton

Technology Center, CA ATL-09999-4-1536 03/11/04 57,620 57,620
Office of Inspector General

54 March 2004/Semiannual Report to Congress

APPENDIX B 1. PROCESSED REPORTS WITH AUDIT FINDINGS (CONT’D.)

Value of

Funds to Federal Federal

Date Be Put to Amount Amount

Report Title Report Number Issued Better Use Questioned Unsupported

National Institute of Standards and Technology (cont’d.)

Honeywell International, Inc., MN ATL-09999-4-1663 03/11/04 128,912 128,912

Michigan Economic Development

Corporation ATL-09999-4-1671 03/18/04

Real-Time Innovations., CA DEN-09999-4-1401 03/18/04 29,892 29,892

Lightwave Microsystems Corp., CA DEN-09999-4-1408 03/18/04 209,494 15,505

Lilliputian Systems, Inc., MA ATL-09999-4-1820 03/25/04 240,353 119,396 119,396

PolyFuel, Inc., CA DEN-09999-4-1400 03/29/04 56,408 10,375

Minnesota Technologies, Inc. ATL-09999-4-1702 03/30/04 514,712 1,864,604 1,850,637

3M Company, MN ATL-09999-4-1502 03/31/04 1,080,175

National Oceanic and Atmospheric Administration

Cameron Parish Police Jury, LA ATL-09999-4-1775 03/31/04 271,751 271,751
March 2004/Semiannual Report to Congress 55

The Inspector General Act of 1978, as amended, specifies reporting requirements for semiannual reports. The requirements are listed

below and indexed to the applicable pages of this report.

Section Topic Page

4(a)(2) ......................................... Review of Legislation and Regulations ..................................................................................... 55

5(a)(1) ......................................... Significant Problems, Abuses, and Deficiencies ...................................................................14–41

5(a)(2) ......................................... Significant Recommendations for Corrective Action ...........................................................14–41

5(a)(3) ......................................... Prior Significant Recommendations Unimplemented ............................................................... 55

5(a)4 ............................................ Matters Referred to Prosecutive Authorities ......................................................................... 43–44

5(a)(5) and 6(b)(2) ...................... Information or Assistance Refused ....................................................................................... 43–44

5(a)(6) ......................................... Listing of Audit Reports ....................................................................................................... 45–54

5(a)(7) ......................................... Summary of Significant Reports ...........................................................................................14–41

5(a)(8) ......................................... Audit Reports—Questioned Costs ............................................................................................. 46

5(a)(9) ......................................... Audit Reports—Funds to Be Put to Better Use ......................................................................... 47

5(a)(10) ....................................... Prior Audit Reports Unresolved ................................................................................................. 56

5(a)(11) ....................................... Significant Revised Management Decisions.............................................................................. 56

5(a)(12) ....................................... Significant Management Decisions with which OIG Disagreed ............................................... 56

REPORTING REQUIREMENTS

4(A)(2): REVIEW OF LEGISLATION

AND REGULATIONS

This section requires the inspector general of each agency to review existing and proposed legislation and regulations relating to

that agency’s programs and operations. Based on this review, the

inspector general is required to make recommendations in the semiannual report concerning the impact of such legislation or regulations on the economy and efficiency of the management of programs and operations administered or financed by the agency or

on the prevention and detection of fraud and abuse in those programs and operations. Comments concerning legislative and regulatory initiatives affecting Commerce programs are discussed, as

appropriate, in relevant sections of the report.

SECTION 5(A)(3): PRIOR SIGNIFICANT

RECOMMENDATIONS UNIMPLEMENTED

This section requires identification of each significant recommendation described in previous semiannual reports for which corrective action has not been completed. Section 5(b) requires that the

Secretary transmit to Congress statistical tables showing the number and value of audit reports for which no final action has been
Office of Inspector General

56 March 2004/Semiannual Report to Congress

taken, plus an explanation of the reasons why recommended action has not occurred, except when the management decision was

made within the preceding year.

To include a list of all significant unimplemented recommendations in this report would be duplicative, costly, unwieldy, and of

limited value to Congress. Any list would have meaning only if it

explained whether adequate progress is being made to implement

each agreed-upon corrective action. Management updates the

Department’s Audit Tracking System annually, most recently as

of July 2003. Information on the status of any audit recommendations can be obtained through OIG’s Office of Audits.

SECTIONS 5(A)(5) AND 6(B)(2):

INFORMATION OR ASSISTANCE REFUSED

These sections require a summary of each report to the Secretary

when access, information, or assistance has been unreasonably

refused or not provided. There were no instances during this semiannual period and no reports to the Secretary.

SECTION 5(A)(10): PRIOR AUDIT REPORTS

UNRESOLVED

This section requires a summary of each audit report issued before the beginning of the reporting period for which no management decision has been made by the end of the reporting period

(including the date and title of each such report), an explanation

of why a decision has not been made, and a statement concerning

the desired timetable for delivering a decision on each such report. There were three NIST reports more than 6 months old.

SECTION 5(A)(11): SIGNIFICANT REVISED

MANAGEMENT DECISIONS

This section requires an explanation of the reasons for any significant revision to a management decision made during the reporting period. Department Administrative Order 213-5, Audit

Resolution and Follow-up, provides procedures for revising a

management decision. For performance audits, OIG must be consulted and must approve in advance any modification to an audit

action plan. For financial assistance audits, OIG must concur with

any decision that would change the audit resolution proposal in

response to an appeal by the recipient. The decisions issued on

the 16 appeals of audit-related debts were finalized with the full

participation and concurrence of OIG.

SECTION 5(A)(12): SIGNIFICANT

MANAGEMENT DECISIONS WITH WHICH

OIG DISAGREED

This section requires information concerning any significant management decision with which the inspector general disagrees. Department Administrative Order 213-5 provides procedures for elevating unresolved audit recommendations to higher levels of

Department and OIG management, including their consideration

by an Audit Resolution Council. During this period no audit issues were referred to the council.

Reporting Requirements
March 2004/Semiannual Report to Congress 57

ATP .......................................................................................................................................................... Advanced Technology Program

BEA ............................................................................................................................................................ Bureau of Economic Analysis

BIS ................................................................................... Bureau of Industry and Security (formerly Bureau of Export Administration)

CAMS ............................................................................................................................ Commerce Administrative Management System

CIO ..................................................................................................................................................................... chief information officer

CCL ...................................................................................................................................................................... Commerce Control List

COTR................................................................................................................................... contracting officers’ technical representative

ECASS ................................................................................................................................... Export Control Automated Support System

EDA ............................................................................................................................................ Economic Development Administration

ESA............................................................................................................................................ Economics and Statistics Administration

FFMIA ......................................................................................................................... Federal Financial Management Improvement Act

FISCAM ............................................................................................................................ Federal Information System Controls Manual

FISMA ............................................................................................................................. Federal Information Management Security Act

GPRA ..................................................................................................................................... Government Performance and Results Act

GWAC.................................................................................................................................................. government-wide agency contract

IG .................................................................................................................................................................................... inspector general

IT .......................................................................................................................................................................... information technology

ITA ...................................................................................................................................................... International Trade Administration

MAF ............................................................................................................................................................................. master address file

MASC ...................................................................................................................................... Mountain Administrative Support Center

MBDA ....................................................................................................................................... Minority Business Development Agency

MBOC ................................................................................................................................... Minority Business Opportunity Committee

MEP ................................................................................................................................................ Manufacturing Extension Partnership

ACRONYMS
Office of Inspector General

58 March 2004/Semiannual Report to Congress

NDAA ............................................................................................................................................... National Defense Authorization Act

NIST ............................................................................................................................... National Institute of Standards and Technology

NMFS .................................................................................................................................................. National Marine Fisheries Service

NOAA ........................................................................................................................ National Oceanic and Atmospheric Administration

NSF .............................................................................................................................................................. National Science Foundation

NTIA....................................................................................................... National Telecommunications and Information Administration

NTIS ........................................................................................................................................... National Technical Information Service

NWS .................................................................................................................................................................. National Weather Service

OAM ................................................................................................................................................... Office of Acquisition Management

OGC ..................................................................................................................................................................Office of General Counsel

OI .......................................................................................................................................................................... Office of Investigations

OIG ................................................................................................................................................................. Office of Inspector General

OMB ................................................................................................................................................... Office of Management and Budget

PAR................................................................................................................................. FY 2002 Performance & Accountability Report

POA&M........................................................................................................................................................ plan of action and milestone

QAR ................................................................................................................................................................. quality assessment review

RLF ............................................................................................................................................................................. revolving loan fund

ROC .................................................................................................................................................................... Radar Operations Center

TIGER ................................................................................................. Topologically Integrated Geographic Encoding and Referencing

TPS ....................................................................................................................................................................... transition power source

UCAR ......................................................................................................................... University Corporation for Atmospheric Research

USEAC ......................................................................................................................................................... U.S. export assistance center

US&FCS ........................................................................................................................................ U.S. and Foreign Commercial Service

USPTO .................................................................................................................................................U.S. Patent and Trademark Office

Semiannual Report to Congress, March 2004
Office of Inspector General

March 2004/Semiannual Report to Congress 59

Types of OIG Work Products

The various kinds of audits, evaluations, inspections, and investigations at our disposal enable the IG’s office to assess Commerce

programs and operations from a range of perspectives. Thus we are able to provide program managers with reviews and recom

mendations that are either narrowly focused or comprehensive, as needed, to aid them in ensuring the most efficient and effective use of taxpayer dollars.

AUDITS

Performance Audits address the efficiency, effectiveness, and economy of the Department’s programs, activities, and information

technology systems. They may check a unit’s compliance with laws and regulations, and evaluate its success in achieving program

objectives. They may also involve review of final contract cost claims or review of financial assistance awards by assessing an award

recipient’s compliance with laws, regulations, and award terms; the allowability and reasonableness of claimed costs; and the degree to

which projects achieved intended results.

Financial Audits determine whether (1) a reporting entity’s financial statements are presented fairly and in accordance with generally accepted accounting principles; (2) the entity has an internal control structure that provides reasonable assurance of achieving

the control objectives set forth by OMB; and (3) the entity complied with laws and regulations that could have a direct and material

effect on the financial statements, the Federal Financial Management Improvement Act, and other laws and regulations.

Attestation Engagements involve examining, reviewing, or performing agreed-upon procedures on a subject matter or an assertion

about a subject matter and reporting the results. Attestation engagements can have a broad range of financial or nonfinancial focuses,

such as an entity’s compliance with laws and regulations and management’s discussion and analysis presentations.

INSPECTIONS

Inspections are reviews of an activity, unit, or office, or a contractor or other nonfederal entity that receives funds from the Department.

They focus on an organization, not a whole program, and are often designed to give agency managers timely and useful information about

operations, including current and foreseeable problems.

EVALUATIONS

Program Evaluations are in-depth reviews of specific management issues, policies, or programs.

Systems Evaluations review system development, acquisitions, operations, and policy, focusing on computer systems and other technologies.

INVESTIGATIONS

Investigations are conducted based on alleged or suspected wrongdoing by Department employees, contractors, recipients of financial

assistance, and others responsible for handling federal resources. Investigations that expose violations of Department rules and regulations or acts of fraud committed against the U.S. government can result in administrative sanctions and/or criminal or civil prosecution.