IG’s Message for the Secretary

March 1999 Commerce IG Semiannual Report i

April 30, 1999

The Honorable William M. Daley

Secretary of Commerce

Washington, D.C. 20230

Mr. Secretary:

I am pleased to provide you with the Office of Inspector General’s semiannual report to the Congress

for the first half of fiscal year 1999. Section 5 of the Inspector General Act requires that you transmit this

report, with any comments you may wish to add, to the appropriate congressional committees within

30 days of its receipt.

I would like to take this opportunity to express my appreciation for the leadership and commitment

you have demonstrated in working with our office to address the major challenges facing the Department.

I am encouraged by the support and cooperation that we have received from secretarial officers. Notwithstanding the differences of opinion that often surface as we confront difficult issues, the bureaus have

generally agreed with our recommendations and have either taken or promised to take corrective actions

to address them.

We look forward to continued cooperation between the Department and the OIG in working toward

our common goal of improving the management and operation of Commerce programs. The benefits of

such cooperation are exemplified by the results of the fiscal year 1998 financial statements audits. The

improved audit opinions received by some operating units, along with a steady reduction in the number of

material weaknesses identified, clearly indicate that Commerce is fast approaching your goal of achieving

an unqualified opinion on its consolidated statements.

Sincerely,

Johnnie E. Frazier

Acting Inspector General

Enclosure

UNITED STATES DEPARTMENT OF COMMERCE

The Inspector General

Washington, D.C. 20230
Table of Contents

IG’S MESSAGE FOR THE CONGRESS .......................................................................... 1

Foreword ................................................................................................................... 1

Major Challenges for the Department........................................................................ 2

Increase the accuracy and control the cost of the 2000 Decennial Census ......... 3

Obtain an unqualified opinion on the Department’s consolidated

financial statements ...................................................................................... 4

Maximize competition in the Department’s financial assistance programs........... 6

Address Commerce’s year 2000 computer problem ........................................... 8

Expand private sector participation in NOAA’s marine and

aeronautical data gathering............................................................................ 9

Successfully implement NWS’s Advanced Weather Interactive

Processing System ...................................................................................... 11

Successfully implement a Department-wide financial management system....... 11

Manage PTO’s space requirements and lease costs .......................................... 13

Evaluate NTIS’s mission and financial viability ................................................ 14

Continue to improve the Department’s strategic planning and performance

measurement in accordance with GPRA .................................................... 15

Other Issues of Concern .......................................................................................... 16

Resolution and Follow-Up ....................................................................................... 18

DEPARTMENT OF COMMERCE ORGANIZATION CHART ...................................... 20

AGENCY OVERVIEWS .................................................................................................. 21

Bureau of Export Administration ............................................................................. 21

Economic Development Administration................................................................... 23

Economics and Statistics Administration ................................................................. 30

International Trade Administration .......................................................................... 36

Minority Business Development Agency ................................................................. 50

National Oceanic and Atmospheric Administration .................................................. 51

National Telecommunications and Information Administration ............................... 61

Patent and Trademark Office .................................................................................. 64

Technology Administration ...................................................................................... 66

Departmental Management ...................................................................................... 74

REPORTING REQUIREMENTS .................................................................................... 87

STATISTICAL HIGHLIGHTS......................................................................................... 91

TABLES AND APPENDIXES ......................................................................................... 92

DEFINITIONS OF TYPES OF OIG REVIEWS AND

FINANCIAL STATEMENTS AUDIT TERMS ............................................................. 104

GLOSSARY OF ABBREVIATIONS .............................................................................. 105

OIG ORGANIZATION CHART AND POINTS OF CONTACT ....... (Inside Back Cover)

ii Commerce IG Semiannual Report March 1999
IG’s Message for the Congress

March 1999 Commerce IG Semiannual Report 1

FOREWORD

During this semiannual period, we continued to emphasize the programs and operations that

represent significant investments of Commerce resources and offer the greatest opportunities for

improvements. To this end, most of our work has focused on what we consider to be the top

management challenges facing the Department and other major Commerce activities. For example,

we completed an evaluation of the dress rehearsal performance of Data Capture System 2000, the

system that is being developed to extract data from an estimated 1 billion pages of forms during the

decennial census. We also evaluated the Department’s efforts to improve the accuracy of its

reporting of Y2K compliance status. In addition, we issued 15 audit reports on the fiscal year 1998

financial statements of Commerce operating units and the Department’s consolidated financial

statements.

We conducted a number of reviews of the Department’s administration of its trade-related

responsibilities. Among these was a program evaluation of the Department’s overall export

promotion efforts, focusing on the effectiveness of ITA, the lead Commerce agency, in managing its

trade programs and operations, and its involvement with other departmental units and federal

agencies in helping expand trade opportunities for U.S. businesses. We also issued reports on our

reviews of specific US&FCS offices that focus on trade promotion, including US&FCS posts in

the European Union, Belgium, Portugal, and South Korea; and the U.S. Export Assistance Center in

Seattle.

In addition, we made considerable progress in completing three major reviews, two of which

were requested by the Congress. First, we are nearing completion of an evaluation of Commerce

export licensing controls for dual-use commodities, part of a multi-agency OIG review requested

by the Senate Governmental Affairs Committee. We have also made significant headway in our

review of discretionary financial assistance programs, which was initiated at the request of the

Chairman of the Senate Commerce, Science, and Transportation Committee. To date, we have

issued reports on 15 programs, 13 during this period, representing 565 awards and $365 million.

In addition, we have nearly completed our Department-wide review of the use of memorandums of

understanding and other special agreements. We have issued eight reports to date, two of which are

discussed in this issue; the two remaining reports are underway.

We plan to continue providing the Department and the Congress with independent, meaningful,

and timely analyses that lead to improvements and positive changes for Commerce.
IG’s Message for the Congress

MAJOR CHALLENGES

FOR THE DEPARTMENT

In this section, we provide our perspective on the top 10 management

challenges facing the Department of Commerce. We identified these

challenges at the joint request of the House Majority Leader and the

Chairman of the House Government Reform and Oversight Committee.

The request was directed to the OIGs of the 24 departments and agencies

subject to the Chief Financial Officers Act of 1990.

In February 1999, the Chairman further requested that each of these

OIGs provide the Committee with a listing of its outstanding, or “open,”

recommendations relating to each challenge, as well as any legislative

recommendations that would enable its agency to better address these

issues. To provide the Committee with a more complete picture of the

types of recommendations we have made and the Department’s efforts to

implement them, in April 1999 we submitted to the Committee a list of

285 of our recommendations that relate to these challenges.

We reported that for 33 percent of the recommendations, the operating

units had already implemented corrective actions, and that for an additional

52 percent, the units had agreed to take corrective actions (see chart

below). Collectively, we have agreement on 85 percent of our recommendations. Of the remaining unresolved recommendations (15 percent),

almost all relate to NOAA’s ships, aircraft, and advanced weather system.

2 Commerce IG Semiannual Report March 1999

Status of OIG Recommendations

Related to Top 10 Management Challenges
IG’s Message for the Congress

Our work during this semiannual period focused on 4 of the top 10

challenges: (1) decennial census, (2) financial statements, (3) discretionary

funding programs, and (4) year 2000 (Y2K) issues.

Increase the Accuracy and Control

the Cost of the 2000 Decennial Census

The accuracy of decennial data is critical because it is the basis for

apportioning seats in the House of Representatives and is used by state

legislatures for redistricting purposes. The data is also used to distribute

billions of dollars of federal funds to state and local governments.

The decennial census is an enormous and complex task—certainly one

of the most difficult that the federal government has to undertake. The

Department recognizes the challenges presented by the 2000 Decennial

Census and is providing increased oversight and management support to

this important undertaking. And we are continuing to make the decennial

census one of our top priorities. We have already issued more than a

dozen reports on various aspects of the bureau’s decennial planning

efforts, and additional reviews are underway. We are also actively

monitoring the bureau’s efforts to address the recommendations from our

various audits and inspections.

In our last issue, we reported on the results of our reviews of the

critical “dress rehearsal” operations. We identified a number of programs

and activities that were operating quite effectively, as well as a number of

problems that need to be addressed in order to ensure efficient decennial

operations. Overall, we concluded that the bureau still faces some

formidable challenges in preparing for the decennial. For example, the

bureau must (1) complete the design, development, and testing of major

automated systems, (2) finish developing an accurate master address file,

and (3) refine the decennial design by incorporating lessons learned from

the dress rehearsal.

The Census Bureau has been working hard to address our findings and

observations related to the dress rehearsal activities. We commend the

bureau for its quick response to our concerns. In many cases, corrective

action has already been implemented.

In this issue, we discuss the results of our evaluation of the dress

rehearsal performance of Data Capture System (DCS) 2000, which is

being developed for use in the decennial. DCS 2000 will use electronic

imaging to read the information from census forms and convert it to

electronic format for processing. Our review found that DCS 2000

March 1999 Commerce IG Semiannual Report 3
IG’s Message for the Congress

experienced extensive problems during the dress rehearsal resulting from

inadequate control of requirements and insufficient system testing. However, we believe that the system will be able to perform as needed during

the decennial if the bureau continues to improve the functional capabilities

of DCS 2000 and better manages the development process (see page 30).

The Department faces additional challenges in securing congressional

funding for its planned methodology for conducting the 2000 decennial.

The bureau planned to integrate statistical methods into the decennial

census design to produce a single-number count, rather than two sets of

census totals, as was done in 1990. However, in November 1998, the

Administration agreed that the bureau would plan for both a sampling and

a non-sampling census while awaiting a Supreme Court ruling on the

legality of using sampling techniques as part of the decennial census

methodology.

On January 25, 1999, the Court ruled that, according to the Census

Act of 1986, statistical sampling techniques cannot be used for apportionment. However, the bureau still intends to provide a statistically adjusted

number for non-apportionment purposes, arguing that the adjusted count is

more accurate.

Obtain an Unqualified Opinion on the

Department’s Consolidated Financial Statements

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 are designed to improve the financial management practices of

federal agencies. The statutes require audited financial statements that

present an entity’s financial position and results of operations and provide

other information needed for the Congress, agency executives, and the

public to assess management’s performance.

The Department received an unqualified opinion on its Consolidated

Balance Sheet as of September 30, 1998. However, because the

Department had received a disclaimer of opinion on its FY 1997 financial

statements, we were unable to express an opinion on the Department’s

Consolidating Statements of Net Cost and Changes in Net Position and

Combined Statements of Budgetary Resources and Financing for the year

ended September 30, 1998 (see page 76).

4 Commerce IG Semiannual Report March 1999
IG’s Message for the Congress

In addition, disclaimers on certain financial statements of NOAA and

Census, along with a disclaimer on the Franchise Fund and the inability to

audit ITA’s statements, resulted in a disclaimer on the Department’s other

financial statements. Until NOAA and Census, in particular, receive other

than disclaimers on their remaining statements, the Department will be

precluded from receiving a clean (unqualified) opinion on its consolidated

financial statements.

It is important to recognize, however, the progress that has been made

this year in addressing many of the problems, weaknesses, and conditions

that have undermined the reliability of some bureaus’ financial management systems and precluded unqualified audit opinions on their financial

statements. This is probably most apparent in the decrease in the number

of material weaknesses over the past two years. Material weaknesses

represent serious conditions where the design or operation of an internal

control component does not minimize the risk that errors, fraud, or

noncompliance in material amounts may occur and not be readily detected.

Two years ago, we reported 37 material weaknesses.

Until these numbers were significantly reduced, the Department would

have a difficult—if not impossible—task of establishing sound financial

management systems and achieving unqualified audit opinions on its financial statements. The Secretary, the Deputy Secretary, and Commerce’s

Chief Financial Officer (CFO) concluded that traditional approaches were

insufficient and made some important changes.

First and foremost, the Secretary made it clear to his senior mangers

that he expected them to get personally involved and monitor the progress

in their bureaus. Second, the Department’s CFO began to hold the

bureaus’ CFOs and other financial managers directly accountable for

aggressively confronting the large number of material weaknesses and

resolving the reportable conditions. Finally, in the past year, there have

been what we view as unprecedented levels of cooperation between the

Department, the bureaus, and the OIG and its contractors.

We believe that these changes, coupled with the renewed management

commitments and increased cooperation, have been the catalyst for

significant progress. And while it is clear that obtaining an unqualified audit

opinion on the FY 1999 consolidated financial statements is a major

challenge, it is equally clear that the aforementioned changes in approach

and commitment are major reasons why, in less than two years,

Commerce has reduced its number of material weaknesses from 37 to 12

(see chart on following page).

March 1999 Commerce IG Semiannual Report 5
IG’s Message for the Congress

Maximize Competition in the Department’s

Financial Assistance Programs

In the September 1998 semiannual report (see page 12), we discussed

our ongoing review of the criteria, procedures, and practices used to make

funding decisions for the Department’s discretionary financial assistance

programs. Our review is being conducted, in large part, at the request of

the Chairman of the Senate Commerce, Science, and Transportation

Committee, who made similar requests of the OIGs of the Department of

Transportation and the National Science Foundation. The Chairman asked

that we examine the criteria developed, statutorily or administratively, to

guide Commerce officials in making discretionary awards, as well as the

extent to which such criteria were appropriately applied. He expressed an

interest in ensuring that federal discretionary funding programs are

administered fairly and without consideration of political or other nonmerit-based criteria.

The use of competitive selection procedures is widely recognized as

the most effective method of ensuring that financial assistance awards are

made on the basis of merit. Although our review is still underway, our

observations indicate that there are opportunities to enhance competition

and improve the Department’s discretionary funding practices.

6 Commerce IG Semiannual Report March 1999

The same material weakness was identified in the FY 1997 audit of both the WCF and

S&E Fund. It is considered one material weakness for the Department as a whole.

a

Includes six material weaknesses identified in the FY 1997 audit of ITA. Since an audit

was not performed in FY 1998, these weaknesses were carried forward.

b

Material Weaknesses Highlighted in

Financial Statements Audits

a b

12

21

37

0

5

10

15

20

25

30

35

40

FY 1996 FY 1997 FY 1998
IG’s Message for the Congress

Discretionary financial assistance programs involve a significant

portion of the Department’s budget and operations. Six Commerce

agencies and the Office of the Secretary administer 72 programs that

provide a total of about $1 billion a year to state and local governments,

educational institutions, nonprofit and for-profit organizations, and

individuals. The chart below shows the amount of obligations and the

number of programs by agency for FY 1997, the period we selected for

review.

Technically, all Commerce financial assistance programs are

discretionary, rather than entitlement, programs. However, our review is

focusing on the FY 1997 award criteria, procedures, and practices of

33 programs we have classified as “full discretion.” For the purpose of our

review, we classified as full discretion programs those programs whose

authorizing legislation places no significant limitations on the Department’s

ability to independently determine the recipients or funding levels of the

awards made under the programs. These programs, which account for

over 1,700 awards and $802 million, should be using competitive selection

procedures designed to promote merit-based decisions.

To date, we have completed audits and issued reports on 15 programs,

of which 7 were administered by NOAA, 3 by NIST, 2 by MBDA, 2 by

NTIA, and 1 by ITA. These programs represent $365 million in funding

distributed through 565 awards.

March 1999 Commerce IG Semiannual Report 7

Commerce Discretionary Funding Programs

FY 1997 Obligations by Agency

Department’s Total=$1.1 billion
IG’s Message for the Congress

We found that 8 of the 15 programs are administered competitively

utilizing evaluation criteria designed to result in merit-based funding

decisions. We did, however, identify opportunities for improvement in

specific aspects of the various awards processes. Several of the programs

could enhance the integrity of their procedures or bring more discipline to

the award process by adopting the following practices:

z Expanding proposal solicitation efforts.

z Including participants from outside the Department as proposal

reviewers to increase the objectivity of the selection process.

z Adequately documenting justifications for deviations from review

panel recommendations.

The other seven programs we reviewed, all NOAA programs, did not

use competitive selection procedures, but instead obligated discretionary

funds through inadequately justified sole source awards.

We are recommending that NOAA ensure that financial assistance

awards under its programs are made through a competitive merit-based

process, unless otherwise mandated by law or adequately justified. We are

pleased to report that NOAA agrees that more awards should be granted

competitively for all discretionary funding programs and that a rigorous

solicitation process should be used. The agency is continuing to look at its

current processes and intends to provide more specific details as part of

the audit resolution process. Summaries of the 13 audit reports issued

during this period are presented in the agency overviews.

We expect to issue final reports on the remaining 18 financial

assistance programs during the next semiannual period. Upon completing

the audits, we plan to issue a capping report summarizing the results of the

individual audits, identifying cross-cutting issues, highlighting “best

practices,” and providing recommendations for improvement.

Address Commerce’s Year 2000

Computer Problem

The OIG has played a major role in highlighting key issues related to

resolving the Y2K problem. In this issue, we discuss the results of our

March 1999 inspection of the Department’s efforts to improve the

accuracy of its reporting of Y2K compliance status. Our inspection

examined whether the number of compliant systems reported to OMB

accurately reflected the status of the Department’s Y2K Program. We

8 Commerce IG Semiannual Report March 1999
IG’s Message for the Congress

found that the number reported was misleading, critical systems were not

properly identified, and evidence was lacking to validate system compliance. Because the Department’s Chief Information Officer had similar

concerns, we were able to work together to improve the Department’s

Y2K program policies to address these weaknesses (see page 78).

The Department expected almost all of its mission critical systems to

be compliant (461 out of 473, or 97 percent) by the March 31, 1999,

deadline set by OMB. However, additional Y2K efforts will be required

beyond that date. For the remainder of this year, the Department’s major

challenge is to continue to reduce the risk of crucial services being

disrupted by Y2K failures. Management needs to ensure that riskreduction activities—such as independent validation of computer systems,

end-to-end business process testing, and contingency planning—receive

high-level attention. The Secretary, the Deputy Secretary, the CFO, and

the Chief Information Officer have clearly stated their commitment to

ensuring that these activities are carried out. Our office is continuing to

monitor the Department’s Y2K program. For example, we are in the

process of assessing the progress and effectiveness of selected Commerce

bureaus’ risk reduction efforts.

Expand Private Sector Participation in NOAA’s

Marine and Aeronautical Data Gathering

Shortly after the end of the semiannual period, the OIG’s Assistant

Inspector General for Auditing testified before the House Science

Subcommittee on Energy and Environment on the OIG’s work related to

NOAA’s approach to acquiring marine and aeronautical data and related

research support. His testimony focused on three OIG reports issued since

1996: (1) an August 1998 audit report on NOAA’s light aircraft fleet, (2) a

September 1997 audit report on the NOAA Corps Transition Plan, and

(3) a March 1996 inspection report on NOAA’s then $1 billion plan to

repair, modernize, and replace its aging fleet of ships. In these reports, we

generally point out that NOAA could achieve greater economy, efficiency,

and effectiveness by increasing private sector participation in its marine

and aeronautical data gathering efforts.

Marine Data

While NOAA has made some progress in expanding private sector

participation in acquiring hydrographic data, we remain concerned about its

plans to design, acquire, and operate four new fishery research vessels,

from FY 2000 through FY 2003, without thoroughly assessing other viable

alternatives. As we have said many times before, we believe that NOAA

March 1999 Commerce IG Semiannual Report 9
IG’s Message for the Congress

should not focus its efforts on designing, owning, maintaining, or operating

ships. Instead, NOAA should clearly articulate its program needs for ship

services to the private sector, academia, and other government ship operators with the goal of identifying modern, more cost-effective platforms for

its data collection needs.

We understand that NOAA has prepared a detailed data acquisition

plan for its fisheries mission and intends to acquire the new fishery

research vessels through the Naval Sea Systems Command. However, a

NOAA consultant reported that the bureau’s approach is far from the best

available. His report details many preferable alternatives, such as using

long-term charters of privately owned vessels or partnering with

universities to operate the ships. NOAA’s challenge is to thoroughly assess

viable alternative approaches instead of relying on its own in-house fleet.

Aeronautical Data

Since its establishment in 1983, NOAA’s Aircraft Operations Center,

now located at MacDill Air Force Base near Tampa, has been responsible

for gathering atmospheric, oceanographic, and other data for such

programs as hurricane and major storm research, nautical and aeronautical

charting, climate and global change, and snow and aerial surveys. As

NOAA’s major flight operations group, the center operates a fleet of

14 aircraft, composed of 2 heavy craft, 1 mid-size jet, 8 light fixed-wing

aircraft, and 3 helicopters.

In December 1996, the President’s Council on Integrity and Efficiency

reviewed the management of the federal civilian aircraft fleet, including

NOAA’s, and found that it cost the government in excess of $1 billion

annually to operate its aircraft programs. Additional studies of operational

efficiencies, commissioned by GSA, reported opportunities to reduce costs

by $92 million annually if most agencies consolidated their operations and

entered into sharing arrangements.

The OIG conducted an audit to determine whether outsourcing is

more cost-effective than in-house operation in meeting NOAA’s aircraft

requirements. Our audit concluded that the full in-house cost of operating

NOAA’s eight light fixed-wing aircraft and two helicopters (the third

helicopter was out of service at the time of our audit) averaged 42 percent

more than the cost to operate similar aircraft in the private sector. In

FY 1996, NOAA and interagency programs spent an additional

$1.9 million to operate its in-house aircraft compared to private sector

costs. We recommended that NOAA privatize its light aircraft operations.

NOAA’s challenge is to find and thoroughly assess the best ways to collect

its aeronautical data.

10 Commerce IG Semiannual Report March 1999
IG’s Message for the Congress

Successfully Implement NWS’s Advanced

Weather Interactive Processing System

The Advanced Weather Interactive Processing System (AWIPS), the

key integrating element of the National Weather Service’s (NWS)

modernization program and an essential ingredient to achieving operational

improvements and staff reductions, is also the last major system of the

modernization to be implemented. AWIPS is intended to provide the

capability to acquire data from advanced observing systems and to give

forecasters the tools to rapidly analyze the data, integrate it with information provided by NWS guidance centers, and prepare timely and accurate

warnings and forecasts for dissemination to the public and the media.

AWIPS continues to warrant OIG oversight and departmental management attention because of its history of escalating costs and schedule

delays. The program is currently operating under a congressionally

mandated cost cap of $550 million. Under the cap, AWIPS must provide

sufficient capabilities to replace the aging field office systems, most notably

the Automation of Field Operations and Services (AFOS). NOAA plans to

complete AWIPS by June 1999. Operational testing and evaluation of

AWIPS, scheduled to begin in May 1999, needs to clearly demonstrate

that the system has the capabilities to allow AFOS to be removed from the

field.

In our last issue, we noted that software development was a month

behind schedule and needed improvements in testing were not yet

implemented. According to NOAA, all activities are now on schedule to

meet the June 1999 completion date. We will continue to monitor

AWIPS’s progress toward fully replacing AFOS, including observing a

portion of the operational testing and evaluation.

Successfully Implement a Department-Wide

Financial Management System

We are continuing to monitor Commerce’s efforts to develop an

integrated financial management system. Commerce’s existing financial

systems are seriously outdated and fragmented; unable to provide

accurate, timely, and reliable financial information; inadequately controlled;

and costly and difficult to maintain. These systems have not proven to be

effective in preparing and reporting the financial results of the Department

and its bureaus. Commerce began developing a Department-wide financial

system in 1992.

March 1999 Commerce IG Semiannual Report 11
IG’s Message for the Congress

Notwithstanding large investments of time, money, and effort,

implementation of the system, known as the Commerce Administrative

Management System (CAMS), proved more difficult than anticipated. The

difficulties occurred, in part, because the CAMS contractor did not meet

established milestones and experienced problems in satisfying departmental

requirements. These factors caused the Department to delay and revise its

implementation strategy several times. In developing this system, the

Department faced major challenges in reversing a pattern of deployment

delays, overcoming skepticism, and controlling costs.

During FY 1998, the Department redefined the composition and

functionality of CAMS, drastically revised the strategy for implementing it,

and reorganized its management structure. The Department’s revised

strategy focused on implementing the redefined CAMS (core CAMS) at a

pilot bureau (Census), a task that was completed during June 1998. An

independent verification and validation concluded that core CAMS, as

implemented at Census, met departmental requirements and was as good

as or better than core financial management software that has been

implemented at other large government agencies.

In September 1998, the Office of the CFO completed a business case

analysis to compare and evaluate strategies for implementing core CAMS.

The analysis recommended a modified approach, implementing core

CAMS at the larger bureaus, with the smaller bureaus obtaining financial

services using cross-servicing agreements. The Department developed a

new strategy that involved implementing core CAMS at NOAA, followed

by NIST. Also, EDA decided to implement certain aspects of core CAMS

for its grant activity. Remaining organizational entities, however, will obtain

financial systems support through cross-servicing arrangements.

NOAA developed a two-year plan to implement core CAMS. A

Department-sponsored independent assessment concluded that NOAA’s

plan was too costly and could be done with fewer NOAA and contractor

staff. The assessment also concluded that NOAA needed significant

additional information technology resources and suggested that NOAA

consider obtaining these resources from Census. In January 1999, NOAA

established a limit on the funds available for implementing core CAMS,

thereby causing the planned implementation to be extended to three years.

In February 1999, the Department’s CFO inquired as to whether the

Department of the Interior, using American Management System’s Federal

Financial System, could provide the same financial management services at

a more competitive cost and with lower management risk. The Department

and NOAA expect to decide whether to implement core CAMS or obtain

financial management services from Interior in May 1999.

12 Commerce IG Semiannual Report March 1999
IG’s Message for the Congress

Manage PTO’s Space Requirements

and Lease Costs

The Patent and Trademark Office’s space consolidation project

presents a special challenge for the agency as it contends with the need to

reinvent its business processes to make them more efficient and effective.

PTO’s project is expected to be one of the largest real estate ventures that

the federal government will undertake in the next decade.

On behalf of PTO, the General Services Administration (GSA) will

award a contract to a private developer to construct a new facility or

renovate an existing facility and lease it back to PTO for at least 20 years

with the option to buy. The solicitation calls for the construction of the

building shell, to include basic electrical and mechanical systems, which

will be “built out” upon completion of the interior design. The project has

been delayed several months because one of the offerors has challenged

certain requirements in federal court. GSA and PTO are contesting the

offeror’s claims and hope to award the lease development contract in the

summer of 1999, with occupancy to begin as early as November 2001.

Given the size and importance of the planned PTO consolidation

project, we conducted a review to determine whether (1) the project was

justified and (2) PTO was effectively managing the critical acquisition

phase of the project (see March 1998 issue, page 54). The review

concluded that the project was justified and should continue. We also

found that PTO was managing many aspects of the lease/development

procurement well.

However, we expressed several concerns about PTO’s management

and planning for this major procurement. For example, PTO had failed to

finalize its space requirements or reach agreement with one of its major

unions concerning working conditions related to space requirements in a

timely manner. In addition, we expressed concern about the lack of a

contractual cost ceiling on the build-out. Also, in determining its space

requirements, PTO had failed to factor in potential savings and efficiencies

gained from systems reengineering and automation.

PTO has responded favorably to all but two of our recommendations

and has incorporated them into its planning and management of this

project. PTO did not agree with establishing a contractual ceiling for the

build-out. However, this is no longer an issue as the October 9, 1998,

Solicitation for Offer placed a cap of $29 million on the above standard

build-out. The other recommendation that PTO did not agree with related

to potential savings and efficiencies gained from systems engineering and

automation.

March 1999 Commerce IG Semiannual Report 13
IG’s Message for the Congress

In September 1998, the Acting Inspector General testified before the

Subcommittee on Transportation and Infrastructure of the Senate

Committee on Environment and Public Works on our review of the space

consolidation project. The Acting IG noted that although some of our

recommendations have not yet been fully addressed by PTO, we remain

satisfied that this project should continue. However, we believe that

continuing management attention and OIG oversight will be needed to

ensure that the project is completed in a timely, cost-effective manner and

within the cost limits prescribed by the Congress.

Evaluate NTIS’s Mission and Financial Viability

The Technology Administration and the Department need to develop a

solution to the National Technical Information Service’s longstanding

financial problems. NTIS supports itself through fees charged for its

products and services. In our September 1998 audit of NTIS’s business

operations, we reported that between FYs 1995 and 1998, the agency

incurred a cumulative loss of $4.8 million. We concluded that if this trend

continued as expected, NTIS would have exhausted its retained earnings

by the end of FY 1999 (see September 1998 issue, page 68).

NTIS has attempted to curb its losses by raising prices, cutting costs,

and developing new products and services. However, a recent consultant

study commissioned by TA, at our recommendation, concluded that even

with significant efforts to improve its profitability, NTIS can no longer

generate sufficient revenue to remain self-supporting. We are also

concerned that in order to replace lost sales, NTIS is seeking business

opportunities on the perimeter of its statutory mission, where it risks

competing against private businesses.

To address NTIS’s immediate fiscal problem, TA has requested a

$2 million appropriation for FY 2000. At best, this is a temporary fix.

NTIS’s financial problems are just a symptom of a much larger problem—

a steady decline in demand for its products and services caused by

fundamental changes in the marketplace. Sales of publications from its

clearinghouse declined from almost 2.3 million units in FY 1993 to

1.3 million in FY 1998. Moreover, federal agencies are increasingly

bypassing NTIS as a distribution channel, instead offering their

publications directly to the public over the Internet.

NTIS’s disappointing operating results raise questions not only about

its ability to be self-sustaining, but also about the need for a single

clearinghouse for technical publications. TA and the Department need to

determine whether the functions performed by NTIS are still needed and,

if so, whether they should be left at NTIS or transferred to another

14 Commerce IG Semiannual Report March 1999
IG’s Message for the Congress

agency. The National Archives and Records Service and the Library of

Congress both have archiving functions.

To address all relevant concerns regarding the short- and long-term

operations of NTIS, the Department and TA have formed a working group

made up of senior managers from both departmental and bureau offices to

consider options for taking corrective actions.

Continue to Improve the Department’s Strategic

Planning and Performance Measurement in

Accordance with GPRA

Like other federal agencies, the Commerce Department faces many

inherent challenges in determining how to best plan and measure its

performance in accordance with the Government Performance and Results

Act of 1993 (GPRA). Commerce submitted its first annual performance

plan in support of its five-year strategic plan to OMB and the Congress in

February 1998. The FY 1999 plan, organized according to three strategic

themes, was criticized for providing an incomplete picture of intended

performance across the Department and not adequately discussing the

Department’s strategy for ensuring that the data to be used in measuring

performance would be accurate, complete, and reliable. GAO and the OIG

also reviewed the plan and had similar concerns.

The Department submitted its second annual performance plan, for

FY 2000, to OMB and the Congress in February 1999. The plan

represents a significant improvement over the 1999 plan and addresses

many of the earlier concerns raised. The 2000 plan, for example, is more

useful to decision-makers as it presents intended performance by

departmental bureaus as opposed to the broader strategic themes used

initially. The improved plan also contains substantially fewer process and

output-oriented, and more outcome-oriented measures, as intended by

GPRA. In addition, the plan includes an improved discussion of how the

Department intends to validate and verify the accuracy, completeness, and

reliability of the data to be used in assessing performance. Moreover, the

Department is preparing an addendum to its 1999 plan that will identify a

revised listing of performance measures consistent with those in the

FY 2000 plan.

Although, by all accounts, significant progress has been made, the

Department must continue to strengthen its strategic planning and

performance measurement efforts. For example, the Department must

continue to refine its performance measures to ensure that they emphasize

achievement of program results and provide assurance that the data to be

March 1999 Commerce IG Semiannual Report 15
used to measure performance will be accurate, complete, and reliable. By

March 31, 2000, the Department will need to detail its FY 1999 actual

results versus planned performance with the submission of its initial

Annual Program Performance Report.

We have regularly provided advice and consultation to the Department

on implementing GPRA. During the FY 1997 and FY 1998 audit cycles,

for example, we reviewed the overviews to the financial statements for the

Department and individual bureaus, providing comments to management.

The overviews provide the linkage between GPRA and the financial

statements. As a result of these reviews, we emphasized the need to

improve performance measurement and reporting, and provided

suggestions for improvement. The Department’s FY 2000 performance

plan incorporated many of our suggestions. In response to our concerns

about its FY 1997 and 1998 consolidated financial statements, the

Department revised its overview and statement of net cost to improve the

linkage between strategic planning and financial reporting.

We will continue to look at the Department’s efforts to implement

GPRA, provide advisory comments regarding GPRA documents, and,

where resources permit, perform targeted reviews.

OTHER ISSUES OF CONCERN

The following sections highlight other important issues of concern for

the Department and discuss our ongoing work related to these issues.

Export Controls for Dual-Use Commodities

The United States controls the export of certain goods and technologies for national security and foreign policy purposes (including

nonproliferation). Within Commerce, BXA issues licenses authorizing the

export of certain dual-use commodities—goods and technologies that have

both civilian and military uses. Dual-use controls are a subject of

continuing controversy, generating a wide range of opinions on how well

the government’s export control policies and practices balance the need to

protect national security and foreign policy interests with the desire not to

unduly hamper U.S. trade opportunities and competitiveness. Striking this

balance can pose a significant challenge for the parties involved.

Last fall the Senate Committee on Governmental Affairs asked us,

along with the OIGs of the Departments of Defense, Energy, State, and

the Treasury and the Central Intelligence Agency, to conduct an interIG’s Message for the Congress

16 Commerce IG Semiannual Report March 1999
agency review of the export licensing process for dual-use commodities

and munitions. As part of this review, we followed up on findings and

recommendations from a similar interagency review completed five years

ago (see September 1993 issue, page 15). We also focused on the

effectiveness of the Department’s current policies, procedures, and

practices in its licensing of dual-use goods and technologies.

Our reports on the export licensing process are expected to be

completed in June 1999. Each OIG will issue a report on its agency’s role

in the licensing process. There will also be a cross-cutting report that will

consolidate the findings and recommendations of the six OIGs’ work on

governmentwide management of the export licensing processes.

Interagency and Other Special Agreements

The Department relies heavily on interagency and other special agreements to perform its mission. For example, in FY 1997, Commerce had

more than 4,700 agreements, involving over $1 billion in funds received

for reimbursable activities or obligated to acquire goods or services from

other parties. These agreements can be between Commerce units or

between a Commerce unit and another federal agency, a state or local

government agency, a university or other educational institution, a not-forprofit organization, or a private party. While agreements involve a significant amount of federal resources, they are not subject to the same controls

as traditional procurement contracts, grants, or cooperative agreements.

The OIG conducted a Department-wide review of agreements and

identified several cross-cutting issues during our eight completed and two

ongoing reviews of Commerce units’ agreements. We also drew upon

work performed under other OIG reviews of agreements conducted during

recent years. In addition to identifying common problems that Commerce

bureaus have experienced in preparing and administering agreements, we

highlight several “best practices” for bureaus and line offices to consider

adopting. Most agreements reviewed appeared to serve important and

appropriate functions, given Commerce’s varied missions. However, we

noted the following problems:

z Some bureaus have improperly entered into informal arrangements

without the benefit of a written agreement.

z The required legal reviews were often not requested or performed.

z Agreements have been used when traditional procurement

contracts would have been more appropriate.

IG’s Message for the Congress

March 1999 Commerce IG Semiannual Report 17
z Agreements have been used when financial assistance awards

(e.g., grants) would have been preferable.

z Bureaus generally do not adequately track and control agreements.

z Bureaus need to improve their systems and procedures to better

ensure full cost recovery under reimbursable agreements.

OIG Oversight of New FOIA Search

Ordered by District Court

In December 1998, the U.S. District Court for the District of

Columbia ordered the Department to conduct a new search for documents

responsive to various Freedom of Information Act requests at issue in a

pending lawsuit filed against Commerce by a private organization. Pursuant to the court’s order, the OIG is conducting a quality control review of

the Department’s search, including a review of employee declarations

describing search efforts and spot checks of offices searched. At the

conclusion of the process, we will provide a written report to the court on

the results of our review.

RESOLUTION AND FOLLOW-UP

The Inspector General Act Amendments of 1988 require this report to

present those audits issued before the beginning of the reporting period

(October 1, 1998) for which no management decision had been made by

the end of the period (March 31, 1999). The following table presents the

overall status.

IG’s Message for the Congress

18 Commerce IG Semiannual Report March 1999

Type of Audit Report Unresolved

Performance

Financial Assistance

Financial Statements

Preaward Contract

Postaward Contract

 2

 2

 0

 0

 0
IG’s Message for the Congress

March 1999 Commerce IG Semiannual Report 19

The two unresolved NOAA performance audits relate to the National

Marine Fisheries Service’s laboratory structure and NOAA’s light aircraft

operations. The first report has remained unresolved for more than one

year, and the second for over six months. Negotiations are ongoing

between the OIG and NOAA concerning alternative approaches to

resolution (see page 60).

One of the financial assistance reports is a NOAA audit that has been

unresolved for over three years. NOAA and the OIG are discussing

whether the recipient’s independent public accountants should be

requested to perform additional cost verification. The other unresolved

financial assistance audit relates to an NTIA grant award. The OIG is

reviewing the audit resolution proposal recently received from the bureau

(see pages 60 and 63).

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.

The eight appeals pending final decision by the Department include

three EDA and five NIST financial assistance audits.

Report Category Appeals

Actions pending (October 1, 1998)

Submissions

Decisions

Actions pending (March 31, 1999)

8

3

3

8

3

3

0

0

Modifications
Department of Commerce

Organization Chart

Office of the

Secretary

National

Telecommunications

and Information

Administration

International

Trade

Administration

Minority Business

Development

Agency

Bureau of

Economic

Analysis

Bureau of

the Census

National Institute

of Standards

and Technology

National

Technical

Information Service

Technology

Administration

Economics and

Statistics

Administration

Bureau of

Export

Administration

Economic

Development

Administration

National Oceanic

and Atmospheric

Administration

Patent and

Trademark

Office

NOAA

Corps

Operations

NESDIS

Oceanic

and Atmospheric

Research

National

Marine Fisheries

Service

National

Ocean

Service

National

Weather

Service

20 Commerce IG Semiannual Report March 1999
Bureau of

Export Administration

The Bureau of Export

Administration is primarily

responsible for the administration

and enforcement of the nation’s

system for controlling exports of

sensitive dual-use goods and

technologies. Under the Export

Administration Act and regulations,

BXA’s 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 act and regulations.

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 base activities.

Export Enforcement participates

in reviews of export license

applications and conducts criminal

and administrative investigations of

the export control portions of the

Export Administration Act and

regulations. It also administers and

enforces the antiboycott provisions

of the act and regulations.

Audit of FY 1998 Financial Statements

In accordance with the Chief Financial Officers Act of 1990, as

amended by the Government Management Reform Act of 1994, the OIG

contracted with an independent public accounting (IPA) firm for an audit

of BXA’s financial statements. We defined the audit scope, selected the

contractor, and oversaw the performance and delivery of the audit.

The IPA firm issued an unqualified opinion on BXA’s financial

statements. This was an especially noteworthy achievement in light of the

significant changes mandated by OMB Bulletin No. 97-01, which required

the preparation of four new financial statements starting in FY 1998. The

audit results indicate that BXA’s internal control over financial reporting

facilitates the preparation of reliable accounting and financial information.

Although the firm’s report identified no material weaknesses, a first for

BXA, it did identify two reportable conditions in BXA’s internal control

structure: (1) accounts payable fiscal year-end cut-off procedures are not

complete and (2) accounts receivable balances are unsupported.

The report also identified one instance of material non-compliance

with laws and regulations related to the Federal Financial Management

Improvement Act of 1996 (FFMIA), which requires auditors to report on

whether an entity’s financial management systems substantially comply

with federal financial management system requirements, applicable federal

accounting standards, and the U.S. Government Standard General Ledger.

Under a reimbursable agreement, BXA receives financial and accounting

support from NOAA, which uses financial management systems that do

not substantially comply with federal financial management system

requirements. This will continue to be an issue until NOAA’s accounting

system is replaced or BXA obtains finance and accounting support from

another organization that has a compliant system.

We reviewed a draft of the overview to BXA’s financial statements.

The overview provides the linkage between the financial statements and

GPRA, which requires government entities to collect and report information on their performance in meeting their goals and objectives. We found

that BXA had incorporated many of our prior year suggestions for

improving the clarity and conciseness of the overview. We provided BXA

management with a memo containing our observations and recommendations on the draft. Management was responsive and also indicated that it

plans to make additional revisions to strengthen the overviews for FY 1999

and beyond. We encourage BXA to strengthen next year’s discussion of

actual results and to continue efforts to improve performance measurement and reporting. (Financial Statements Audits Division: FSC-10864-

9-0001)

March 1999 Commerce IG Semiannual Report 21
Bureau of Export Administration

Export

Administration

Bureau of

Export

Administration

Export

Enforcement

Legislative and Funding Uncertainties Delay

Implementation of Chemical Weapons Treaty

The OIG conducted a survey of BXA’s export control operations

related to dual-use chemicals (those that have both military and

commercial uses) as a follow-up to an earlier review that concentrated on

the bureau’s export controls over biological agents (see September 1995

issue, page 23). The purpose of our survey was to conduct an initial

analysis of BXA programs and policies related to dual-use chemicals and

determine whether an audit should be conducted of the bureau’s

operations in this area.

Our survey focused primarily on BXA’s export control process and

efforts to implement the Chemical Weapons Convention, a 1994 treaty

signed by 169 countries as of October 1998, which is intended to eliminate

the production, spread, and use of such weapons. We examined the

bureau’s procedures and its data on licenses approved and rejected during

1996-98; its resource planning and industry counseling in anticipation of

legislation to implement the treaty; and its enforcement activities related to

dual-use chemical exports.

At the time of our survey, BXA lacked the authority to implement the

Chemical Weapons Convention without implementing legislation, which

was pending. Therefore, it could not begin its mandated work under the

treaty. We also found that the bureau’s responsibilities and workload would

be increased significantly by the treaty and that its resource level was

insufficient to carry out its draft enforcement plan. Although the Congress

has stated its intention to review BXA’s resource level once the legislation

is passed, we believe that the bureau should develop a contingency plan in

case its full funding request is not granted. Such action would increase

BXA’s ability to comply with the treaty’s main provisions under a

restricted funding scenario.

We presented the results of our survey in an October 1998

memorandum to the Under Secretary. In view of the uncertainty

surrounding the Chemical Weapons Convention legislation and BXA

funding and staffing levels, we deferred our audit until the legislation has

been passed and activities to implement the treaty have progressed.

On October 19, 1998, after our memorandum was issued, the

Congress passed the implementation legislation in H.R. 4328, “Making

Omnibus Consolidated and Emergency Appropriations for Fiscal Year

1999 (page 886).” BXA now has the authority to implement the treaty.

(Science and Technology Audits Division)

22 Commerce IG Semiannual Report March 1999
Economic Development

Administration

The Economic Development

Administration was established

under the Public Works and

Economic Development Act of

1965, as amended, including the

comprehensive amendments by

the Economic Development

Administration Reform Act of 1998,

to generate new jobs, help protect

existing jobs, and stimulate

commercial and industrial growth

in economically distressed areas

of the United States. EDA does

this by providing grants to public

and private nonprofit organizations

in communities with problems that

are stifling economic growth;

planning grants to states, cities,

districts, and Indian reservations;

special economic adjustment

assistance to states and local

governments with recent, severe

problems or long-term economic

deterioration; technical assistance

to communities to build

organizational capacity and solve

specific economic development

problems; and research and

evaluation grants to increase

knowledge about effective

economic development tools.

March 1999 Commerce IG Semiannual Report 23

Audit of FY 1998 Financial Statements

A contractor IPA firm issued an unqualified opinion on EDA’s

FY 1998 financial statements. This represents a marked improvement for

EDA, which had received a qualified opinion on its balance sheet and a

disclaimer of opinion on its statement of operations and changes in net

position for FY 1997. The audit results indicate that EDA has now

established an internal control structure that facilitates the preparation of

reliable accounting and financial information.

However, the IPA firm did identify four reportable conditions in EDA’s

internal control over financial reporting, one of which constitutes a material

weakness. Specifically, EDA (1) does not collect data from grantees to

estimate its accrued grant expense, (2) lacks adequate controls over its

financial accounting, reconciliation, and reporting process, (3) continues to

have annual leave discrepancies, and (4) has control weaknesses in its

financial management systems. Although EDA has made progress in

financial management, the bureau must continue efforts to resolve these

reportable conditions, particularly its methodology for determining accrued

grant expense.

The firm also identified two instances of material non-compliance with

laws and regulations: (1) the financial management system used for EDA’s

grant accounting does not comply with the U.S. Government Standard

General Ledger at the transaction level, and (2) the financial management

system used for salaries and expenses does not comply with certain system

requirements of FFMIA.

In reviewing a draft of the overview to EDA’s financial statements, we

found that EDA had incorporated many of our prior year suggestions for

improving the clarity and conciseness of the overview. We provided EDA

management with a memo containing our observations and recommendations on the draft. Management was responsive and also indicated that it

plans to make additional revisions to strengthen the overviews for FY 1999

and beyond. We encourage EDA to strengthen next year’s discussion of

actual results and to continue efforts to improve performance measurement and reporting. (Financial Statements Audits Division: FSD-10997-

9-0001)
Economic Development Administration

24 Commerce IG Semiannual Report March 1999

Defense Adjustment Assistance

Program Found to Be Well Focused

During the 10-year period ended in 1997, the Department of Defense

eliminated an estimated 550,000 military and 230,000 civilian jobs. In

addition, reductions in defense acquisition programs and military

construction caused private industry job losses of at least 1 million. In

1990 the Congress passed Public Law 101-510, the National Defense

Authorization Act, to assist communities that were substantially and

seriously affected by defense cutbacks by lessening their dependence on

defense spending, thereby providing for their transition to non-defensedependent businesses, employment, and revenue.

From 1991 through 1997, EDA awarded 300 defense adjustment

assistance grants under Title IX of the Public Works and Economic

Development Act of 1965, providing program funds in excess of

$500 million, some of which came from transfers of funds from the

Defense Department.

The OIG conducted an audit to determine whether the projects

awarded by EDA with defense adjustment assistance funds complied with

the purpose of Public Law 101-510 and met Title IX program objectives.

We reviewed the project files for 196 (about 65 percent) of the awards,

representing $435 million (about 87 percent) of the funding.

We concluded that nearly all the grants met EDA Title IX and Defense

Department objectives to mitigate economic losses and create jobs,

thereby fulfilling the requirements of Public Law 101-510. Moreover,

EDA’s program was well focused on the economic losses caused by

cutbacks, and the approved projects were generally consistent with the

transition to non-defense economies.

We did, however, identify four grants (about 2 percent of the total

reviewed) that did not demonstrate defense-related economic dislocations

or did not significantly relate to creating jobs that were lost as a result of

defense cutbacks. Because these projects were minor exceptions to EDA’s

strong performance under the program, we made no recommendations.

(Denver Regional Office of Audits: DEN-9806-9-0001)

Program

Operations

Economic

Development

Administration

Cong. Liaison,

Program

Research and

Evaluation

Finance and

Administration
Economic Development Administration

March 1999 Commerce IG Semiannual Report 25

Recipient Violated Grant Terms and Conditions

To alleviate the economic disruptions caused by defense program

reductions at a private sector engineering laboratory, in 1994 EDA

awarded a $6 million defense adjustment assistance grant to a county, city,

and nonprofit corporation in Idaho. The corporation supports, develops,

and promotes entrepreneurial talent and start-up businesses, and

encourages the participation of financial, business, educational, and

governmental organizations.

The grant was divided into three components: (1) $4.55 million to

construct a 35,000-square-foot technology incubator building to house

high-technology start-up companies, (2) $1 million to capitalize a business

revolving loan fund (RLF) targeting new and emerging high-technology

business development and businesses started by dislocated workers, and

(3) $450,000 for technical assistance to manage the incubator and the RLF

and assist high-technology start-up companies. The county was responsible

for constructing the technology building; the city assisted in the construction and provided some matching funds; and the corporation was

responsible for managing the building and implementing the RLF and the

technical assistance component.

The OIG conducted an audit of the grantees’ activities in completing

the defense adjustment assistance project. We did not identify any cost or

performance issues related to the county’s and the city’s construction of

the incubator. However, we identified several areas of concern related to

the corporation’s management of the RLF and its technical assistance

program. Specifically, the corporation deviated from grant objectives by

leasing space to some companies and providing loans to some borrowers

not targeted by the grant; violated grant requirements by obtaining more

than $25,000 in federal reimbursement than allowed; deposited $61,000 of

program income from leasing building space into its general operating fund;

and did not contribute or could not document nearly $50,000 in required

matching funds.

We recommended that EDA require the corporation to restrict leases

and RLF loans to workers dislocated from the laboratory or companies

that focus on transferring technology from the laboratory; disallow

questioned costs of about $20,000 and recover $25,000 in excess grant

disbursements; require the corporation to classify $61,000 in rental

revenues as program income; and document or provide the $50,000 in

matching funds.
Economic Development Administration

26 Commerce IG Semiannual Report March 1999

The corporation generally agreed that it had leased space and provided

loans to borrowers who were not targeted by the grant program, and that

excess loan funds had been retained. However, it did not agree with our

findings and recommendations regarding its use of program income as

general revenue and its failure to provide all required matching funds.

(Seattle Regional Office of Audits: STL-10482-9-0001)

Flood Act Grantee Did Not Disclose

Application for Other Federal Funds

The Emergency Supplemental Appropriations for Relief from the

Major Widespread Flooding in the Midwest Act of 1993 (Public Law 103-

75) provided EDA with $200 million to award disaster assistance grants to

assist in the economic recovery of communities, industries, and firms

harmed by the 1993 floods. In September 1994, EDA awarded an

Emergency Flood Act grant to a city in Kansas under Title I of the Public

Works and Economic Development Act of 1965, as amended. The

purpose of the grant was to construct a new water treatment plant to

replace capacity lost at the existing plant as a result of the flooding. The

total approved cost of the project was $28.5 million, consisting of

$7.5 million from EDA and a $21 million matching share from the city.

At the time the award was made, EDA was unaware that the city had

also applied to the Federal Emergency Management Agency (FEMA) for

funds to repair or replace its water treatment plant. It was understood by

EDA that its grant would pay for the entire cost of constructing the facility.

In February 1998, FEMA awarded $10.1 million to the city to finance

a $17.7 million project, consisting of about $4.7 million to demolish the

existing plant and $13 million to construct a new one. FEMA estimated the

cost of the entire water system project to be about $45 million.

An OIG audit determined that the city had violated the terms and

conditions of the EDA award by not disclosing in its grant application that

it had earlier applied for FEMA funding to repair or replace the water

treatment plant. We found that the overlapping scopes of the EDA and

FEMA projects could lead to duplicative claims and reimbursements. In

addition, the city improperly claimed reimbursement for nearly $125,000

in costs incurred prior to the grant period for work that was planned before

the floods, resulting in over $32,000 in excess disbursements from EDA.

We recommended that EDA require the city to explain its nondisclosure of the FEMA grant application, determine if any administrative

action is required as a result of this non-disclosure, and require the city to
Economic Development Administration

March 1999 Commerce IG Semiannual Report 27

prepare a revised project budget clearly delineating the scopes of the EDA

and FEMA projects. We also recommended that EDA seek recovery of

over $32,000 in excess disbursements. (Denver Regional Office of Audits:

DEN-9652-9-0001)

Florida Grantee Made Improper Drawdowns

and Financed Ineligible Loan Activities

In June 1993, EDA awarded a $2 million Long-Term Economic

Deterioration implementation grant to a Florida city to capitalize a

revolving loan fund to help the city’s economic recovery after Hurricane

Andrew’s severe devastation in August 1992. In July 1998, EDA

deobligated $268,000 of the award funds, reducing the grant amount to

about $1.7 million. The grant, which required no matching share, was

funded under Title IX of the Public Works and Economic Development

Act of 1965, as amended.

The grant required the city to use the RLF to create and retain jobs,

develop innovative financing for higher credit risk businesses, and attract

new businesses. As of February 1998, the RLF had a capital balance of

over $2 million, consisting of outstanding loans of about $1.3 million and a

cash reserve of $700,000.

The OIG conducted an audit of the award to determine the RLF’s

financial status and the city’s compliance with federal rules and regulations

and EDA grant terms and conditions. We found that the city had

improperly retained $490,000 in premature grant drawdowns for almost

one year, and that two borrowers had used $214,000 in loan proceeds to

finance ineligible loan activities. Also, because the city did not follow all

applicable grant administration requirements, it incurred $90,000 in

questionable grant administration costs, submitted inaccurate financial

reports, and failed to provide required RLF plan certifications or to record

nearly $8,000 in RLF income. We believe a frequent turnover of RLF

administrators contributed significantly to these problems.

We recommended that EDA require the city to (1) remit to EDA

$26,000 in accrued interest on the premature drawdowns, (2) reimburse

the RLF $90,000 for the questioned administrative costs and $214,000 for

the outstanding balances of the ineligible loans, and (3) ensure the

accuracy of its financial and performance reports and the adequacy of its

accounting records, submit all RLF plan certifications and modifications as

required, and inform EDA of any significant changes in administrative

personnel. (Atlanta Regional Office of Audits: ATL-10730-9-0001)
Economic Development Administration

28 Commerce IG Semiannual Report March 1999

Grantee Disregarded Procurement

Standards in Contract Award

In September 1996, a Texas nonprofit organization received a

technical assistance grant under EDA’s Defense Conversion Assistance

program to enable it to assist companies located in Arkansas, Louisiana,

New Mexico, Oklahoma, and Texas to move from dependence on

defense-related activities to reliance on commercial markets. The total

approved project cost was $450,000, consisting of a 75-percent federal

share and a 25-percent local match. Based on claimed project costs of

more than $500,000, EDA disbursed the full federal share of $337,500 to

the grantee. Most of the project work was performed through a contract

with a for-profit consulting firm.

The OIG conducted an audit to determine whether the costs claimed

by the grantee were allowable, reasonable, and allocable and whether the

parties complied with the grant terms and conditions. Following is a

summary of our audit results:

z We found that the grantee disregarded procurement standards in

awarding a $244,250 contract to the consulting firm. Specifically,

the grantee’s procurement files did not show that it had obtained

competitive bids for the contract or justified the sole-source

award. We recommended that EDA require any future awards to

the grantee to contain special conditions to ensure that applicable

procurement requirements are followed.

z Of the $513,646 in total costs claimed by the grantee, we

questioned $258,838, primarily related to contractor costs for

salaries ($149,710) and in-kind contributions ($72,500). We

recommended that EDA disallow the questioned costs and seek

recovery of $146,394 in excess federal disbursements.

The grantee maintained that the questioned salary costs were

supported by reconstructed time distribution records submitted in response

to our draft report, but we found the records to be insufficient to support

the costs claimed. The grantee also asserted that the procurement requirements were not applicable because the consulting firm was a subrecipient

rather than a contractor. This assertion, however, is contradicted by the

terms of the agreement between the two parties, which clearly identified

the firm as a contractor. In addition, the consulting firm, as a for-profit

company, cannot legally be a recipient of EDA Title IX funds. (Denver

Regional Office of Audits: DEN-10586-9-0001)
Economic Development Administration

March 1999 Commerce IG Semiannual Report 29

Legislation Requires Funds Disbursement

Despite City’s Violations of Grant Terms

In September 1994, EDA awarded a $912,000 Title IX disaster

assistance grant to a city in Kansas to help mitigate the effects of the

Midwest floods of 1993. The grant funds were to be used to make street

and water system improvements and to support a new technology center

being built at a local university. The grant required the city to provide a

$2.7 million matching share from the state transportation department and

general obligation bonds, bringing the total estimated project cost to about

$3.6 million.

An OIG audit disclosed that the city had violated several terms of the

grant award. However, in October 1998, after we had completed our audit

fieldwork, the Congress enacted Public Law 105-277, which provided that

upon completion of this project, EDA was to disburse the full $912,000 to

the city, notwithstanding any other provision of law. In view of this

legislation, we reported the grant violations to EDA, but did not make any

recommendations for corrective action. The project has been completed,

and EDA has disbursed the funds to the city. (Denver Regional Office of

Audits: DEN-10587-9-0001)

In Brief

Conviction. In March 1999, a former economic development representative was convicted of one count of bribery based on a joint OIG/FBI/

IRS investigation, which revealed that he had accepted $3,000 in November 1995 from two individuals representing an applicant for EDA grant

funds. Sentencing is scheduled for May 1999 in U.S. District Court for the

Western District of Texas. (Denver Field Office of Investigations)
Economics and

Statistics Administration

The Economics and Statistics

Administration analyzes

economic developments, develops

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. Census is

the country’s preeminent statistical

collection and dissemination

agency. It publishes a wide variety

of statistical data about people and

the economy of the nation,

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.

BEA’s goal is to provide a clear

picture of the U.S. economy by

preparing, developing, and

interpreting the national income

and product accounts

(summarized by the gross

domestic product) as well as

aggregate measures of

international, regional, and state

economic activity.

Data Capture System Requirements and Testing

Problems Experienced During Dress Rehearsal

In the spring of 2000, the Census Bureau will begin collecting and

processing data from approximately 120 million households as part of its

decennial census operations. These operations will require the capture of

data from an estimated 1 billion pages of census forms within a fourmonth period. To accomplish data capture, the bureau will use a state-ofthe-art system, Data Capture System 2000.

In contrast to previous decennial censuses, DCS 2000 is being

developed by a contractor, rather than by the bureau. The DCS 2000

contract is divided into two overlapping phases: Phase I was the design and

development of a pre-production version of the system for use in the 1998

Dress Rehearsal. Phase II is the development of the full-scale production

version, which will be used for the 2000 Decennial Census.

An OIG review of Phase I of DCS 2000 operations disclosed that the

system experienced serious problems in processing dress rehearsal forms

as a result of inadequate control of requirements and insufficient testing.

Specifically, growth and change in system requirements caused the data

capture contractor to abandon its well-defined system engineering

procedures. Instead, concurrent development, testing, and deployment

activities were performed on a short cycle that did not allow enough time

to consistently apply sound system engineering practices, including

software and system testing.

In addition, funding shortfalls and the disruption to the system

engineering approach caused by requirements instability made it necessary

to reduce the size and scope of the bureau’s test program, which was

designed to identify and correct problems and validate that the system was

functioning properly before the dress rehearsal. As a result of the less

rigorous and comprehensive testing, many problems were not identified

until during the dress rehearsal.

Despite these difficulties, the system met all of its processing

deadlines, due largely to the noteworthy efforts of the bureau and the

contractor in addressing the unexpected problems. However, the size,

complexity, and performance requirements of the decennial census mean

that similar problems in 2000 would introduce a high risk of not being able

to complete data capture operations on time and could produce data of

questionable accuracy. We believe, nevertheless, that with strict

requirements management, comprehensive testing, and sufficient funding,

the problems experienced with DCS 2000 during the dress rehearsal can be

30 Commerce IG Semiannual Report March 1999
Economics and Statistics Administration

Economics and

Statistics

Administration

Bureau

of the

Census

Bureau of

Economic

Analysis

solved, and the system will be capable of performing as needed during the

decennial census.

We recommended that the bureau strengthen the requirements

management process for DCS 2000, and establish schedules with sufficient

time and provide adequate funding to perform complete and improved

testing of the system, including operational testing. The bureau agreed with

our findings and is taking steps to implement our recommendations. For

example, the bureau has recently convened a steering group composed of

decennial operational managers to implement a requirements control

process. (Office of Systems Evaluation: OSE-10846)

Audit of Census’s

FY 1998 Financial Statements

An IPA firm issued an unqualified opinion on Census’s FY 1998

balance sheet, but a disclaimer of opinion on its remaining financial

statements because the bureau did not adequately perform reconciliations

or produce accurate financial statements on a timely basis with sufficient

quality assurance procedures. This situation was caused by the bureau’s

lack of adequate financial management systems, reports, and oversight,

which prevented it from preparing timely and accurate statements.

Census’s inability to produce timely and accurate financial statements

hampered the Department’s ability to meet the legislatively mandated

March 1, 1999, deadline for producing its audited consolidated financial

statements. High-level bureau managers must continue to make financial

management improvement a top priority, and must intensify their efforts to

improve the bureau’s internal control over financial reporting and promptly

implement corrective actions for the preparation of the 1999 financial

statements so that the Department can meet the March 1, 2000, deadline.

The IPA firm’s report identified two material weaknesses:

z Lack of adequate financial management systems, reports, and

oversight to prepare timely and accurate financial statements.

z Lack of adequate support for accounts payable and undelivered

orders balances.

As a result of the second material weakness, the firm identified

$3.3 million in invalid obligations. Census agreed that the obligations were

not valid and made adjustments to its financial records. This sum represents funds available to be put to better use.

March 1999 Commerce IG Semiannual Report 31
Economics and Statistics Administration

In addition to the material weaknesses, there were four other

reportable conditions, related to (1) differences between fixed asset

subsidiary records and periodic inventory results, (2) policies and

procedures for determining the actual cost of items held in inventory for

sale, (3) the application of the Working Capital Fund surcharge, and

(4) general controls related to CAMS.

The firm also identified one instance of material non-compliance with

laws and regulations: Census’s financial management systems did not

comply with certain requirements of FFMIA.

Our office reviewed a draft of the overview to Census’s financial

statements and informally provided management with our suggestions for

improvement. While the final overview incorporated some of our suggestions from the previous year’s review, it is generally not responsive to this

year’s comments. The overview lacks historical data for trend analysis and

target data for FY 1998, and contains only a limited discussion of the

challenges the bureau faces and management efforts to address them.

(Financial Statements Audits Division: FSD-10865-9-0001)

Census Needs Policies for Preparing,

Reviewing, and Tracking Its Agreements

Interagency and other special agreements are mechanisms for federal

agencies to define terms for performing work for others, acquiring work

from others, or coordinating complementary programs (without the

transfer of funds). The Bureau of the Census uses such agreements—

consisting of reimbursable agreements, obligation agreements, or

agreements not involving the transfer of funds—to pursue several aspects

of its mission to collect and provide timely, relevant, and quality data about

the people and the economy of the United States. In FY 1997, Census had

586 reimbursable agreements, 81 obligation agreements, and 40 agreements not involving the transfer of funds that were active.

The OIG evaluated the policies, procedures, and practices being

followed by the bureau in its preparation, review, and management of

obligation agreements and agreements not involving the transfer of funds.

(We did not review the bureau’s individual reimbursable agreements

because they were partially included in an OIG audit of the FY 1997

financial statements.) This was one in a series of reviews in the OIG’s

Department-wide examination of agreements (see page 17).

32 Commerce IG Semiannual Report March 1999
Economics and Statistics Administration

Overall, we found that the bureau used agreements to support its

mission by obtaining and exchanging data, conducting joint statistical

projects, and acquiring information technology. However, we also

identified the need for significant improvements in the agreements

themselves, the review process, the policies that govern agreements, and

the tracking of agreements.

Specifically, our review disclosed that:

z Agreements were not always properly prepared. The bureau

did not consistently cite an applicable legal authority, prepare

written justifications, include total project costs and budget

summaries, or define termination dates or review periods.

z Oversight process for reviewing agreements was inadequate.

Only 2 of the 26 sampled agreements from FY 1997 received

Office of General Counsel review. In addition, the bureau did not

have any policy or procedure that stipulated when legal review

was required before an agreement could be signed.

z The bureau lacked a central database to inventory and track

agreements. Although the bureau has separate financial systems

for tracking reimbursable and obligation agreements, there is

neither a repository nor a central listing of all agreements.

We recommended that Census develop a comprehensive set of

guidelines for preparing and reviewing all types of bureau agreements that

is consistent with departmental guidance. In addition, relevant information

for preparing and processing agreements should be distributed internally

through the bureau’s intranet and at appropriate bureau management and

administrative meetings. We also recommended that the bureau provide

training to program and administrative staff responsible for preparing,

processing, and reviewing agreements, and establish a centralized system

to adequately inventory, track, and control agreements.

The bureau acknowledged that improvements in the agreement

processes are necessary and agreed with all of our recommendations.

(Office of Inspections and Program Evaluations: IPE-10523)

March 1999 Commerce IG Semiannual Report 33
Economics and Statistics Administration

Census Denver Office Needs to Improve

Internal Controls over Bankcard Purchases

In conjunction with an OIG plan to periodically review Commerce

units’ use of bankcards, we conducted an audit of FY 1997 bankcard

transactions at the Census Bureau’s Denver Regional Office to determine

whether purchases were made in compliance with applicable federal and

departmental requirements. The objectives of the bankcard program,

established government-wide in 1989, are to reduce administrative

procurement costs, improve cash management by expediting and

simplifying small purchases, and strengthen internal controls to eliminate

the vulnerabilities to fraud and abuse of other small purchase methods.

We identified a number of deficiencies in the regional office’s internal

controls over bankcards: (1) the contracting office head did not perform

the required annual review of bankcard activity, (2) six of the seven office

bankcards were not stored in a secure location, (3) two unauthorized

employees were permitted to use a bankcard at least four times, (4) one

prohibited service was purchased monthly with a bankcard, (5) purchases

were routinely made without preapproval, (6) accounts were not properly

closed when cardholders left the office, (7) several records for a

cardholder who had left the office were not retained, and (8) mandatory

training was not provided to two cardholders. As a result, the office was at

risk for unauthorized and improper procurements.

We recommended that the bureau ensure that the Denver office

follows effective internal control practices and conduct a follow-up review

of the office’s bankcard activity within 18 months of our report and

provide us with the results of that review. Bureau officials agreed with our

recommendations, stating that the contracting office head will complete the

annual review within 12 months to ensure that the internal control

deficiencies we identified are corrected. In addition, cardholders and

approving officials will be instructed regarding the importance of these

matters. (Denver Regional Office of Audits: DEN-11030-9-0001)

Audit of ESA and BEA’s

FY 1998 Financial Statements

An IPA firm issued an unqualified opinion on ESA and BEA’s

FY 1998 financial statements. The firm did not identify any material

weaknesses, but did cite two reportable conditions in the agencies’ internal

control over financial reporting.

34 Commerce IG Semiannual Report March 1999
Economics and Statistics Administration

One condition involved the controls surrounding the Department’s

Office of Computer Services mainframe system, on which the Financial

Accounting and Reporting System (FARS) application is processed. The

firm considers these issues to be a reportable condition to ESA and BEA

because FARS processes the financial information used in preparing the

financial statements. However, the reportable condition is not under the

control of ESA and BEA management.

The second reportable condition relates to annual leave discrepancies

that continue to exist between the Department’s time and attendance

system and the National Finance Center’s payroll system and the fact that

reconciliations between the systems are not being performed regularly.

Although the number and value of the discrepancies are not material to the

financial statements, the lack of adequate reconciliation could result in the

reporting of inaccurate payroll expenses in the statements.

The firm also identified one instance of material non-compliance with

laws and regulations related to FFMIA. Specifically, FARS does not maintain sufficient commonality of data elements and transactions processing to

ensure timely, accurate, and effective financial reporting, as required by

federal guidance.

In reviewing a draft of the overview to ESA and BEA’s financial

statements, we found that the agencies had incorporated many of our prior

year suggestions for improving the clarity and conciseness of the overview,

which resulted in an improved discussion of their activities and results.

However, ESA and BEA need to provide additional discussion of

performance goals, such as a comparison of actual results to benchmarks

and a discussion of variances. ESA and BEA management were also

responsive to the observations and recommendations we made on the

draft. We encourage the agencies to strengthen next year’s discussion of

actual results and to continue efforts to improve performance measurement and reporting. (Financial Statements Audits Division: FSD-10863-

9-0001)

March 1999 Commerce IG Semiannual Report 35
International

Trade Administration

The International Trade

Administration is responsible for

most nonagricultural U.S. trade

issues and works with the Office of

the U.S. Trade Representative in

coordinating U.S. trade policy. ITA

has four principal units:

Market Access and Compliance.

MAC 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 achieve

full compliance by foreign nations

with trade agreements signed with

the United States.

Trade Development. TD 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. IA

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. & Foreign Commercial

Service. US&FCS promotes the

exports of U.S. companies and

helps small and medium-sized

businesses market their goods and

services abroad. It has 98 domestic offices and 138 overseas posts

in 75 countries.

FY 1998 Financial Statements Reviewed

Under Agreed-Upon Procedures

During the prior four fiscal years, the OIG contracted with an IPA firm

to perform a full-scope audit of ITA’s financial statements. These audits

resulted in disclaimers of opinion due to material weaknesses in ITA’s

internal control over financial reporting. Because ITA management

indicated that substantive corrective actions had not been fully implemented for FY 1998, the OIG altered the scope of work from conducting

a full-scope audit to performing certain agreed-upon procedures. The

purpose of these procedures, which we defined, was to perform limited

testing of corrective actions made to date and to support the FY 1998

Department of Commerce consolidated financial statements audit. This

approach was also designed to afford ITA an opportunity to focus its

efforts toward the FY 1999 financial statements audit.

In its report, the IPA firm noted that ITA had completed the planning

and early implementation stages of two major initiatives that should

dramatically improve the bureau’s financial management:

z ITA has a contract with an IPA firm to develop standardized

financial policies and procedures for overseas posts in support of

CFO Act requirements. Such policies and procedures should

correct two of the six material weaknesses identified in the firm’s

FY 1997 report on ITA’s financial statements (see March 1998

issue, page 31).

z ITA is in the process of outsourcing its accounting operations and

financial system support services to the Department of the

Interior. Since Interior’s Federal Financial System meets all

relevant federal requirements, this outsourcing should help correct

the four remaining material weaknesses.

In addition, the firm reported that because these corrective actions

were not fully implemented during FY 1998, many of the deficiencies

noted in FY 1997 remain. Although a Chief Financial Officer and a Deputy

were appointed, ITA was still unable to produce auditable financial

statements, and material internal control weaknesses continued to exist. In

addition, except for transferring sufficient cash to fund the voluntary

foreign service national separation pay accrual, ITA continued to be

noncompliant with certain laws and regulations.

36 Commerce IG Semiannual Report March 1999
International Trade Administration

Import

Administration

Market

Access and

Compliance

Trade

Development

U.S. and Foreign

Commercial

Service

International

Trade

Administration

We commend ITA for its efforts to correct its material weaknesses and

encourage continued implementation of these corrective actions. However,

constant oversight is still needed. The mid-year conversion to Interior’s

Federal Financial System is especially critical as the conversion process

will be complex and difficult. (Financial Statements Audits Division:

FSC-10866-9-0001)

Better Management and Coordination

Needed to Improve Export Promotion

The OIG conducted a review of the Department’s export promotion

efforts, focusing on the effectiveness of ITA, as the lead Commerce

agency, in managing its export promotion programs and operations, and its

involvement with other departmental units and other federal agencies to

expand trade opportunities for U.S. businesses.

We found that ITA has accomplished a great deal in the area of export

promotion. Among the steps ITA is taking are (1) establishing a

government-wide strategy for export promotion services, (2) providing

U.S. firms with a greater awareness of export opportunities, and

(3) offering improved services and support at its domestic and overseas

offices. However, our review disclosed several issues regarding ITA’s

internal structure and the guidance and direction provided by its senior

managers that warrant management attention:

z Periodic voids in leadership and general direction. Too often

in the past, the Under Secretary position has been vacant and the

Deputy Under Secretary has filled in, in effect performing two

jobs.

z Fragmented approach to providing export promotion

services. ITA’s organizational structure has encouraged a

fragmented, often duplicative approach to providing support to

U.S. firms. Senior officials have indicated that they recognize the

need to make changes in this area.

z Inadequate integration of US&FCS’s domestic and overseas

personnel. Although US&FCS’s decision to better integrate its

staff was sound, initial efforts to implement the decision were not

well planned and did not adequately consider employees’ concerns. The agency’s recently revised approach addresses many of

those concerns, but may not go far enough.

March 1999 Commerce IG Semiannual Report 37
International Trade Administration

! Limited use of US&FCS’s “Teams Initiative.” This initiative,

which involves teams of trade specialists located throughout the

United States who work to promote exports for a particular

industry or a specific geographic region, has the potential to be an

important tool in improving ITA’s effectiveness and coordination

worldwide. But teams could be more effective if they routinely

leveraged staff resources from other ITA units to address specific

trade-related issues. The initiative would also benefit from having

its manager located at Commerce headquarters.

! Ineffective information technology strategies for both inhouse operations and service delivery. US&FCS does not

(1) have a permanent office with leadership responsibilities in

information technology, (2) have an adequate system development

methodology, or (3) adequately plan or budget for its information

technology modernization. Efforts underway to upgrade the

agency’s office automation infrastructure, improve client tracking,

and develop a standard system platform for sharing information

appear promising, but more work is needed.

We also found problems related to ITA’s interaction within the

Department on export promotion activities. Although ITA appears to be

working well with BXA and the National Marine Fisheries Service

(NMFS), the bureau needs to better coordinate with (1) EDA to prioritize

and maximize the use of its grant funds for export promotion efforts,

(2) MBDA to provide more effective export promotion services to its

clients throughout the nation, and (3) NTIA to promote international

market access and trade opportunities for U.S. telecommunications

companies. In addition, NIST should continue to work closely with ITA in

furthering Commerce’s efforts to help developing nations shape their

industry standards.

In an earlier report on export promotion (see March 1993 issue, page

28), we expressed concerns about inadequate governmentwide interagency

coordination. Since then, ITA has improved interagency coordination

through the Trade Promotion Coordinating Committee (TPCC), which

includes senior-level representatives from 20 federal agencies, and has

established a TPCC Secretariat to provide a point of contact for federal or

private sector parties. We found, however, that there was often inadequate

cooperation among the various TPCC agencies operating at overseas

posts, which can result in missed trade opportunities, inefficient operations,

and overlap and duplication.

38 Commerce IG Semiannual Report March 1999
International Trade Administration

Among our recommendations were that ITA (1) refine and implement

its reorganization plan and, as appropriate, revise its policies to redefine the

roles and responsibilities of the agency and its components in relation to

exporters’ needs, (2) designate a permanent office that has the necessary

capabilities and authority to address bureauwide information technology

issues, (3) seek to strengthen the role of the TPCC as a tool to encourage

greater government cooperation and coordination on trade issues,

(4) periodically evaluate the integration initiative to ensure that it is

delivering the desired results, and (5) ensure that the Teams Initiative

includes, where appropriate, industry and country specialists from other

ITA units. We also made recommendations to both ITA and senior

officials at those Commerce agencies—EDA, MBDA, and NTIA—with

which better coordination is needed.

ITA generally agreed with our recommendations. (Office of

Inspections and Program Evaluations: IPE-9904)

Acting IG Testifies on Commerce

Export Promotion Initiatives

On March 25, 1999, the Acting Inspector General appeared before the

House Government Reform and Oversight Subcommittee on Criminal

Justice, Drug Policy, and Human Resources to discuss the results of the

OIG’s recent work related to the Department’s—and particularly ITA’s—

efforts to promote U.S. exports. He observed that ITA has accomplished

much in the area of export promotion in recent years. Current and

potential U.S. exporters, as well as related associations, are increasingly

acknowledging ITA’s success in making U.S. firms better aware of export

opportunities, offering a wide range of services and support at its domestic

and overseas offices, and pursuing an effective government-wide strategy

for export promotion services.

The Acting IG highlighted a recent OIG report that both assessed the

Department’s export promotion efforts and described some of the

challenges facing Commerce managers as they continue to improve their

export promotion activities (see page 37). In conducting this review, the

OIG attempted to address two primary questions: (1) What is the

Department doing to meet the objectives of the Omnibus Trade and

Competitiveness Act of 1998? (2) Are U.S. exporters, and potential

exporters, being well served by the Department?

The testimony focused on the efforts of the U.S. and Foreign

Commercial Service—the Department’s largest, and most visible export

promotion unit—describing in particular the results of OIG reviews of

March 1999 Commerce IG Semiannual Report 39
International Trade Administration

US&FCS’s overseas posts (see below). The Acting IG also presented

observations relating to the export promotion efforts of other ITA units and

other Commerce agencies, and discussed the OIG’s views on how certain

trade promotion activities are, or should be, coordinated among the many

federal agencies with responsibilities in this area.

OIG Continues Its Reviews

of US&FCS’s Overseas Posts

During this semiannual period, the OIG continued its series of reviews

of selected Commerce overseas posts (see September 1998 issue, page

35), which are under the direction of ITA’s U.S. and Foreign Commercial

Service. The reviews evaluate a post’s operational effectiveness and

determine whether it is efficiently accomplishing its mission: to assist U.S.

companies, especially small and medium-sized ones, with export

assistance. In reporting the results of each review, we generally divide our

findings into some combination of the following areas: general management

and organizational issues, program activities and performance measurement, and internal control environment. In the following sections, we

summarize the results of the five audit reports issued during this

semiannual period.

US&FCS European Union

The European Union (EU) comprises 15 countries, referred to as

member states, having a total population of about 370 million people,

roughly 11⁄2 times that of the United States. The United States maintains

diplomatic relations with EU through the U.S. Mission to the EU, whose

staff includes representatives from the Departments of Agriculture,

Commerce, Justice, State, and the Treasury; the Office of the U.S. Trade

Representative; the U.S. Information Agency; the Customs Service; and

the Agency for International Development. Commerce’s operations are

managed by US&FCS and also include programs of NIST and NOAA.

! General management and organizational issues. Although

US&FCS’s EU operation is an atypical post, with activities

directed primarily at supporting the U.S. mission’s policy and

regulatory-reporting initiatives, we believe that it needs to more

fully integrate its operations with the agency’s core mission of

providing export marketing assistance to U.S. firms. To do this,

the post must develop a strategic commercial plan and identify

primary and secondary target markets for its output.

40 Commerce IG Semiannual Report March 1999
! Program activities and performance measurement. US&FCS

EU has supported mission efforts in advancing mutual recognition

agreements to improve access for U.S. and EU firms to each

other’s markets, and both the NIST standards program and the

NOAA fisheries program were providing valuable services to the

U.S. business community and other US&FCS posts in Europe.

However, the development of core US&FCS products and

services needed attention, and NIST’s and NOAA’s programs

should be better integrated into Showcase Europe, the Department’s strategy to approach Europe on a regional basis and to help

U.S. firms already exporting in one market to move into others.

Moreover, the post needed to establish an outreach program,

develop marketing materials, and explore untapped service

markets, especially for small and medium-sized enterprises.

! Internal control environment. US&FCS EU’s administrative

structure was inadequate, and appropriate internal controls had not

been established, primarily because of changes in management and

turnover in personnel. As a result, the post was not actively

monitoring its finances; significant discrepancies in accounting data

existed between State and ITA financial reports, as well as prior

year unobligated authorizations and unliquidated obligations; and

physical asset management had deficiencies.

US&FCS generally agreed with the recommendations we made and

described measures already taken to implement them. These include

developing a FY 1999 strategic action plan to coordinate the post’s

marketing efforts with other US&FCS European posts and Showcase

Europe and taking steps to strengthen the post’s internal control system.

(Business and Trade Audits Division: BTD-10588-9-0001)

US&FCS Belgium

One of the leading trading nations in the world, Belgium offers a

central location for reaching the major European markets, a first-rate

infrastructure, a skilled multilingual workforce, and an open economy.

Belgium is a major market for American products, importing an estimated

$12.5 billion in 1996. U.S. direct investment in Belgium was $17.8 billion

at the end of 1995, and more than 1,200 American companies have

operations there. The post is also responsible for commercial affairs at the

U.S. embassy in Luxembourg.

International Trade Administration

March 1999 Commerce IG Semiannual Report 41
Our audit of US&FCS operations disclosed the following:

! Organizational issues. Under the office structure in place at the

time of our review, the deputy senior commercial officer directly

supervised only two of the six foreign service nationals responsible

for industry sector coverage. Giving the deputy more responsibilities would enable the commercial staff to benefit more readily

from his substantive expertise and would likely improve final work

products.

! Program activities. To complement its Europe-wide commercial

strategy, US&FCS has considered adopting a regional approach to

the three countries making up the Benelux region—Belgium, the

Netherlands, and Luxembourg. However, US&FCS had not taken

decisive action on such an approach at the time of our review. A

single-management approach to Benelux, managed by US&FCS

Belgium, could provide more coordinated services for U.S. companies seeking to do business in the region.

We also found that two-thirds of the post’s “success stories”—a

performance measure of export actions in which the Department

played a role—were the result of four US&FCS-coordinated or

supported trade events held each year. We believe that with the

size and experience of its commercial staff, US&FCS Belgium

should implement an action plan to increase the number of success

stories generated through other than event-related products and

services. US&FCS should also better coordinate and streamline its

two distinct operations in Belgium—the Belgium post and EU.

! Internal control environment. US&FCS has established

generally good internal control systems to meet the intent of the

Federal Managers’ Financial Integrity Act. Systems were in place

to document and record transactions and events and to safeguard

assets, and the post had proper physical asset management procedures over inventory. However, we did find some weaknesses in

accounting controls that needed to be addressed. Specifically,

account balances recorded by the State Department and ITA

differed significantly, and the total unfunded severance liability for

the post was over $1 million at the end of FY 1997.

We made several recommendations to US&FCS to address the identified deficiencies. The agency generally agreed with our recommendations

and described measures it has taken to implement them. (Business and

Trade Audits Division: BTD-10595-9-0001)

International Trade Administration

42 Commerce IG Semiannual Report March 1999
US&FCS Portugal

In 1997 direct U.S. exports to Portugal amounted to about $1 billion.

However, as only the 34th largest market for direct U.S. exports of goods

and services, Portugal is not ranked highly by U.S. businesses as a new

market to explore. US&FCS Portugal consists of two offices—in Lisbon

and Porto.

! Program activities and general management. Because U.S.

exporters consider Portugal to be peripheral to other European

markets, US&FCS Portugal has focused on servicing Portuguese

companies interested in importing or distributing U.S. products.

The post’s primary goals for FY 1997-98 were to increase success

stories resulting from assistance to importers and to coordinate

regional promotion of Portugal through Showcase Europe.

However, while the Porto office was generating a large number of

success stories, the quantity and sector coverage represented by

these stories, as well as the lack of a strong working relationship

with the local branch of the American Chamber of Commerce,

indicated that the office’s activity might be too narrowly focused.

Moreover, the Agent/Distributor Service—a customized overseas

search for qualified agents, distributors, and representatives for

U.S. firms—needed improvement in management and timeliness.

! Internal control environment. US&FCS Portugal played an

active role in administering the International Cooperative

Administrative Support Services, the administrative cost system

for U.S. overseas operations, and maintained an adequate internal

control environment. The minor internal control weaknesses we

found involved asset management control over vehicles and

inventory, controls over cash collections, and the amount of the

severance cost liability.

Again, to correct the identified deficiencies, we made a series of

recommendations, which US&FCS generally agreed with. It also described

measures taken to implement them, including improving the relationship

with the Porto branch of the American Chamber of Commerce, increasing

the number of visits to Lisbon by the Porto foreign service national,

processing all Agent/Distributor Service requests within US&FCS time

frames, and maintaining an up-to-date inventory of office and residential

property. (Business and Trade Audits Division: BTD-10594-9-0001)

International Trade Administration

March 1999 Commerce IG Semiannual Report 43
US&FCS South Korea

Until its recent economic troubles, the Republic of South Korea’s

economic growth over the last 30 years had been spectacular. South Korea

has grown from one of the poorest to among the largest economies in the

world, and one of the largest U.S. export markets. However, the South

Korean market is difficult for U.S. companies to penetrate for several

reasons, among them the amount of pirated and counterfeit goods in the

marketplace, the sometimes inconsistent enforcement of laws and

regulations, the dominance of domestic conglomerates, cumbersome

customs clearance procedures and regulations, and non-tariff trade

barriers. US&FCS South Korea operates in two facilities in Seoul: an

office in the embassy and a business center in an adjacent building.

We concluded that in general, US&FCS’s management team was

effective and morale was high among the staff. The post was operating an

ambitious outreach program and delivering high-quality products and

services to U.S. exporters. Clients and export organizations who work with

the post had positive comments about its operations, and it generated a

large number of success stories.

! General management and organizational issues. Despite its

overall strong performance, the post needed to address certain

weaknesses to sustain its effectiveness. For example, continuity of

operations is at risk due to the scheduled departure of most

commercial officers during the summer of 1999, the high turnover

of FSN staff in recent years, and the lack of emphasis on staff

training. In addition, management of the U.S.-Asia Environmental

Partnership program (a joint US&FCS-Agency for International

Development program to promote U.S. environmental exports in

Asia) has been inadequate.

! Program activities and performance measurement.

Notwithstanding its many successes, the post’s management and

staff expressed concern that too much time and resources may

have been spent on its trade policy functions, at the expense of its

trade promotion responsibilities. Moreover, US&FCS South Korea

needed to improve its coordination with other ITA elements; the

trade promotion effort was too focused on large companies; and

the post performed no formal planning or cost analysis in

preparation for the opening of the business center, which lost

nearly $44,000 in FY 1997.

International Trade Administration

44 Commerce IG Semiannual Report March 1999

MAP

OF

SOUTH KOREA
! Internal control environment. Although we found the post’s

internal control environment to be generally strong, we did find

some administrative weaknesses, including the need to reconcile

account balances on a timely basis, examine prior year

unliquidated obligations and unobligated authorizations, properly

identify and account for inventory, and address certain information

technology issues.

US&FCS generally agreed with our recommendations and identified

corrective actions being taken to implement them. For example, the post

has initiated a schedule of staggered departures of commercial officers,

increased its training for officers and foreign service nationals, increased its

oversight of the U.S.-Asia Environmental Partnership program, and

prepared a cost and marketing strategy for the business center. (Business

and Trade Audits Division: BTD-10221-9-0001)

American Institute in Taiwan

Over four decades, Taiwan, an important component of the big

emerging market that also includes China and Hong Kong, has transformed

itself from an underdeveloped, agricultural island to an economic power

that is both a leading producer of high-technology goods and a heavy

importer of goods for domestic consumption and industrial needs. To

maintain ties with Taiwan after recognizing the People’s Republic of China

as the sole legal government of China, the United States established the

American Institute in Taiwan (AIT). AIT is a nonprofit, private

corporation that functions much like an embassy, undertaking a wide range

of activities representing U.S. interests, including commercial services.

AIT has an office in the capital of Taipei, a branch office in the

Taiwanese city of Kaohsiung, and a headquarters office in Arlington,

Virginia. The AIT Commercial Section receives most of its funding

through AIT (which receives funds through the Department of State) and a

portion through a memorandum of understanding with the Department of

Commerce. The section operates similarly to US&FCS posts in terms of

the delivery of products and services to U.S. exporters.

We found that the Commercial Section maintains strong, productive

relations with its clients and other AIT sections, and has produced a high

volume of quality research products and timely services for its clients.

However, our review also identified the following issues warranting

management attention:

International Trade Administration

March 1999 Commerce IG Semiannual Report 45
! General management and organizational issues. The

relationships between the Department, the Commercial Section,

and AIT/Washington need improvement. Most notably, the

memorandum of understanding is unclear and ineffective, and

needs to be renegotiated. In addition, the commercial officers’ lack

of experience and adequate Chinese language skills threatens the

operation’s effectiveness, while management weaknesses in trade

promotion leadership and the U.S.-Asia Environmental Partnership program need to be addressed.

! Program activities and performance measurement. The

Commercial Section was devoting significant time and resources to

trade policy matters at the expense of its trade promotion program,

as manifested in the low level of attention being paid to its trade

center, the most public and visible component of its operations. In

addition, while the section generated a high dollar figure of success

stories, the number of such stories was small and reflected too

many large company, advocacy-related projects and too few

programs that assist small and medium-sized companies. The

section was also providing inadequate support to BXA’s licensing

and export programs.

! Internal control environment. The Commercial Section’s

internal controls and financial management practices were

inadequate, ineffective, and insufficiently emphasized by

management. Specifically, (1) source financial documentation was

not maintained efficiently, (2) key duties were not separated and

supervisory review of internal controls was ineffective, (3) proper

imprest fund procedures were lacking, (4) proper procedures on

the reporting and use of funds generated by trade events were not

being followed, and (5) obligations and disbursements were not

being systematically analyzed.

US&FCS agreed with nearly all of our recommendations and identified

actions being taken to implement them, most notably amending the memorandum of understanding with AIT to make it more specific. (Business

and Trade Audits Division: BTD-10220-9-0001)

International Trade Administration

46 Commerce IG Semiannual Report March 1999
Seattle USEAC Provides Quality Service,

but Some Improvements Are Needed

US&FCS operates a network of 19 U.S. Export Assistance Centers

(USEACs) connecting 100 smaller centers in a “hub and spoke”

arrangement. The primary objective of the USEACs is to enhance and

expand federal export marketing and trade finance services through greater

cooperation and coordination between federal, state, and local partners.

USEACs are “one-stop shops” that offer U.S. businesses a single point of

contact for federal export promotion and finance programs operated by

US&FCS, the Small Business Administration, and the Export-Import

Bank.

The OIG conducted an inspection of the Seattle USEAC to assess the

quality of its services and its effectiveness in delivering those services to

business clients. Our review focused on program operations as well as

some of the financial and administrative practices being followed at the

USEAC. We found that the Seattle USEAC is doing a good job of

providing export assistance to Washington state businesses. The USEAC is

staffed with capable, dedicated, and knowledgeable trade specialists who

have developed strong partner relationships with state and local trade

organizations. In addition, it works well with overseas posts, and its

financial affairs appear to be in order.

However, we also found several issues that warrant attention:

(1) USEAC management was in transition, as the former director had

resigned and the acting director was nearing the end of his term;

(2) although clients generally gave positive feedback on the USEAC’s

services, their mixed feedback on the products of the US&FCS overseas

posts made the USEAC reluctant to market some post products; (3) efforts

to market the USEAC’s services were not as effective as they could be;

and (4) some internal controls need improvement.

We recommended that US&FCS fill the Seattle USEAC director

position as soon as possible; reassess the effectiveness of the current

quality control procedures at headquarters; develop a better system to

ensure the quality and timeliness of products and services provided by

overseas posts to the USEACs and their clients; and improve Seattle

USEAC marketing efforts through advertising, external promotion and

seminars, and an Internet web page tailored to the needs of businesses in

the state. We also made recommendations to address the internal control

deficiencies. US&FCS largely agreed with our recommendations and is

working to implement them. (Office of Inspections and Program

Evaluations: IPE-11007)

International Trade Administration

March 1999 Commerce IG Semiannual Report 47
Award Process for ABC Program Designed

to Promote Merit-Based Funding Decisions

The OIG conducted an audit of the FYs 1997 and 1998 award criteria,

procedures, and practices for soliciting, reviewing, and selecting financial

assistance applications under US&FCS’s American Business Center (ABC)

Program. The audit was conducted as part of a Department-wide review

of Commerce’s discretionary financial assistance programs initiated at the

request of the Chairman of the Senate Committee on Commerce, Science,

and Transportation (see page 6).

Discretionary funding assistance programs are those programs for

which federal agencies have the authority to independently determine the

recipients and funding levels of the awards. These programs involve a

significant portion of the Commerce Department’s budget and operations,

representing approximately $1 billion annually.

Through the ABC Program, US&FCS assists U.S. firms in overcoming many of the obstacles to entry into the markets of Russia and the

Newly Independent States, including the lack of commercial, economic,

and legal information; affordable office space; and adequate transportation

and telecommunications facilities. In FYs 1997 and 1998, the program

awarded or renewed 14 cooperative agreements totaling more than

$2.4 million.

We found that US&FCS’s criteria, procedures, and practices for the

solicitation, review, and selection of ABC awards and renewals complied

with statutory, departmental, and agency requirements and were designed

to promote merit-based funding decisions. Specifically, US&FCS

(1) developed and used merit-based award criteria to evaluate applications

for financial assistance, (2) complied with requirements and procedures for

soliciting, reviewing, and selecting applications for new ABC awards, and

(3) followed established procedures for renewing prior awards.

We did, however, find one deficiency: The program was not listed in

the Catalog of Federal Domestic Assistance for FY 1998, although

US&FCS had requested its inclusion. The Catalog contains vital

information on financial and nonfinancial assistance programs administered

by federal agencies. We recommended that US&FCS work with GSA to

ensure that the ABC Program is promptly included in the Catalog.

US&FCS agreed to take action to correct this problem, and the program

was added to the Catalog as of the December 1998 update. (Business and

Trade Audits Division: BTD-10957-9-0001)

International Trade Administration

48 Commerce IG Semiannual Report March 1999
In Brief

Suspension. A senior US&FCS officer received a 10-day suspension for

misuse of official time and property and conduct unbecoming a federal

employee after an OIG investigation established that the officer had used

government telephones, facsimile machines, delivery services, and vehicles

to conduct personal business. We also found that the officer frequently

directed subordinate employees to perform his personal business during

work hours, and was rude and abusive in his dealings with office staff.

(Washington Field Office of Investigations)

International Trade Administration

March 1999 Commerce IG Semiannual Report 49
Minority Business

Development Agency

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.

Audit of FY 1998 Financial Statements

An IPA firm issued an unqualified opinion on MBDA’s FY 1998

financial statements. However, the firm’s report identified four reportable

conditions in MBDA’s internal control over financial reporting, which

involved weaknesses in the following areas: (1) controls surrounding its

financial management systems, (2) the presentation of its performance in

the overview, (3) the deobligation process for inactive grants and

agreements, and (4) annual leave recording.

The first reportable condition is not under the control of MBDA

management. It relates instead to deficiencies surrounding internal controls

in the Department’s Office of Computer Services mainframe system, on

which MBDA’s financial data is processed, and compliance problems of

EDA’s financial management system, which performs certain accounting

functions involving MBDA’s grant funds.

The IPA firm also identified two instances of material non-compliance

with laws and regulations. First, the financial management system of EDA,

discussed above, does not comply with the U.S. Government Standard

General Ledger at the transaction level. Second, NIST’s Financial

Accounting and Reporting System, which performs some financial

transaction processing and reporting for MBDA, does not maintain

appropriate commonality of data elements and transaction processing to

ensure timely, accurate, and effective financial reporting.

Both the OIG and the IPA firm conducting the audit reviewed a draft

version of the overview to MBDA’s financial statements. The firm’s

review identified serious weaknesses, including performance measures not

in accordance with the Department’s annual performance plan, inconsistencies between the overview and the bureau’s strategic plan, the lack of a

clear mission statement, and an incomplete discussion of the Y2K situation. These findings were consistent with our review of the overview. As a

result, the firm cited the overview as a reportable condition.

We sent MBDA management a memorandum containing our

observations regarding the weaknesses with the overview, and our

recommendations for strengthening this component of the financial

statements. Management was responsive to our recommendations.

(Financial Statements Audits Division: FSD-10867-9-0001)

Finance and

Administration

Strategic

Planning

Program

Development

External

Affairs

Minority Business

Development

Agency

50 Commerce IG Semiannual Report March 1999
National Oceanic and

Atmospheric Administration

The National Oceanic and

Atmospheric Administration

studies climate and global change;

ensures protection of coastal

oceans and management of

marine resources; provides

weather services; and manages

worldwide environmental data. It

does this through the following

organizations:

National Weather Service. NWS

reports the weather of the United

States and provides weather

forecasts and warnings to the

general public.

National Ocean Service. NOS

issues nautical and aeronautical

charts; performs geodetic surveys;

conducts research; and develops

policies on ocean mining and

energy.

National Marine Fisheries

Service. NMFS 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.

NESDIS observes the environment

by operating a national satellite

system.

Office of Oceanic and

Atmospheric Research. OAR

conducts research related to the

oceans and inland waters, the

lower and upper atmosphere,

space environment, and the Earth.

Office of NOAA Corps

Operations. The Corps is the

nation’s seventh uniformed

service. Its ships, aircraft, and

personnel support NOAA’s

activities throughout the world.

Audit of FY 1998 Financial Statements

An IPA firm issued an unqualified opinion on NOAA’s FY 1998

consolidated balance sheet but a disclaimer of opinion on the remaining

financial statements because of the effects of the previous year’s qualified

opinion. The unqualified opinion is especially noteworthy and recognizes

the many corrective actions the bureau has taken to eliminate most of its

material weaknesses and reportable conditions. From the 1997 to the 1998

audit, NOAA reduced the number of material weaknesses from 6 to 2 and

the number of other reportable conditions from 11 to 5.

The two FY 1998 material weaknesses involved deficiencies in

accounting for construction work in progress and in monitoring grant

recipients. The five other reportable conditions related to the need to:

(1) improve the preparation, analysis, and monitoring of financial

information; (2) improve procedures for year-end accounts payable

accruals; (3) improve controls over budgeting monitoring; (4) implement

procedures to comply with the Statement of Federal Financial Accounting

Standards No. 2; and (5) follow policies and procedures related to

interagency agreements.

The firm also identified two instances of material non-compliance with

laws and regulations: (1) NOAA did not fully fund its capital leases and

(2) the bureau’s financial management system does not substantially

comply with FFMIA in that it does not support the preparation of timely,

accurate financial statements and does not adequately support the budget

execution process.

The firm also performed agreed-upon procedures related to NOAA’s

FY 1997 and 1998 Superfund transactions to determine whether related

costs billed to the Environmental Protection Agency under interagency

agreements were properly accounted for in accordance with the Comprehensive Environmental Response, Compensation, and Liability Act of

1980 and the Superfund Amendments and Reauthorization Act of 1986.

The firm noted no exceptions.

We recognize NOAA’s commitment to preparing high-quality, reliable,

and meaningful financial statements. It has made progress in many areas,

but still needs to address the remaining material weaknesses and reportable

conditions, which continue to inhibit accurate and timely financial

reporting. Certain reportable conditions can be corrected by allocating

additional personnel resources, providing more training, and changing

policies and procedures. However, the remaining conditions can only be

addressed with the replacement of NOAA’s current financial system.

March 1999 Commerce IG Semiannual Report 51
National Oceanic and Atmospheric Administration

National

Weather

Service

National

Ocean

Service

National

Marine Fisheries

Service

NESDIS

NOAA

Oceanic and

Atmospheric

Research

NOAA

Corps

Operations

NOAA is evaluating the feasibility of acquiring financial services through a

cross-servicing agreement with the Department of the Interior. If crossservicing is not feasible and cost effective, NOAA will proceed with the

implementation of the Commerce Administrative Management System.

We reviewed a draft of the overview to NOAA’s financial statements

and sent NOAA management a memo containing our observations and

suggestions to strengthen their presentation of performance results. We

encourage NOAA to strengthen next year’s discussion of results and to

continue its efforts to improve performance measurement and reporting.

(Financial Statements Audits Division: FSD-10869-9-0001)

Proposed NPOESS Demonstration Satellite

Reduces Risk, but Excludes Critical Sensor

A 1994 Presidential Decision Directive called for the Departments of

Commerce and Defense, along with the National Aeronautics and Space

Administration, to jointly develop the National Polar-orbiting Operational

Environmental Satellite System (NPOESS). The system will combine the

Defense Meteorological Satellite Program and the Commerce/NASAsupported Polar-orbiting Operational Environmental Satellite Program to

create the nation’s first polar-orbiting system that will meet both civilian

and defense environmental data needs.

NPOESS is expected to save taxpayers $1.3 billion over 10 years by

reducing the number of U.S.-owned operational satellites from four to two,

increasing the useful life span of each satellite from 42 to 84 months, and

combining the support functions. Program implementation is the responsibility of an Integrated Program Office under the direction of a Commerce

system program director.

The NPOESS acquisition strategy developed in 1996 includes the

early development of five critical sensors, which presents significant

technological challenges. However, the methodology for demonstrating the

sensors was revised in 1998 as a result of increased cost estimates,

Integrated Program Office budget cuts, and other concerns.

The Commerce and NASA OIGs conducted a joint inspection of the

risks and costs associated with critical sensor technology that is being

transferred to NPOESS from NASA and other sources. The inspection

identified a risk reduction issue concerning a proposed joint Integrated

Program Office/NASA NPOESS Preparatory Project mission developed

under the 1998 revised methodology. We found that preliminary planning

assumptions for the proposed project do not include evaluating the

52 Commerce IG Semiannual Report March 1999
National Oceanic and Atmospheric Administration

feasibility of demonstrating the Ozone Mapper Profiler Suite, one of the

Integrated Program Office’s critical sensors. Excluding the sensor from

flight demonstration will significantly increase the risk of a disruption in

vital ozone data continuity.

We recommended that the Integrated Program Office (1) request

NASA to include the sensor as a possible payload in its Preparatory

Project feasibility study, (2) defer the decision to include or exclude the

sensor for flight demonstration until mission costs are fully analyzed and a

cost sharing arrangement is negotiated with NASA, and (3) assess the

operational risk of not demonstrating the sensor.

The Integrated Program Office generally concurred with the findings

and recommendations in the report and indicated that actions have been

taken or are planned to address our concerns. The office expressed some

concern about the report’s suggestion that the NPOESS program should be

responsible for ensuring continuity of global ozone mapping data, which is

currently a NASA responsibility. We would note, however, that the Clean

Air Act of 1990 gives Commerce and NASA equal responsibility for

monitoring and reporting on the condition of the earth’s ozone. (Office of

Systems Evaluation: OSE-11103)

Discretionary Program Awards

Were Not Competitively Selected

As part of its Department-wide review of Commerce’s discretionary

financial assistance programs (see page 6), the OIG conducted

performance audits of the seven NOAA discretionary funding programs

listed below to assess the FY 1997 criteria, procedures, and practices for

soliciting, reviewing, and selecting applications for financial assistance.

z Cooperative Science and Education Program (National Marine

Fisheries Service).

z Habitat Conservation Program (National Marine Fisheries

Service).

z Unallied Management Projects Program (National Marine

Fisheries Service).

z Unallied Science Program (National Marine Fisheries Service).

z Hydrologic Research Program (National Weather Service).

March 1999 Commerce IG Semiannual Report 53
National Oceanic and Atmospheric Administration

z Ocean Resources Conservation and Assessment Program

(National Ocean Service).

z Research in Remote Sensing of the Earth and Environment

Program (National Environmental Satellite, Data, and Information

Service).

Upon examining NOAA’s and its components’ criteria, procedures,

and practices for the solicitation, review, and selection of awards, we

found that all seven programs failed to fully comply with departmental and

NOAA requirements. The programs were not administered as competitionbased financial assistance programs, as encouraged by federal law and

regulations and mandated by Commerce policies and procedures. In

addition, the sole-source justifications for new non-competitive awards

made in FY 1997 were inadequate. Specifically, we found that the NOAA

components responsible for the programs:

z Did not comply with the Department’s and NOAA’s requirements

that a notice be placed in the Federal Register, at least annually,

announcing the availability of funding and specifying the criteria

and the process to be used in reviewing and selecting applications

for funding.

z Did not develop and publish merit-based evaluation criteria against

which program applications for financial assistance could be

reviewed.

z Did not comply with the requirements that (1) all financial

assistance awards be made on the basis of a competitive review

process, unless a special waiver is obtained, and (2) the competitive review process meet minimum standards established by the

Department.

As a result of these deficiencies, NOAA and its components cannot

provide reasonable assurance that awards made under these programs are

merit-based and represent the most effective means of achieving program

objectives. Not following competitive procedures creates a greater potential

for the components to make questionable or even inappropriate noncompetitive program awards in instances where other sources are

available.

We also found that NOAA’s Grants Management Division did not

provide adequate oversight of the components’ administration of the award

selection process.

54 Commerce IG Semiannual Report March 1999
National Oceanic and Atmospheric Administration

We recommended that the NOAA officials responsible for the seven

discretionary funding programs ensure that all financial assistance awards

are made through a competitive, merit-based process, unless otherwise

mandated by law or adequately justified, and that the award process

complies with Department policies and procedures and includes the

following four elements:

1. Widespread solicitation of eligible applications and disclosure of

essential application and program information in written

solicitations.

2. Independent application reviews that consistently apply written

program evaluation criteria.

3. Written justifications for award decisions that deviate from

recommendations made by application reviewers.

4. Adequate written justifications for noncompetitive awards that

document appropriate market search efforts to validate the

determination that there is only one source for the anticipated

award. The market search should include, at a minimum, a

preaward notice in the Federal Register stating that the agency

expects to make a noncompetitive award and inviting other

qualified parties to inquire.

We also recommended that NOAA’s Office of Finance and

Administration, which includes the Grants Management Division, require

that grants officer reviews of proposed noncompetitive awards include

procedures designed to objectively determine compliance with departmental and NOAA competitive requirements. NOAA agreed that more

awards should be granted competitively for all discretionary funding

programs and that a rigorous solicitation process should be used. (Atlanta

Regional Office of Audits: ATL-10944-9-0001, ATL-11084-9-0001, and

ATL-11140-9-0001 and Seattle Regional Office of Audits: STL-10947-9-

0001, STL-10951-9-0001, STL-10952-9-0001, and STL-10953-9-0001)

Insufficient Planning for Supercomputer

Acquisition Risked Funding Availability

NOAA is currently using a Class VII supercomputer at its National

Centers for Environmental Prediction to generate data that assists the

National Weather Service in forecasting weather and meeting its mission

goals of collecting, analyzing, and disseminating data related to the Earth’s

oceans and atmosphere. In May 1997, NOAA proposed to acquire a Class

March 1999 Commerce IG Semiannual Report 55
National Oceanic and Atmospheric Administration

VIII system to replace its current supercomputer. According to NOAA, this

upgrade is critical to achieving many of its environmental modeling and

forecasting goals for the next four years.

NOAA had originally planned to award the contract for the Class VIII

supercomputer by April 15, 1998, with installation of the system at the

Goddard Space Flight Center in Greenbelt, Maryland, in July 1998, seven

months before the February 1999 lease expiration of the Class VII system,

which is located in Suitland, Maryland. However, the award date was

delayed due to concerns raised by the House Appropriations Subcommittee on Commerce, Justice, State, the Judiciary and Related Agencies

regarding the proposed location of the new supercomputer, the adequacy

of NOAA’s justification for early delivery, and the financial terms

pertaining to early delivery outlined in the solicitation. Also questioned was

the basis for the funding of lease services to be provided from the award

date through September 30, 1998.

Although NOAA’s analysis of potential sites for the new system

indicated that Goddard was the most cost-effective alternative, the OIG

determined that the analysis was deficient and that the current site in

Suitland was adequate with some modifications (see September 1998

issue, page 48). NOAA agreed to install the Class VIII system in Suitland,

and a contract was awarded on October 9, 1998, for installation before

February 1999.

At the request of the Subcommittee, we conducted a review of the

new system’s acquisition funding and advanced lease payments. We made

two major observations that we brought to the attention of NOAA

management:

z Because the program office did not sufficiently plan for the

acquisition of the supercomputer, it did not provide adequate

assurance that funding would be available. The program office

did not generate a procurement request, provide an accurate

program budget, or develop a schedule for obtaining the necessary

funds. Lack of funding could cause delays in the supercomputer’s

delivery, which could in turn lead to delayed programmatic

benefits.

z Solicitation provisions for advanced lease payments for the

new system were unclear. The National Centers for Environmental Prediction included notes in the solicitation stating that

pricing should be broken out by fiscal year and giving the funding

limitations by year. The intent of these notes was to provide lease

payment for the equipment in advance of the period of

56 Commerce IG Semiannual Report March 1999
National Oceanic and Atmospheric Administration

performance. The solicitation’s provisions for these advanced

payments were unclear and could have affected how offerors

priced their proposals, leading to inaccurate or uncomparable

proposals.

We recommended that NOAA ensure that for all National Centers

acquisitions, (1) there is adequate acquisition planning so that funding and

budgeting issues are identified, (2) an approved procurement request is

forwarded to the contracting officer before contract award indicating that

funds will be available at the time of award, and (3) any decision to

provide advanced payments is adequately justified and that criteria cited in

the Federal Acquisition Regulation are adhered to and reflected in the

solicitation and contract. NWS and the National Centers agreed with our

recommendations. (Office of Systems Evaluation: OSE-10969)

NWS Agreements Need Better

Management and Oversight

NOAA’s National Weather Service consists of 20 program offices that

support the agency’s mission of protecting human lives and property from

severe storms by issuing weather and flood warnings, public forecasts, and

advisories for the United States, its territories, adjacent waters, and ocean

areas. To accomplish their mission, NWS program offices often undertake

special projects, reimbursable activities, and programmatic efforts with

other governmental and non-governmental entities through interagency and

other special agreements. In FY 1997, NWS had 454 agreements in effect.

As part of an OIG Department-wide review, we conducted an evaluation of the effectiveness and efficiency of NWS’s process for entering into

agreements with departmental offices and outside parties (see page 17).

Based on our review of a sample of NWS’s agreements, we found that

they supported its mission, were appropriate funding mechanisms, and did

not constitute a substantial proportion of its budget resources. However,

we also found several aspects of the agreements processes that warrant

management attention:

z Processes, policies, and guidance for preparing agreements

need improvement. Agreements sometimes had deficiencies,

including uncited programmatic or funding authorities, inadequate

sole-source justifications, missing or unauthorized signatures, and

no statement of specific duration. In addition, guidelines, policies,

and procedures were limited in their usefulness for preparing

agreements, were not up-to-date, and were not centrally located

for easy reference.

March 1999 Commerce IG Semiannual Report 57
National Oceanic and Atmospheric Administration

z Process for reviewing agreements also needs improvement.

Agreements were not consistently reviewed during preparation,

written justifications were not required, no formal criteria existed

for the review of agreements by the Department’s Office of

General Counsel, and policies on the need for periodic review to

determine whether an agreement should be renewed, amended, or

canceled were not consistent or adequate.

z Financial management of agreements needs attention. Some

agreements experienced financial problems, including unrecovered

costs on Economy Act agreements, inequitable apportionment of

costs for joint projects, and improper billing.

z A database to inventory and track agreements is needed.

NWS had no comprehensive database or tracking system for its

agreements. Existing lists were incomplete and not easily sorted by

relevant type of information, such as legal authority or type of

agreement.

We recommended that NOAA require that NWS, when entering into

interagency agreements akin to traditional procurement contracts, adhere

to federal requirements for procurements by preparing proper justifications

and advertising sole-source contracts over $25,000. In addition, a comprehensive set of guidelines for preparing agreements that is consistent with

departmental guidance should be developed. Once these new guidelines

have been established, appropriate NWS staff should be trained on how to

properly prepare and process agreements.

Among our other recommendations were that NOAA disseminate

information for preparing and processing agreements through NWS’s

intranet and at appropriate NWS management and administrative meetings

and that it establish a centralized system to inventory, track, and control

NWS’s agreements that is compatible with the proposed Department-wide

agreements database. NOAA agreed with all of the report’s recommendations. (Office of Inspections and Program Evaluations: IPE-10417)

West Virginia Awardee Overstated

Termination Settlement Costs

In March and May 1998, the OIG issued audit reports to NOAA and

EDA, respectively, describing inadequacies found in a West Virginia

foundation’s accounting and financial management system, which, along

with unforseen delays, prevented us from negotiating an indirect cost rate

(see March 1998 issue, page 47, and September 1998 issue, page 21). In

September 1998, we issued a report on our audit of the foundation’s actual

58 Commerce IG Semiannual Report March 1999
National Oceanic and Atmospheric Administration

indirect costs for FY 1997 (see September 1998 issue, page 58). Meanwhile, in July 1997, NOAA officials and the foundation agreed to terminate

their cooperative agreement. The foundation claimed a total of $2.5 million

for the award period and termination costs associated with this agreement.

Our audit of the foundation’s claims, including its termination

settlement costs, disclosed $442,000 in improperly claimed costs. We

questioned $387,000 as a result of the foundation’s overstatement of

termination settlement costs, including $292,000 associated with the loss of

projected grant revenues. In addition, we questioned $55,000 of unallowable project costs claimed for the approximately 17-month period of the

award prior to termination.

We recommended that NOAA disallow the $442,000 in questioned

costs, disburse $325,000 to the foundation as its final award payment, and

deobligate the remaining $39,000 in award funds. In response to our draft

report, the foundation disagreed with the disallowance of the $292,000

claimed as unrecovered indirect costs. In addition, it disagreed with our

calculations of indirect costs and requested an additional $36,000 in legal

expenses to be included as direct project costs. However, the foundation

did not provide any new evidence or documentation sufficient to cause us

to change our findings and recommendations. (Atlanta Regional Office of

Audits: ATL-10634-9-0001)

In Brief

Conviction. In March 1999, a Florida fisherman and his wife pleaded

guilty to a one-count indictment charging them with conspiracy to defraud

the government through the filing of false claims under the Gulf of Mexico

Fisheries Disaster Program. Sentencing is scheduled for June in U.S.

District Court for the Northern District of Florida. (Denver Field Office of

Investigations)

Suspension. A senior NOAA official was given a 30-day suspension for

misuse of a government vehicle when an OIG investigation revealed that

he had used cars assigned to his office to commute between home and

work on numerous occasions over a period of approximately three years.

(Washington Field Office of Investigations)

Audit Reports Unresolved for Over Six Months

As of March 31, 1999, two performance audit reports and one

financial assistance audit report had recommendations unresolved in excess

of six months.

March 1999 Commerce IG Semiannual Report 59
National Oceanic and Atmospheric Administration

Light Aircraft Operations

The first performance audit report, Light Aircraft Fleet Should be

Privatized, STD-9952-8-0001 (see September 1998 issue, page 44),

recommended that NOAA cease operating its eight light fixed-wing aircraft

and three helicopters and release them, along with related spare parts. We

also recommended that NOAA discontinue all interagency reimbursable

work related to its fixed-wing light aircraft and helicopters.

NOAA did not concur with our findings and recommendations. NOAA

believes that discontinuing use of the aircraft would compromise its ability

to continue uninterrupted data collection efforts required to protect lives

and property, increase the risk of accidents, and increase the cost of

aircraft support. In addition, NOAA believes that interagency agreements

have proven to be cost-effective for meeting some of its data collection

needs. Nevertheless, NOAA has submitted an audit action plan, which we

are reviewing.

NMFS Laboratory Structure

The second performance audit report, NMFS Laboratory Structure

Should Be Streamlined, STL-8982-8-0001 (see March 1998 issue, page

39), recommended closing six laboratory facilities and transferring their

programs and personnel to other NMFS laboratories. In another instance,

we recommended that a laboratory and most of its programs be transferred

to the State of Maryland. We also recommended that the proposed Santa

Cruz, California, facility be expanded to accommodate programs and

personnel from another California laboratory. In addition, we differed with

NMFS’s plans to transfer some programs from a Seattle laboratory to the

proposed Auke Cape facility in Alaska.

NOAA disagreed with our findings and recommendations. In April

1998, the OIG requested NOAA to submit a revised audit action plan, and

subsequent meetings were held between OIG and NOAA officials. NOAA

submitted a revised plan in November 1998, but did not change its initial

position. Negotiations are ongoing between OIG and NOAA concerning

alternative approaches to resolution.

University of Hawaii

This financial assistance audit report, ATL-9999-5-0753 (see

September 1995 issue, page 99), was an OMB Circular A-133 audit that

questioned $1.1 million of claimed costs. In September 1998, NOAA

provided the OIG with a another draft revision to the audit resolution

proposal, which is under review.

60 Commerce IG Semiannual Report March 1999
National Telecommunications

and Information Administration

The mission of the National

Telecommunications and

Information Administration is to

(a) serve through the Secretary of

Commerce as the principal

executive branch advisor to the

President on domestic and

international communications and

information policies, (b) ensure

effective and efficient federal use

of the electromagnetic spectrum,

(c) develop with other federal

agencies policies for international

communications and standardssetting organizations, (d) serve as

the federal telecommunications

research and engineering center,

and (e) administer grants under

the Telecommunications and

Information Infrastructure

Assistance Program and the

Public Telecommunications

Facilities Program.

Audit of FY 1998 Financial Statements

An IPA firm issued an unqualified opinion on NTIA’s FY 1998

financial statements. This is a noteworthy achievement, considering that

four new financial statements were mandated by OMB Bulletin 97-01.

The firm’s report did not identify any material weaknesses but did cite one

reportable condition in the bureau’s internal control over financial

reporting: EDA’s financial management system, which is used to account

for NTIA’s grant activity, does not comply with the U.S. Government

Standard General Ledger at the transaction level. Although this issue is

considered to be a reportable condition to NTIA, corrective actions related

to EDA’s system are not within the purview of NTIA management.

The firm also identified one issue of non-compliance with laws and

regulations, which related to FFMIA. This issue also involves the abovementioned deficiency in EDA’s grant accounting system.

In reviewing a draft version of NTIA’s overview to its financial

statements, we noted that NTIA incorporated many of our prior year

suggestions to strengthen this integral component of the statements.

Bureau management was also responsive to our suggestions for improving

the overview for the FY 1998 statements. We encourage NTIA to make

continued improvements in performance measurement and reporting.

(Financial Statements Audits Division: FSC-10870-9-0001)

Grant Process Designed to Promote Merit-Based

Funding Decisions, but Needs More Discipline

The OIG conducted audits of the FY 1997 award criteria, procedures,

and practices for soliciting, reviewing, and selecting financial assistance

applications under the Public Telecommunications Facilities Program

(PTFP) and the Telecommunications and Information Infrastructure

Assistance Program (TIIAP), as part of its Department-wide review of

discretionary financial assistance programs (see page 6).

PTFP provides financial assistance in planning, acquiring, installing,

and modernizing public telecommunications facilities. The program targets

public or noncommercial education broadcast stations; noncommercial

telecommunications entities; systems of public telecommunications entities;

private nonprofit organizations established primarily for educational or

cultural purposes or that plan for the provision of public telecommunications services; state, local, and Indian tribal governments; and other

governmental agencies and subdivisions. In FY 1997, the program

awarded 97 grants totaling $14.1 million.

March 1999 Commerce IG Semiannual Report 61
Spectrum

Management

Policy

Analysis and

Development

Telecom. and

Information

Applications

Institute for

Telecom.

Sciences

International

Affairs

NTIA

TIIAP provides financial assistance to nonprofit organizations, colleges

and universities, and state, local, and Indian tribal governments to promote

the widespread use of telecommunications and information technologies in

the public and non-public sectors. By providing targeted matching

demonstration and planning grants, the program helps develop nationwide,

interactive multimedia information infrastructures that are accessible to

citizens in both rural and urban areas. In FY 1997, the program awarded

55 grants totaling almost $20.9 million.

We examined NTIA’s criteria, procedures, and practices for soliciting,

reviewing, and selecting awards under both programs and found that they

generally complied with statutory, departmental, and agency requirements

and appeared designed to promote merit-based funding decisions. We

found that NTIA (1) developed and published merit-based technical and

public policy criteria that were consistent with the programs’ objectives

and (2) complied with the Department and agency requirement to place a

notice in the Federal Register, at least annually, announcing the availability

of funds, soliciting award applications, and specifying the criteria and

process to be used in reviewing and selecting applications.

We also found that NTIA followed established requirements for the

competitive review of applications for TIIAP, but not totally for PTFP.

Specifically, NTIA program staff participated in review panels for PTFP

awards and routinely adjusted the independent reviewers’ scores or

composite evaluation scores without consulting with the reviewers. The

staff’s unilateral adjustment of evaluation scores has the potential to

undermine the independence and objectivity of the review process.

Moreover, although departmental and NTIA requirements for selecting

applications were followed for both programs, documentation was lacking

to explain the reasons for deviations from the program directors’ lists of

applications recommended for funding. For the year reviewed, we found

that the Assistant Secretary for Communications and Information, as the

selecting official, added nine applications to and deleted seven from the

TIIAP recommended funding list, and added three applications to the

PTFP list.

A memorandum concerning the additional PTFP applications noted

that the selecting official’s decision was made to achieve greater

geographical distribution, but did not provide specific reasons why certain

applicants were selected over others. In addition, there were no written

justifications for any of the seven deleted TIIAP applications, although the

official did provide justifications for the nine added applications.

National Telecommunications and Information Administration

62 Commerce IG Semiannual Report March 1999
We recommended that NTIA ensure that the bases for making awards

that deviate from the program director’s recommendations are adequately

documented. Additionally, we recommended that PTFP staff ensure that

independent reviewers’ scores are not adjusted by program staff during the

review process. NTIA agreed with our findings and recommendations and

has modified its financial assistance award process to implement our

recommendations. (Atlanta Regional Office of Audits: ATL-10945-9-0001

and ATL-10946-9-0001)

Audit Reports Unresolved for Over Six Months

Telecommunications Network Grant

A financial assistance audit report, ATL-10378-8-0001 (see September

1998 issue, page 63), found that a nonprofit grantee’s financial management system did not comply with federal standards because it did not

provide adequate assurance that only reasonable, allowable, and allocable

costs were claimed. We questioned $298,000 in costs, due mainly to a lack

of documentation, and recommended that the Department recover about

$106,000 in excessive grant disbursements. We recently received the audit

resolution proposal and are reviewing it.

National Telecommunications and Information Administration

March 1999 Commerce IG Semiannual Report 63
Patent and

Trademark Office

The 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, to invest in research, to

commercialize new technology,

and to draw attention to inventions

that would otherwise go unnoticed.

PTO also collects, assembles,

publishes, and disseminates

technological information disclosed

in patents.

Audit of FY 1998 Financial Statements

For the sixth straight year, the OIG issued an unqualified opinion on

PTO’s financial statements. We commend PTO for its successful

implementation of both OMB Bulletin No. 97-01 and its new cost

accounting system. Our audit identified only one reportable condition,

which related to the general controls associated with its Revenue

Accounting and Management system (see below).

We recognize PTO’s hard work and commitment to sound financial

management and high-quality, meaningful financial reporting. As a result of

the bureau’s actions taken during FY 1998 to improve internal controls,

there are no longer reportable conditions relating to controls over property,

analysis and monitoring of financial information, or timely deposits of cash

receipts.

In performing tests of compliance with applicable laws and regulations

that have a material effect on PTO’s financial statements, we found no

instances of noncompliance. (Financial Statements Audits Division: FSD10898-9-0001)

Revenue Accounting and Management System

Needs Stronger General Controls

PTO’s data center provides data processing support for the Revenue

Accounting and Management system, which is used to process and

account for fees collected. These fees totaled about $890 million in

FY 1998. As part of its FY 1998 audits of PTO’s and the Department’s

consolidated financial statements, the OIG conducted a review of the

general controls associated with the system. Effective controls provide

assurance that the data used to prepare the financial statements is reliable.

We assessed the general controls related to the integrity, confidentiality, and availability of information associated with the Revenue

Accounting and Management system. Our review focused on the adequacy

and effectiveness of general controls in the following areas: (1) entity-wide

security program planning and management; (2) access controls; (3) application software development and change controls; (4) system software

controls; (5) segregation of duties; and (6) service continuity controls.

Although our review disclosed certain weaknesses in all of these areas,

we did not identify any instances of unauthorized access to the financial

data. Nevertheless, the weaknesses, if not corrected, could hamper PTO’s

ability to accurately record and report revenues on its financial statements.

64 Commerce IG Semiannual Report March 1999
Patent and Trademark Office

Assistant

Commissioner

for Patents

Assistant

Commissioner

for Trademarks

Associate

Commissioner

and CFO

Chief

Information

Officer

Patent and

Trademark

Office

And any adverse effect on PTO’s statements could also affect the

Department’s consolidated statements.

We made a number of recommendations to address the identified

deficiencies. PTO agreed with our recommendations and has already

initiated corrective actions in several areas. (Financial Statements Audits

Division: FSD-10898-9-0002)

Minor Internal Control Deficiencies

Found in Bankcard Program

In conjunction with an OIG plan to periodically review Commerce

units’ use of bankcards, we conducted an audit of FY 1997 PTO bankcard

transactions to determine whether purchases were made in compliance

with applicable federal and departmental requirements. During FY 1997,

PTO made more than 4,600 bankcard transactions, totaling nearly

$3.9 million.

Our review disclosed minor internal control deficiencies in PTO’s

bankcard program that we believe can be prevented by strengthening

oversight by cognizant agency officials. Specifically, cardholders were not

always (1) maintaining statement records as required, (2) storing cards in a

secure location, and (3) maintaining training documentation on site. However, PTO was properly following other program requirements, such as

conducting an annual review of bankcard use and engaging in competitive

bidding when required. Moreover, we found few instances of split

purchases to avoid cardholder limits.

Among our recommendations were that PTO ensure that cardholders

maintain statements and invoice documentation, physically secure cards at

all times, and keep training documentation on site. PTO agreed with our

findings and recommendations. (Business and Trade Audits Division:

BTD-10901-9-0001)

In Brief

Suspension. A patent examiner was suspended for 14 days after an OIG

investigation determined that he had expended official funds for an

unauthorized purpose and created the appearance of a loss of impartiality

when he ordered a translation of a foreign document to assist an applicant

with an international patent application while her U.S. patent application

was pending at PTO. The examiner also repaid the government $223 for

the cost of the unauthorized translation. (Washington Field Office of

Investigations)

March 1999 Commerce IG Semiannual Report 65
Technology

Administration

The Technology Administration

serves the needs of technologybased 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 by

industry. It includes three major

organizations:

Office of Technology Policy. OTP

works to raise national awareness

of the competitive challenge,

promotes industry/government/

university partnerships, fosters

quick commercialization of federal

research results, promotes

dedication to quality, increases

industry’s access to and participation in foreign research and

development, and encourages the

adoption of global standards.

National Institute of Standards

and Technology. NIST promotes

U.S. economic growth by working

with industry to develop and apply

technology, measurements, and

standards. NIST manages four

programs: the Advanced Technology Program, the Manufacturing

Extension Partnership Program, a

laboratory-based measurement

and standards program, and the

National Quality Program.

National Technical Information

Service. NTIS is a self-supporting

agency that promotes the nation’s

economic growth and job creation

by providing access to voluminous

information that stimulates

innovation and discovery. NTIS

accomplishes this mission through

two major programs: information

collection and dissemination to the

public, and information and

production services to federal

agencies.

Audit of TA’s FY 1998 Financial Statements

As it had in the past three fiscal years, TA received an unqualified

opinion on its FY 1998 financial statements. The IPA firm conducting the

audit did not identify any material weaknesses, reportable conditions, or

instances of noncompliance with laws or regulations.

We reviewed a draft version of TA’s overview to its financial statements. The bureau has incorporated many of our prior year suggestions to

strengthen this integral component of the statements, and was also

responsive to our suggestions for improving the overview for the FY 1998

statements. We encourage TA to strengthen next year’s discussion of

actual results and to continue efforts to improve performance measurement and reporting. (Financial Statements Audits Division: FSC-10872-

9-0001)

Acting IG Testifies on Audit and

Inspection Work at TA Agencies

On February 11, 1999, the Acting Inspector General testified before

the House Science Subcommittee on Technology to discuss the OIG’s

recent audit and inspection work on the Technology Administration’s

programs and operations. He appeared a year earlier before the same

Subcommittee to discuss TA’s FY 1999 budget request (see March 1998

issue, page 63).

His recent testimony focused on OIG work in six areas of TA’s

operations:

z NIST’s Facilities Improvements Program, which includes

renovation and construction of facilities at its Gaithersburg,

Maryland, and Boulder, Colorado, locations. The OIG has

concluded that most of NIST’s facilities plans were justified and

necessary and that they had improved markedly in recent years.

Nevertheless, given the magnitude of these expenditures, it is

essential that NIST, OIG, and Department officials continue to

scrutinize the plans to ensure that all construction, renovation, and

maintenance plans are fully justified.

z NIST’s financial assistance programs, which we examined

through several approaches, most notably as part of a

Department-wide review of Commerce discretionary funding

programs (see page 6). We had reviewed three NIST programs at

that time and found that they were using appropriate merit-based

66 Commerce IG Semiannual Report March 1999
Technology Administration

NIST

Technology

Administration

Technology

Policy

NTIS

criteria and competitive procedures in selecting applications for

funding (see page 68). In addition, in the past year, we completed

29 financial-related audits of first-time recipients of financial

assistance awards under the ATP and MEP programs (see page

71). We also have begun two performance audits of various

aspects of NIST’s administration of ATP.

z NIST’s and NTIS’s systems compliance with federal Y2K

requirements. NIST recently reported to the Department that

107 of its 109 mission-critical systems were Y2K compliant and

that the other 2 systems were scheduled for conversion by the

March 31, 1999, deadline. NTIS, on the other hand, recently

raised its number of noncompliant systems to 10. The

Department’s Chief Information Officer expressed concern about

NTIS’s ability to repair its systems by the deadline and has taken

steps to closely monitor the agency’s progress. The OIG plans to

do the same.

z TA’s implementation of Government Performance and

Results Act requirements in planning and measuring performance.

Based on our review of the TA agencies’ overviews to their

FY 1998 financial statements, we concluded that the Office of

Technology Policy should continue to refine its performance

measurement and reporting, that NIST continues to make

improvements in addressing the formidable challenge of measuring

the results of its investments in science and technology by using

diverse sources of performance data, and that NTIS should

continue to explore methods other than the number of products

for measuring and reporting on its performance.

z NTIS’s mission and its financial stability, which raise concerns

about whether the organization will have sufficient funds to cover

its operations in FY 1999 and beyond. We recommended that TA

commission an outside review of NTIS’s operations for use in

developing a business plan to address short- and long-term

financial and business problems, and seeking relief from any of its

legislative mandates, as appropriate (see page 14).

z The FY 1998 financial statement audits of TA, NIST, and

NTIS, all of which were expected to receive unqualified opinions,

with no material weaknesses (see pages 66, 68, and 73).

March 1999 Commerce IG Semiannual Report 67
Technology Administration

Audit of NIST’s FY 1998 Financial Statements

The IPA firm issued an unqualified opinion on NIST’s FY 1998

financial statements, representing the sixth straight year of clean opinions.

The firm did not identify any material weaknesses, reportable conditions,

or instances of noncompliance with laws or regulations.

In reviewing a draft version of NIST’s overview to its financial

statements, we noted that the bureau had incorporated many of our prior

year suggestions to strengthen this integral component of the statements.

We believe that NIST has made significant progress in its presentation of

performance results. NIST management was also responsive to our

suggestions for improving the overview for the FY 1998 and future

statements. (Financial Statements Audits Division: FSC-10868-9-0001)

NIST Discretionary Award Process

Promotes Merit-Based Funding Decisions

The OIG conducted audits of the FY 1997 award criteria, procedures,

and practices for soliciting, reviewing, and selecting financial assistance

applications under NIST’s Advanced Technology Program (ATP), Manufacturing Extension Partnership (MEP) program, and National Standard

Reference Data System (NSRDS) program as part of its Department-wide

review of Commerce’s discretionary financial assistance programs (see

page 6).

Advanced Technology Program

ATP is a cost-sharing program designed to help U.S. industry pursue

high-risk technologies with significant broad-based commercial and

economic benefits for the nation. The program enables award recipients to

pursue research and development projects that, because they are high-risk,

are unlikely to be developed without federal government financial support.

In FY 1997, NIST awarded 64 ATP cooperative agreements from

seven 1997 competitions and 8 additional cooperative agreements from a

1996 competition that were not funded in 1996 due to budget constraints.

NIST also processed 74 renewals of prior year cooperative agreements. In

total, NIST funded more than $216 million in FY 1997 ATP awards and

renewals.

Our review found that the criteria, procedures, and practices used by

NIST to solicit, review, and select ATP applications met the Department’s

minimum requirements and were generally adequate to support merit68 Commerce IG Semiannual Report March 1999
Technology Administration

based funding decisions. Specifically, we found that NIST (1) used meritbased technical and public policy criteria, (2) established adequate

procedures for reviewing ATP applications, and (3) followed established

procedures in soliciting, reviewing, ranking, and selecting applications for

funding.

At the same time, we identified opportunities for improving the

program’s award procedures and practices. We found that NIST had a

minor deficiency in documenting the review of ATP applications. Although

established procedures were generally sufficient to provide an independent

and qualified competitive review of each applicant, the program staff failed

to mention 12 proposals submitted for four ATP competitions in the

Source Evaluation Board minutes. This issue was brought to the program

staff’s attention, and they have revised their procedures to prevent this

from happening again.

In addition, NIST did not report the correct Catalog of Federal

Domestic Assistance category code number for three new ATP awards

and six award renewals. We recommended that NIST ensure that all future

ATP cooperative agreement award and renewal actions are reported under

the correct Catalog number. NIST agreed with our recommendation.

As part of our review, we also followed-up on NIST’s handling of

recommendations included in three prior OIG audit reports (see September

1995 issue, page 71; March 1996 issue, page 60; and September 1997

issue, page 48) and a GAO report concerning NIST’s administration of the

ATP award selection process. We found that NIST had adequately

addressed the specific audit findings, including its failure to (1) document

the bases for selecting successful proposals, (2) document the rationale by

which Source Evaluation Boards overturned recommendations of proposal

reviewers, (3) adequately track award contingencies, and (4) sufficiently

involve grant office personnel in the review process. (Denver Regional

Office of Audits: DEN-10960-9-0001)

Manufacturing Extension Partnership Program

The MEP program provides financial assistance to a nationwide

network of 75 not-for-profit centers to provide business assistance to small

and medium-sized manufacturers. The MEP-funded centers, located in all

50 states and Puerto Rico, are linked together through NIST, making it

possible for even the smallest manufacturers to have access to more than

2,000 manufacturing and business specialists.

March 1999 Commerce IG Semiannual Report 69
In FY 1997, MEP processed 55 cooperative agreement actions, all

renewals, totaling nearly $79.5 million. Since NIST did not conduct a

competition for new awards in FY 1997, we focused our review on

FY 1996 competitive criteria, procedures, and practices, including followup on NIST’s actions in implementing previous audit report recommendations, and NIST’s procedures for granting the renewal awards in FY 1997.

We found that NIST (1) had taken appropriate steps to improve its

MEP center selection process, as we recommended earlier (see September

1994 issue, page 56), (2) used merit-based criteria for funding decisions,

and (3) followed established procedures in reviewing, selecting, and

renewing awards.

However, NIST failed in its 1996 solicitation notice to meet the

minimum departmental requirements for identifying the intended funding

instrument and discussing the proposal review criteria and process. NIST

did mitigate this failure by mailing supplemental information packages to

278 interested parties.

In addition, all proposal reviewers were members of the MEP program

staff, a situation that could raise questions about the independence and

objectivity of the process. We also noted an additional minor deficiency as

NIST recorded several 1997 MEP award renewals under an incorrect

Catalog of Federal Domestic Assistance code number. As a result, the

Department received inaccurate data for tracking awards.

We recommended that NIST ensure that future MEP solicitation

notices meet the Department’s minimum requirements, invite participants

from outside NIST and the Department to serve as proposal reviewers to

enhance the objectivity of the selection process, and report award renewals

under the correct Catalog number.

NIST agreed with our findings and recommendations and will ensure

that any future MEP center solicitations comply with the minimum

requirements and will involve outside proposal reviewers. In addition,

NIST will report the proper Catalog category number on all future MEP

award actions. (Denver Regional Office of Audits: DEN-10959-9-0001)

National Standard Reference Data System Program

Under the NSRDS program, NIST offers grants and cooperative

agreements to academic institutions, nonfederal agencies, and independent

and industrial laboratories. The aim of the program is to provide critically

evaluated numerical data to the scientific and technical community in a

convenient, accessible form.

Technology Administration

70 Commerce IG Semiannual Report March 1999
In FY 1997, NSRDS processed only one award action—a $57,896

renewal of a cooperative agreement initially awarded on a competitive

basis in 1994. Since NIST did not conduct a competition for new awards

in FY 1997, we focused our audit on the FY 1994 competition procedures

and practices. This was the most recent NSRDS competition, and NIST

does not anticipate conducting any competitions in the foreseeable future.

We found that although NIST developed appropriate merit-based

criteria for evaluating NSRDS applications and followed adequate

procedures and practices for selecting awardees, there were four minor

deficiencies in the solicitation and review processes. Specifically, NIST

(1) failed to comply with departmental guidance by inappropriately

identifying two types of funding instruments in its 1994 solicitation notice,

(2) did not publish annual program notices in the Federal Register, (3) did

not maintain written records of the findings of one of three proposal

evaluators, and (4) weakened the objectivity of the review process by only

using in-house reviewers. We made recommendations to correct these

minor deficiencies.

Although there are no current plans to solicit applications for NSRDS

funding, NIST agreed to implement our recommendations in the event of

future award competitions. (Denver Regional Office of Audits: DEN10962-9-0001)

Accounting System Surveys and Audits

of NIST Financial Assistant Recipients

As noted in earlier issues of this report, the OIG has been performing a

series of accounting system surveys of first-time recipients of financial

assistance awards under NIST’s Advanced Technology and Manufacturing

Extension Partnership programs (see, for example, September 1998 issue,

page 70). During this semiannual period, key aspects of our work on NIST

financial assistance programs involved conducting surveys and audits of

recipients under ATP. No audits or surveys were performed of MEP

program recipients.

During the period, we reported on eight NIST-requested audits

performed pursuant to a memorandum of understanding. We conducted

audits of five joint venture partners and three single recipients. In its effort

to improve the financial management of its multibillion-dollar ATP

program, NIST requested that we perform seven accounting system

surveys and interim cost audits, and one final cost audit of a specific

cooperative agreement. The cooperative agreements we reviewed averaged

about $2 million each. Accounting system surveys and interim cost audits

Technology Administration

March 1999 Commerce IG Semiannual Report 71
are intended to prevent future problems of noncompliance with the terms

and conditions of NIST cooperative agreements. The final cost audit

provided information to enable NIST to close out the agreement in a

timely fashion.

The surveys and the interim cost audits disclosed only minor costs

questioned and adequate compliance with NIST financial requirements in

all but one case, in which we recommended terminating an agreement for

noncompliance. The final cost audit disclosed significant questioned costs.

(Denver Regional Office of Audits: DEN-10737-9-0001, DEN-10763-9-

0001, DEN-10791-9-0001, DEN-10909-9-0001, DEN-10921-9-0001,

DEN-10934-9-0001, DEN-10980-9-0001, and DEN-11121-9-0001)

NIST Properly Handled Superfund

Interagency Agreement with EPA

Under interagency agreements with the Environmental Protection

Agency (EPA), NIST conducts technical research to develop methods to

counteract the effects of toxic waste spills. Funds appropriated for these

agreements are made available through the Hazardous Substance Response

Trust Fund, known as the Superfund, which is used to identify the nation’s

hazardous waste sites, assign priorities to the risks they create, and work to

eliminate those risks. During FY 1998, one NIST operating unit—the

Technology Laboratory—received Superfund monies under an interagency

agreement. The total of $862,000 received was obligated during the year.

The Superfund Amendments and Reauthorization Act of 1986

requires the OIG to audit all Commerce payments, obligations, reimbursements, and other uses of the Superfund annually to ensure that it is being

properly administered. During this semiannual period, we conducted an

audit to determine whether NIST had properly managed the financial

aspects of the Superfund agreement entered into with EPA during

FY 1998.

We determined that NIST had accurately accumulated, documented,

and charged the Superfund for reimbursable costs under the agreement;

funds had been received in advance for all work performed; the agency

was in compliance with the relevant financial provisions of the legislation

that created the Superfund and the terms and conditions of the agreement;

and controls over Superfund activities were adequate. As a result, we

made no recommendations. (Business and Trade Audits Division: BTD11485-9-0001)

Technology Administration

72 Commerce IG Semiannual Report March 1999
Audit of NTIS’s FY 1998 Financial Statements

An IPA firm issued an unqualified opinion on NTIS’s FY 1998

financial statements. The firm did not identify any material weaknesses in

the agency’s internal control over financial reporting. However, the firm

did cite one reportable condition and one instance of material

noncompliance under FFMIA. These problems both involved NTIS’s

failure to use the proper U.S. Government Standard General Ledger

accounts to summarize the results of its budgetary transactions. As a

result, the bureau’s financial management systems do not comply with the

requirements of FFMIA.

NTIS’s unfavorable financial position at the end of FY 1998 and prior

year trends in costs and revenues caused the IPA firm to increase its audit

scope to include procedures to determine whether the bureau had a “going

concern” issue for FY 1999. After reviewing NTIS’s financial position and

its FY 1999 annual plan, the firm concluded that the bureau did not have a

going concern issue for 1999. However, we believe that management

should closely monitor NTIS’s financial position. If the bureau continues

to post losses at the current rate, it will not have sufficient funds to sustain

itself. NTIS has requested a FY 2000 appropriation of about $2 million.

In reviewing a draft version of NTIS’s overview to its financial

statements, we noted that the bureau had incorporated many of our prior

year suggestions to strengthen this integral component of the statements.

NTIS management was also responsive to our suggestions for improving

the overview for the FY 1998 and future statements. (Financial

Statements Audits Division: FSC-10871-9-0001)

Technology Administration

March 1999 Commerce IG Semiannual Report 73
Departmental Management

Chief

Information

Officer

Security

Financial

Management

CFO and

Assistant Secretary

for Administration

Management

and

Organization

Human

Resources

Management

Acquisition

Management

Civil

Rights

Financial Statements Audits

The OIG is responsible for performing the annual audit of the

Department of Commerce’s consolidated financial statements under the

provisions of the CFO Act, as amended by the Government Management

Reform Act of 1994. During this semiannual period, the Department

prepared its third set of consolidated financial statements. We issued an

unqualified opinion on the consolidated Balance Sheet and a disclaimer of

opinion on the consolidating Statements of Net Cost and Changes in Net

Position, and the combined Statements of Budgetary Resources and

Financing (see page 76).

In addition to reporting on the Department’s consolidated financial

statements, we issued individual audit reports on the Department’s

14 reporting entities. Eleven entities (BXA, EDA, ESA/BEA, MBDA,

NIST, NTIA, NTIS, PTO, TA, the Department’s Working Capital Fund,

and its Salaries and Expense Fund) received unqualified opinions on their

financial statements. Two other entities, Census and NOAA, received

unqualified opinions on their balance sheets with a disclaimer of opinion on

their remaining statements. The Department’s Franchise Fund received a

disclaimer of opinion on all financial statements. We did not audit ITA’s

financial statements due to the continued existence of material weaknesses.

Instead, certain procedures were performed to support our audit work on

the Department’s consolidated financial statements.

The Department made significant improvements in financial

management during FY 1998, as evidenced by the Department and four

bureaus receiving improved audit opinions on their financial statements

(see chart on the following page). In addition, there was a significant

reduction in the number of material weaknesses and reportable conditions

at both the Department and bureau levels. Despite the improvements in

internal control and the receipt of an unqualified opinion on the consolidated Balance Sheet, obtaining an unqualified opinion on all statements will

not be easy. Until NOAA and Census, whose statements are material to

the Department, receive other than disclaimers on their remaining

statements, the Department will be precluded from receiving an unqualified

opinion on its FY 1999 consolidated statements.

Section 803 of FFMIA requires agencies to determine whether they

are in substantial compliance with the act. If not, they are required to

prepare a remediation plan outlining the actions needed to bring them into

substantial compliance within three years. Based in part on our audit of the

FY 1997 financial statements, the Department concluded it was not in

substantial compliance with FFMIA. Accordingly, the Department

developed an action plan to correct the material weaknesses and reportable

74 Commerce IG Semiannual Report March 1999

Budget

Administrative

Operations

Small and

Disadvantaged

Business Util.

Exec. Budgeting

and Assistance

Management
Entity FY 1994 FY 1995 FY 1996 FY 1997 FY 1998

Department Disclaimer Disclaimer Balance Sheet

Unqualified; All Other

Statements Disclaimer

BXA Survey Disclaimer Disclaimer Balance Sheet

Unqualified; Income

Statement Disclaimer

Unqualified

Census Disclaimer Balance Sheet

Qualified

Balance Sheet

Qualified; Income

Statement Disclaimer

Balance Sheet

Unqualified; Income

Statement Disclaimer

Balance Sheet

Unqualified; All Other

Statements Disclaimer

EDA Disclaimer Disclaimer Disclaimer Balance Sheet

Qualified; Income

Statement Disclaimer

Unqualified

ESA/BEA Balance Sheet

Unqualified

Unqualified Unqualified Unqualified Unqualified

Franchise Fund Disclaimer Disclaimer

ITA Disclaimer Disclaimer Disclaimer Disclaimer *

MBDA Survey Balance Sheet

Unqualified

Unqualified Unqualified Unqualified

NIST Unqualified Unqualified Unqualified Unqualified Unqualified

NOAA Disclaimer Disclaimer Disclaimer Balance Sheet

Qualified; Income

Statement Disclaimer

Balance Sheet

Unqualified; All Other

Statements Disclaimer

NTIA Unqualified Unqualified Unqualified Unqualified Unqualified

NTIS Unqualified Unqualified Balance Sheet

Qualified; Income

Statement Disclaimer

Balance Sheet

Unqualified; Income

Statement Disclaimer

Unqualified

PTO Unqualified Unqualified Unqualified Unqualified Unqualified

S&E Fund Disclaimer Balance Sheet

Qualified; Income

Statement Disclaimer

Unqualified Unqualified

TA Balance Sheet

Unqualified

Unqualified Unqualified Unqualified

WCF Balance Sheet

Unqualified

Unqualified Unqualified Unqualified Unqualified

Note: Definitions of the types of opinions appear on page 104.

* Unaudited - certain agreed upon procedures were performed.

Departmental Management

March 1999 Commerce IG Semiannual Report 75
Departmental Management

conditions, with the goal of getting an unqualified opinion on its FY 1999

financial statements. Each quarter, the Department reports the current

status of its corrective actions to OMB.

In our view, the action plan, along with the quarterly status reports to

OMB, meets the definition of a remediation plan. For the quarter ending

March 31, 1999, the Department planned to revise its report to OMB to

reflect actions needed to correct material weaknesses and reportable

conditions identified in the FY 1998 financial statements audits. The OIG,

under Section 804(b) of FFMIA, is required to notify the Congress when

the Department does not meet intermediate target dates in the remediation

plan. We did not identify any instances that would necessitate our notifying

the Congress.

During the FY 1997 and FY 1998 audit cycles, we reviewed the

overview to the financial statements for the Department and individual

bureaus, providing comments to management. The overviews serve as a

link between GPRA and the financial statements. We emphasized the need

to improve performance measurement and reporting, providing suggestions

where improvements could be made. We have also provided advice and

consultation to the Department on the implementation of GPRA and linkage to the financial statements. The Department’s FY 2000 performance

plan reflected many of our suggestions. The Department was responsive to

our comments on its consolidated financial statements. In particular, the

Department revised its overview and statement of net cost to improve the

linkage between strategic planning and financial reporting. Senior

Commerce officials should continue to improve financial management and

make GPRA implementation one of their top priorities.

Audit of the Department’s FY 1998

Consolidated Financial Statements

The OIG issued an unqualified opinion on the Department’s FY 1998

consolidated Balance Sheet and a disclaimer of opinion on the consolidating Statements of Net Cost and Changes in Net Position, and the

combined Statements of Budgetary Resources and Financing. The

disclaimer of opinion on the FY 1997 financial statements precluded us

from issuing an opinion on these FY 1998 financial statements because the

October 1, 1997, opening financial statement balances were not audited.

Although significant improvements have been made in financial

management, further improvements are needed. Our review of internal

control at the Department for FY 1998 disclosed six material weaknesses,

which involved the need for improvements in (1) financial management,

76 Commerce IG Semiannual Report March 1999
Departmental Management

(2) financial systems, (3) controls over property, (4) controls over

undelivered orders and accounts payable, (5) controls over grants, and

(6) reconciliations. There were two other reportable conditions, relating to

needed improvements in the preparation of the overview and controls over

cash receipts and accounts receivable.

The unqualified opinion on the Department’s FY 1998 Balance Sheet

represented a marked improvement from the disclaimer of opinion on its

FY 1997 financial statements. There was also a reduction of departmental

material weaknesses and reportable conditions, and we did not identify any

new material weaknesses or reportable conditions at the Department level.

In performing tests of compliance with certain provisions of applicable

laws and regulations, we noted several material instances of noncompliance. Specifically, the Department was not in substantial compliance with

the requirements of FFMIA, in part because it does not meet the requirements for a single, integrated financial system. The Department reporting

entities did not fully comply with federal accounting standards, and four

financial systems did not meet the requirement of complying with the U.S.

Government Standard General Ledger at the transaction level. In addition,

our tests of compliance with other applicable laws and regulations at the

individual entities disclosed material instances of noncompliance at ITA

(see page 36) and NOAA (see page 51).

The Department concurred with our recommendations for corrective

action and will prepare an audit action plan to address them. To achieve an

unqualified opinion in future years, the Department must focus on meeting

three challenges:

z Although two of the Department’s most significant reporting

entities, NOAA and the Census Bureau, received unqualified

opinions on their Balance Sheets, their four remaining financial

statements received disclaimers of opinion. These entities must

identify and resolve any potential impediments in the preparation

and audit of these statements.

z ITA’s FY 1999 financial statements will be audited. Because the

FY 1998 statements were not audited, this will constitute, in

essence, a first year audit. Typically, federal organizations are not

able to receive an opinion on all financial statements on a first-year

audit.

z Existing material weaknesses at the Department and entity levels

need to be corrected. (Financial Statements Audits Division:

FSD-10899-9-0001)

March 1999 Commerce IG Semiannual Report 77
Departmental Management

Department Is Working to Improve Accuracy

of Reporting on Y2K Compliance Status

Like other governmental and private organizations, Commerce needs

to fix its year 2000 computer problem to ensure that its business operations

are not disrupted as a result of the improper functioning of its critical

systems. If these systems are not Y2K compliant, services crucial to our

nation’s well-being—such as weather forecasting, the 2000 Decennial

Census, economic reporting, export license enforcement, and intellectual

property protection—could be jeopardized.

In May 1997, OMB began requiring federal agencies to file quarterly

reports on their progress in making critical systems Y2K compliant. In

November 1998, Commerce reported that 80 percent (367 of 458) of its

critical systems were compliant. In February, after our report was

completed, Commerce reported that 86 percent of its critical systems were

compliant and that 97 percent were expected to be compliant by the

March 31, 1999, deadline set by OMB.

As part of a series of OIG reviews focusing on the Department’s Y2K

Conversion Program, we examined whether the number of compliant systems reported to OMB accurately reflected the status of the Department’s

systems. We identified several deficiencies that diminished the accuracy of

the Department’s reporting:

z The reported number of compliant systems was misleading.

This number was biased by a combination of factors: in some

cases, bureaus reported systems to be compliant that were not; in

other cases, bureaus included non-critical systems that were easily

made compliant.

z Critical systems were not properly identified. The bureaus may

not have adequately performed a criticality assessment and have

had difficulty identifying their critical systems. Five of the

14 systems we assessed were not critical.

z Evidence is lacking to validate compliance. When we asked the

bureaus for test documentation to substantiate that systems were

compliant, very little documentation was available for 8 of the

14 systems.

We are concerned that the inaccurate statistics on compliant systems

can give the impression that the bureaus are making significant progress

when the most difficult Y2K conversions may still remain.

78 Commerce IG Semiannual Report March 1999
Departmental Management

Commerce has begun addressing its weaknesses, as identified by both

the OIG and the Department’s Chief Information Officer, by emphasizing

sound business management practices in its Y2K Conversion Program and

establishing a process for validating compliance. This effort should

increase confidence that the bureaus’ most critical systems are selected for

Y2K conversion, compliance is substantiated, and officials receive the

status information they need to manage their Y2K programs.

To reinforce the Department’s actions, we recommended that it ensure

that (1) the bureaus prioritize their Y2K efforts by identifying and focusing

resources on the most critical systems within core business functions that

have the greatest risk of Y2K failures, (2) the bureaus comply with the

requirements to provide test documentation for compliant systems and

have operating unit heads attest that systems are compliant, (3) special

efforts are taken to ensure the accuracy and completeness of the Department’s quarterly report to OMB, and (4) progress of the most critical,

high-risk systems is monitored through frequent Department reviews.

The Department agreed with our findings and said it would implement

two of our four recommendations. As for the other two, it suggested

alternative courses of action that we considered responsive to the

recommendations. (Office of Systems Evaluation: OSE-10924)

Audit of the WCF’s and S&E Fund’s

FY 1998 Financial Statements

An IPA firm issued an unqualified opinion on the FY 1998 financial

statements of General Administration’s Working Capital Fund (WCF) and

Salaries and Expenses (S&E) Fund. One management team operates both

funds under the same internal control structure and procedures for

compliance. The IPA firm did not identify any material weaknesses, but

did identify two reportable conditions in WCF and S&E’s internal control

over financial reporting. They involved the need for improved controls

surrounding the Financial Accounting and Reporting System and property.

Concerning the first reportable condition, an FY 1997 OIG review

performed at the Department’s Office of Computer Services identified

several issues relating to the general controls surrounding the mainframe

system used to process FARS. The majority of these issues were not

corrected during FY 1998. Therefore, the IPA firm considers these issues

to be a reportable condition to WCF and S&E because FARS processes

the financial information used in preparing the two agencies’ financial

statements. However, the reportable condition is not under the control of

WCF and S&E management.

March 1999 Commerce IG Semiannual Report 79
The second condition relates to problems in the WCF and S&E

property retirement process that resulted in discrepancies between the

subsidiary property ledger and the capitalized property records in the

FARS accounting system. Because these discrepancies dealt with

property that was fully depreciated, the impact on the financial

statements was not material. However, corrections should be made to

bring the ledger and FARS into agreement.

The firm also identified one instance of material non-compliance

with laws and regulations related to FFMIA. Specifically, FARS does not

maintain sufficient commonality of data elements and transactions

processing to ensure timely, accurate, and effective financial reporting,

as required by federal guidance.

In reviewing a draft of the overviews to WCF’s and S&E’s financial

statements, we found that the agencies had incorporated many of our

prior year suggestions for improving the clarity and conciseness of the

overview. Management was also responsive to our comments on the

FY 1998 overviews. WCF and S&E should strengthen discussion of

performance, such as by providing comparisons of actual results to

benchmarks and explanations of variances. (Financial Statements

Audits Division: FSC-10873-9-0001)

Audit of the Franchise Fund’s

FY 1998 Financial Statements

An IPA firm issued a disclaimer of opinion on the FY 1998 Balance

Sheet of General Administration’s Franchise Fund because of

deficiencies in the Fund’s accounting records and internal control over

financial reporting, as well as the unknown financial impact of an

ongoing review of certain aspects of its procurement process. The

Fund’s remaining financial statements were not audited, having been

excluded from the scope of the audit because of the effects of the

previous year’s disclaimer of opinion.

Despite the contractor’s disclaimer of opinion, the Fund’s

management and staff have made progress since the previous year’s

audit. The FY 1997 audit identified four material weaknesses and two

other reportable conditions, whereas the FY 1998 audit had only one

material weakness and three other reportable conditions. The material

weakness involved the need for improvement in controls surrounding

accounts payable and year-end estimated expenses. The other reportable

conditions dealt with needed improvements in controls over the financial

accounting and reporting system, accounts receivable and collections,

and the recording and documentation of fixed assets.

Departmental Management

80 Commerce IG Semiannual Report March 1999
The IPA firm also identified one instance of material non-compliance

with laws and regulations in that the Fund’s financial management system

was not in substantial compliance with federal financial systems requirements. We also reviewed and commented on a draft version of the Fund’s

overview to its FY 1998 financial statements. Fund management was

responsive to our observations and recommendations and indicated its

plans to make additional revisions to strengthen its future overviews.

(Financial Statements Audits Division: FSC-11029-9-0001)

Office of Security Needs to Improve

Planning and Procedures As It Reorganizes

Real and perceived lapses in security involving a former political

appointee brought a great deal of attention to the management of security

at Commerce. To restore any loss of confidence in the Department’s

security program, Secretary Daley called for both internal and external

reviews of security operations. These reviews concluded that the

Department’s entire security function should be strengthened.

The Secretary responded by establishing a high-level position of

Deputy Assistant Secretary for Security and ordering the consolidation of

nearly all departmental security personnel who were formerly employed by

various Commerce bureaus and operating units. A phased implementation

of this consolidation began in August 1998.

At the request of the new Deputy Assistant Secretary for Security, the

OIG conducted a review of the Office of Security’s administrative

operations to help identify problems that could be solved as the office

undergoes its reorganization. We also assessed the office’s readiness to

take on an expanded role in the security of the Department’s bureaus.

We found a dedicated security management team and staff who were

working hard to redefine relationships with the bureaus and to improve the

office’s effectiveness. For example, the Department reduced its number of

security clearances by 27 percent between August 1997 and February

1998, and has established a system of periodic, unannounced reviews of

security practices and regularly scheduled inspections of Commerce offices

that handle classified information.

Despite this progress, we found several operational and administrative

problems that could reduce the efficiency and effectiveness of the Office

of Security as it consolidates and takes on new administrative responsibilities. To address these problems, we recommended, among other things,

that the office (1) complete its consolidation plans for the Department’s

Departmental Management

March 1999 Commerce IG Semiannual Report 81
field security functions; (2) revise its draft organizational plan so that the

budget and administrative operations functions report as one entity to

senior officials; (3) draft an information technology plan that considers a

full range of practical applications to maximize the use of office resources;

(4) implement incident tracking software to help track, record, and analyze

incidents Department-wide; (5) increase the pool of special agents available

for protecting the Secretary; and (6) assess all options thoroughly before

selecting a central inventory control system.

In response to our report, the Office of Security identified steps that it

was taking to comply with the intent of most of our recommendations.

(Office of Inspections and Program Evaluations: IPE-11331)

Classified Document Tracking

System Needs Improvements

During our review of Office of Security functions, we identified

several vulnerabilities in the Department’s classified documents tracking

system that could allow unauthorized individuals access to the system.

Because of the sensitivity of these issues, we decided to deal with them in

a separate report, in which we discussed the issues and made recommendations for correcting them. (Office of Inspections and Program

Evaluations: IPE-11630)

In Brief

Settlement. In December 1998, the U.S. Treasury received $2.25 million

from a major government contractor under the Defense Department’s

Voluntary Disclosure Program, resulting from the company’s earlier

disclosure that its automated inventory system contained a defect that

caused delivery of reworked computer equipment or parts under contracts

awarded by the Departments of the Army, the Navy, the Air Force, and

Commerce. The payment included $92,000 in damages and accrued

interest allocable to several NOAA and Census contracts. In support of the

Justice Department’s investigation of the disclosure, the OIG identified

noncompliant parts delivered on the Commerce contracts and recommended an appropriate discount figure for calculating the damages.

(Financial Fraud Unit)

Demotion. An Office of Administration employee was demoted and

removed from his responsibilities as a contracting officer’s technical

representative after an OIG investigation revealed that he had borrowed a

substantial amount of money from a contract employee working on the

contract for which he served as technical representative. In addition, we

Departmental Management

82 Commerce IG Semiannual Report March 1999
established that he had lied in a sworn statement given in a prior

investigation in which he denied ever borrowing money from a contract

worker. The employee had been previously disciplined for engaging in

improper financial dealings with the contractor and for misusing government time and equipment. (Washington Field Office of Investigations)

Federal Managers’ Financial Integrity Act

Under the Federal Managers’ Financial Integrity Act of 1982 (Public

Law 97-255), executive agency heads are required to report annually to

the President and the Congress on the adequacy of their accounting and

management control systems. The annual report identifies material

weaknesses and actions being taken to correct them.

Personnel from the OIG and the Department’s Office of the CFO

work together to assist bureaus in identifying their material weaknesses.

For 1999 the Secretary reported the four material weaknesses listed below,

all of which were reported in previous years and all of which are on our list

of the top 10 management challenges facing the Department. Although

progress has been made in each of these areas, they remain areas of

serious concern for the Department.

z Modernization of the National Weather Service (NOAA).

z Development of a plan to explore alternative ways of meeting

marine and aeronautical data gathering needs (NOAA).

z Financial Systems (Department-wide).

z Management of the Design and Implementation of the 2000

Decennial Census (Census).

Preaward Financial Assistance Screening

We continue to work with the Office of Executive Assistance

Management, NOAA and NIST grant offices, and EDA program offices to

screen all of the Department’s grants, cooperative agreements, and loan

guarantees before award. Our screening (1) provides information on

whether the applicant has unresolved audit findings and recommendations

on earlier awards, and (2) determines whether a name check or investigation has revealed any negative history on individuals or organizations

connected with a proposed award.

Departmental Management

March 1999 Commerce IG Semiannual Report 83
During this period, we screened 671 proposed awards. On 12 of these

awards, we found that the required information for name checks had not

been provided, and/or that there was adverse information in the name

check file that required us to obtain and review additional information. All

the concerns were satisfactorily resolved and the awards were subsequently made. (Office of Audits)

Departmental Management

84 Commerce IG Semiannual Report March 1999

Preaward Screening Results

Results

Awards denied/delayed

Special award conditions

Amount

$80,185,673

0

12

 0

Number

Cost reimbursement basis 0 0

Indirect Cost Reviews

OMB has established a policy whereby a single federal agency is

responsible for the review, negotiation, and approval of indirect cost rates

for public and private entities receiving funds under various federal

programs. Normally, the federal agency providing the most direct funding

to an entity is designated as its cognizant agency. OMB has designated

Commerce as the cognizant agency for 280 economic development

districts, as well as a number of state and local government units. From

time to time, the Department also has oversight responsibilities for other

recipient organizations. The Department has authorized the OIG to

negotiate indirect cost rates and review cost allocation plans on its behalf.

The OIG reviews and approves the methodology and principles used in

pooling indirect costs and establishing an appropriate base for distributing

those costs to ensure that each federal, state, and local program bears its

fair share.

During this period, we negotiated 19 indirect cost rate agreements with

non-profit organizations and governmental agencies, and reviewed and

approved 28 cost allocation plans. We also provided technical assistance to

recipients of Commerce awards regarding the use of rates established by

other federal agencies and their applicability to our awards. Further, we

have worked closely with first-time for-profit recipients of Commerce

awards to establish indirect cost proposals that are acceptable for OIG

review. (Atlanta Regional Office of Audits)
Nonfederal Audit Activities

In addition to OIG-performed audits, the Department’s financial

assistance programs are audited 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 entities. Entities that are for-profit

organizations and receive ATP 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.

(Before June 30, 1996, when the requirements for nonfederal audits were

consolidated in the new OMB Circular A-133 referenced above, such

audits were subject to the requirements of Circular A-128, Audits of State

and Local Governments, and the former Circular A-133, Audits of

Institutions of Higher Education and Other Non-Profit Institutions. Some

of the audits discussed below were conducted in accordance with these

earlier circulars.)

We examined 288 audit reports during this semiannual period to

determine whether the reports contained audit findings on any Department

programs. For 129 of these reports, the Department acts as cognizant

agency and monitors the auditee’s compliance with the applicable OMB

circulars or the NIST program-specific reporting requirements. The other

159 reports are from entities for which other federal agencies have

oversight responsibility.

Departmental Management

March 1999 Commerce IG Semiannual Report 85

Report Category

OMB

A-133

Audits

Pending (October 1, 1998)

Received

Examined

Pending (March 31, 1999)

30

296

248

78

ATP

ProgramSpecific

Audits Total

31

89

40

80

61

385

288

158
Departmental Management

86 Commerce IG Semiannual Report March 1999

Includes $57,565,897 in ATP program-specific audits.

Bureau Funds

EDA

ITA

MBDA

NIST

$78,176,365

1,229,915

1,350,112

97,105,576

NOAA

NTIA 7,809,342

Agency not identified

Total

6,996,318

$270,888,405

a

a

78,220,777

The following table shows a breakdown by bureau of the $270 million

in Commerce funds audited.

We identified a total of $2,507,316 in questioned costs. In most

reports, the Department’s programs were considered nonmajor, resulting in

limited transaction and compliance testing against laws, regulations, and

grant terms and conditions. The 17 reports with Commerce findings are

listed in Appendix B-1. (Atlanta Regional Office of Audits)
INDEX

 The Inspector General Act of 1978, as amended (1988), specifies reporting requirements for

 semiannual reports. The requirements are listed below and indexed to the applicable pages.

Section Topic Page

4(a)(2) Review of Legislation and Regulations 88

5(a)(1) Significant Problems, Abuses, and Deficiencies 21-86

5(a)(2) Significant Recommendations for Corrective Action 21-86

5(a)(3) Prior Significant Recommendations Unimplemented 88

5(a)(4) Matters Referred to Prosecutive Authorities 21-86

5(a)(5) and 6(b)(2) Information or Assistance Refused 89

5(a)(6) Listing of Audit Reports 97-103

5(a)(7) Summary of Significant Reports 21-86

5(a)(8) Audit Reports—Questioned Costs 93,96

5(a)(9) Audit Reports—Funds to Be Put to Better Use 94,95

5(a)(10) Prior Audit Reports Unresolved 18,89

5(a)(11) Significant Revised Management Decisions 19,89

5(a)(12) Significant Management Decisions with Which the OIG Disagreed 90

The OIG is also required by section 804(b) of the Federal Financial Management Improvement Act of 1996

to report on instances and reasons when an agency has not met the dates of its remediation plan. This matter

is discussed on page 74.

Reporting Requirements

March 1999 Commerce IG Semiannual Report 87
Reporting Requirements

Section 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, and to make recommendations in the semiannual

report concerning the impact of such legislation or regulations on the

economy and efficiency in the administration 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. Recommendations

on legislative or regulatory initiatives affecting Commerce programs are

discussed in relevant sections of the report.

Section 5(a)(3): Prior Significant

Recommendations Unimplemented

This section requires an identification of each significant

recommendation described in previous semiannual reports on which

corrective action has not been completed. Section 5(b) requires that the

Secretary transmit to the Congress statistical tables for audit reports for

which no final action has been taken, plus a statement that includes an

explanation of the reasons final action has not been taken on each such

audit report, 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

the Congress. Any list would have meaning only if explanations detailed

whether adequate progress is being made to implement each agreed-upon

corrective action. Also, as this semiannual report is being prepared,

management is in the process of updating the Department’s Audit Tracking

System as of March 31, 1999, based on semiannual status reports due

from the bureaus in mid-April. An accurate database is therefore not

available to the OIG for reference here. However, additional information

on the status of any audit recommendations may be obtained through the

OIG’s Office of Audits.

88 Commerce IG Semiannual Report March 1999
Reporting Requirements

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 such 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 the reasons such management

decision has not been made, and a statement concerning the desired

timetable for achieving a management decision on each such report.

As of March 31, 1999, two performance audits and two financial

assistance audits were in this category, as discussed below.

Performance Audits

The two NOAA unresolved reports address the bureau’s light aircraft

operations and NMFS’s laboratory structure. These reports are discussed

on page 60.

Financial Assistance Audits

The two unresolved audits relate to financial assistance awards made

by NOAA and NTIA. Audit resolution proposals have been submitted;

however, the OIG and the two bureaus were not able to resolve the reports

on a timely basis. Additional details are presented on pages 60 and 63.

Section 5(a)(11): Significant Revised

Management Decisions

This section requires a description and explanation of the reasons for

any significant revised management decision made during the reporting

period. Department Administrative Order 213-5, Audit Resolution and

Follow-up, provides procedures for revision of a management decision.

For performance audits, the OIG must be consulted and must approve, in

advance, any modification to an audit action plan. For financial assistance

audits, the OIG must concur with any decision that would change the audit

resolution proposal in response to an appeal by the recipient.

March 1999 Commerce IG Semiannual Report 89
Reporting Requirements

During the reporting period, three modifications were submitted to the

OIG for review. The modifications did not involve issues with current

significance, and the OIG concurred with the proposed adjustments.

The decisions issued on the three appeals of audit-related debts were

finalized with the full participation and concurrence of the OIG.

Section 5(a)(12): Significant Management

Decisions with Which the OIG Disagreed

This section requires information concerning any significant management decision with which the Inspector General is in disagreement.

Department Administrative Order 213-5 provides procedures for the

elevation of unresolved audit recommendations to higher levels of

Department and OIG management, including an Audit Resolution Council.

During this period, no audit issues were referred to the Council.

90 Commerce IG Semiannual Report March 1999
Statistical Highlights

March 1999 Commerce IG Semiannual Report 91

Allegations Processed

by OIG Investigators

Accepted for investigation ..................................... 21

Referred to operating units .................................... 28

Evaluated but not accepted for

investigation or referral .......................................... 57

Total ..................................................................... 106

Numerous other allegations and complaints were forwarded to the

appropriate federal and nonfederal investigative agencies.

In addition

OIG HOTLINE

Telephone: (202) 482-2495 or (800) 424-5197

Internet E-Mail: oighotline@doc.gov

Investigative

Statistical Highlights

Arrests ................................................................................................ 2

Indictments and informations .............................................................. 3

Convictions ......................................................................................... 3

Personnel actions* .............................................................................. 8

Administrative actions** ...................................................................... 5

Fines, restitutions, judgments, and other civil

and administrative recoveries .................................................. $99,020

Savings and avoidance of unnecessary expenditures ............. $28,759

** Includes removals, suspensions, reprimands, demotions, reassignments, and resignations

** or retirements in lieu of adverse action.

** Includes actions to recover funds, new procedures, and policy changes that result from

** investigations.

Audit

Statistical Highlights

Questioned costs this period ............................................ $3,759,051

Value of audit recommendations made

this period that funds be put to better use ........................ $6,314,806

Value of audit recommendations agreed

to this period by management .......................................... $9,077,291
TABLES PAGE

1. Audits with Questioned Costs 93

2. Audits with Recommendations That Funds Be Put to Better Use 94

3. Preaward Contract Audits with Recommendations That Funds Be Put to Better Use 95

4. Postaward Contract Audits with Questioned Costs 96

APPENDIXES

A. Office of Inspector General Reports 97

 A-1. Performance Audits 97

 A-2. Inspections 99

 A-3. Financial Statements Audits 100

 A-4. Financial Assistance Audits 101

B. Processed Reports 102

 B-1. Processed Financial-Related Audits 103

DEFINITIONS

The term questioned cost refers to a cost that is questioned by the 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.

The term unsupported cost refers to a cost that, at the time of the audit, is not supported by adequate documentation.

Questioned costs include unsupported costs.

The term recommendation that funds be put to better use refers to a recommendation by the OIG 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 that are specifically identified.

The term management decision refers to 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.

Tables and Appendixes

92 Commerce IG Semiannual Report March 1999
Table 1: Audits with Questioned Costs

Report Category Number

Questioned

Costs

Unsupported

Costs

A. Reports for which no management decision had been

 made by the commencement of the reporting period 25 $8,426,122 $1,180,456

B. Reports issued during the reporting period 24 3,759,051 2,413,548

C. Total reports (A+B) requiring a management decision

C. during the reporting period 49 12,185,173 3,594,004

C. Reports for which a management decision was made

C. during the reporting period 28 7,815,608 1,224,292

 ii. Value of disallowed costs 3,455,987 1,216,862

 ii. Value of costs not disallowed 4,601,309 8,718

D. Reports for which no management decision had been

D. made by the end of the reporting period 21 $4,369,565 $2,369,712

Notes and Explanations:

In Category C, line i contains two reports that had disallowed costs identified during the resolution process.

In Category C, lines i and ii do not always equal the total on line C since resolution may result in values greater

than the original recommendations.

Three audit reports included in this table are also included in the reports with recommendations that funds be

put to better use (see Table 2). However, the dollar amounts do not overlap.

No postaward contract audits are included in this table; instead, any such audits are listed in Table 4.

Tables and Appendixes

March 1999 Commerce IG Semiannual Report 93
Table 2: Audits with Recommendations

Table 2: That Funds Be Put to Better Use

Report Category Number Value

A. Reports for which no management decision had been made by the

A. commencement of the reporting period 7 $21,509,863

B. Reports issued during the reporting period 4 6,314,806

C. Total reports (A+B) requiring a management decision during the

B. reporting period 11 27,824,669

C. Reports for which a management decision was made during the

C. reporting period 6 5,793,665

 ii. Value of recommendations agreed to by management 5,340,039

 ii. Value of recommendations not agreed to by management 471,626

D. Reports for which no management decision had been made by the

D. end of the reporting period 5 $22,031,004

Notes and Explanations:

In Category C, line i contains one report that had funds to be put to better use identified during the resolution

process.

In Category C, lines i and ii do not always equal the total on line C since resolution may result in values greater

than the original recommendations.

Three audit reports included in this table are also included in the reports with questioned costs (see Table 1).

However, the dollar amounts do not overlap.

No preaward contract audits are included in this table; instead, any such audits are listed in Table 3.

Tables and Appendixes

94 Commerce IG Semiannual Report March 1999
Table 3: Preaward Contract Audits with Recommendations

Table 3: That Funds Be Put to Better Use

Report Category Number Value

A. Reports for which no management decision had been made by the

A. commencement of the reporting period 2 $521,265

B. Reports issued during the reporting period — —

C. Total reports (A+B) requiring a management decision during the

B. reporting period 2 521,265

C. Reports for which a management decision was made during the

C. reporting period 2 521,265

 ii. Value of recommendations agreed to by management 281,265

 ii. Value of recommendations not agreed to by management 240,000

 iii. Value of reports on proposals that were not awarded contract —

D. Reports for which no management decision had been made by the

D. end of the reporting period — —

Notes and Explanations:

Preaward audits of contracts include results of audits performed for the OIG by other agencies.

When there are multiple proposals for the same contract, we report only the proposal with the lowest dollar value

for funds to be put to better use; however, in Category C, lines i-ii, we report the value of the awarded contract.

In Category C, lines i-iii do not always equal the total on line C since resolution may result in values greater

than the original recommendations.

Tables and Appendixes

March 1999 Commerce IG Semiannual Report 95
Table 4: Postaward Contract Audits

Table 4: with Questioned Costs

Report Category Number

Questioned

Costs

Unsupported

Costs

A. Reports for which no management decision had been

 made by the commencement of the reporting period — — —

B. Reports issued during the reporting period — — —

C. Total reports (A+B) requiring a management decision

C. during the reporting period — — —

C. Reports for which a management decision was made

C. during the reporting period — — —

 ii. Value of disallowed costs — —

 ii. Value of costs not disallowed — —

D. Reports for which no management decision had been

D. made by the end of the reporting period — — —

Notes and Explanations:

As noted in the September 1997 issue (page 58), the OIG transferred certain audit-related activities to the

Department’s contracting officers, allowing them to request audits directly from the cognizant audit offices. As a

result, data on contract audit savings is now maintained by the cognizant audit office rather than by the OIG.

Tables and Appendixes

96 Commerce IG Semiannual Report March 1999
Appendix A. Office of Inspector General Reports

Type Number Appendix

Performance Audits 22 A-1

Inspections 10 A-2

Financial Statements Audits 16 A-3

Financial Assistance Audits 14 A-4

Total 62

Appendix A-1. Performance Audits

Agency Subject Number Date

Funds to

Be Put to

Better Use

EDA Defense Adjustment Assistance Program Is Well

Focused

DEN-9806-9-0001 01/99 —

ESA Internal Controls Over Denver Bankcard Purchases

Need Improving

DEN-11030-9-0001 02/99 —

ITA US&FCS Belgium Needs to Make Organizational

Modifications to Maximize Export Promotion Efforts

BTD-10595-9-0001 12/98 —

US&FCS European Union Mission Should Develop

a Europe-wide Commercial Strategy

BTD-10588-9-0001 01/99 —

US&FCS South Korea Needs to Augment Effective

Program with Stronger Internal Controls

BTD-10221-9-0001 01/99 —

US&FCS Portugal Is Effectively Providing Services,

But Should Strengthen Program Management

BTD-10594-9-0001 03/99 —

The American Institute in Taiwan Commercial

Section Needs to Place Greater Emphasis on Trade

Promotion and Improve Internal Controls

BTD-10220-9-0001 03/99 —

US&FCS American Business Center Program

Funding Decisions Were Merit Based, CFDA No.

11.115

BTD-10957-9-0001 03/99 —

Tables and Appendixes

March 1999 Commerce IG Semiannual Report 97
Tables and Appendixes

Appendix A-1. Performance Audits — Continued

Agency Subject Number Date

Funds to

Be Put to

Better Use

NOAA NESDIS’s Research in Remote Sensing of the Earth

and Environment Program Awards Were Not

Competitively Selected, CFDA No. 11.440

ATL-10944-9-0001 03/99 —

NMFS’s Cooperative Science and Education

Program Awards Were Not Competitively Selected,

CFDA No. 11.455

STL-10951-9-0001 03/99 —

NMFS’s Habitat Conservation Program Awards

Were Not Competitively Selected, CFDA No. 11.463

STL-10953-9-0001 03/99 —

NMFS’s Unallied Management Projects Program

Awards Were Not Competitively Selected, CFDA

No. 11.454

STL-10952-9-0001 03/99 —

NMFS’s Unallied Science Program Awards Were

Not Competitively Selected, CFDA No. 11.472

STL-10947-9-0001 03/99 —

NOS’s Ocean Resources Conservation and

Assessment Program Awards Were Not

Competitively Selected, CFDA No. 11.426

ATL-11084-9-0001 03/99 —

NWS’s Hydrologic Research Program Awards Were

Not Competitively Selected, CFDA No. 11.462

ATL-11140-9-0001 03/99 —

NTIA Public Telecommunications Facilities Program

Award Process Promotes Merit-Based Decisions,

But Process Needs More Discipline

ATL-10945-9-0001 03/99 —

Telecommunications and Information Infrastructure

Assistance Program Award Process Promotes MeritBased Decisions, But Process Needs More Discipline

ATL-10946-9-0001 03/99 —

PTO Minor Internal Control Deficiencies Found in

Bankcard Program

BTD-10901-9-0001 03/99 —

TA-NIST NIST Properly Tracked FY 1998 Superfund Charges

to the Environmental Protection Agency

BTD-11485-9-0001 01/99 —

Advanced Technology Program Award Process

Promotes Merit-Based Decisions, CFDA No. 11.612

DEN-10960-9-0001 03/99 —

Manufacturing Extension Partnership Program

Award Process Promotes Merit-Based Decisions,

CFDA No. 11.611

DEN-10959-9-0001 03/99 —

National Standard Reference Data System Program

Award Process Promotes Merit-Based Decisions,

CFDA No. 11.603

DEN-10962-9-0001 03/99 —

98 Commerce IG Semiannual Report March 1999
Tables and Appendixes

Appendix A-2. Inspections

Agency Subject Number Date

Funds to

Be Put to

Better Use

ESA Data Capture System 2000 Requirements and

Testing Issues Caused Dress Rehearsal Problems

OSE-10846 01/99 —

Interagency Agreements Require Improvements IPE-10523 03/99 —

ITA Seattle USEAC Is Providing Its Clients Excellent

Service, but Some Improvements Are Needed

IPE-11007 11/98 —

Management Improvements Needed to Better

Prepare for the Export Challenges of the 21st

Century

IPE-9904 03/99 —

NOAA NWS Requires Better Management and Oversight of

Interagency and Other Special Agreements

IPE-10417 03/99 —

Proposed NPOESS Preparatory Project Reduces

Operational Risk, but Excludes Demonstration of

Critical Ozone Suite

OSE-11103 03/99 —

Supercomputer Acquisition Had Inadequate

Assurance of Funding and Unclear Provisions for

Advanced Payments

OSE-10969 03/99 —

O/S Department Is Working to Improve Accuracy of

Reporting Y2K Compliance Status

OSE-10924 03/99 —

Office of Security Needs to Improve Planning and

Procedures As It Reorganizes

IPE-11331 03/99 —

Vulnerabilities in the Department’s Classified

Document Tracking System Need to Be Corrected

IPE-11630 03/99 —

March 1999 Commerce IG Semiannual Report 99
Tables and Appendixes

Appendix A-3. Financial Statements Audits

Agency Subject Number Date

Funds to

Be Put to

Better Use

BXA Financial Statements for FY 1998 FSC-10864-9-0001 03/99 —

EDA Financial Statements for FY 1998 FSD-10997-9-0001 03/99 —

ESA ESA’s and BEA’s Combined Financial Statements

for FY 1998

FSC-10863-9-0001 03/99 —

Census’s Financial Statements for FY 1998 FSC-10865-9-0001 03/99 $3,300,000

ITA Financial Statements for FY 1998 FSC-10866-9-0001 03/99 —

MBDA Financial Statements for FY 1998 FSC-10867-9-0001 03/99 —

NOAA Financial Statements for FY 1998 FSC-10869-9-0001 03/99 —

NTIA Financial Statements for FY 1998 FSC-10870-9-0001 03/99 —

O/S General Administration’s Franchise Fund’s FY 1998

Financial Statements

FSC-11029-9-0001 03/99 —

General Administration’s WCF and S&E Fund’s

FY 1998 Financial Statements

FSC-10873-9-0001 03/99 —

Department of Commerce’s Consolidated Financial

Statements as of September 30, 1998

FSD-10899-9-0001 03/99 —

PTO Financial Statements for FY 1998 FSD-10898-9-0001 03/99 —

Revenue Accounting and Management System -

General Controls Review

FSD-10898-9-0002 03/99 —

TA TA’s Financial Statements for FY 1998 FSC-10872-9-0001 03/99 —

NIST’s Financial Statements for FY 1998 FSC-10868-9-0001 03/99 —

NTIS’s Financial Statements for FY 1998 FSC-10871-9-0001 03/99 —

100 Commerce IG Semiannual Report March 1999
Appendix A-4. Financial Assistance Audits

Agency Auditee Number Date

Questioned

Costs

Unsupported

Costs

Funds to

Be Put to

Better Use

EDA Bonneville County

Technology Park, ID

STL-10482-9-0001 12/98 $15,377 $15,377 $131,985

City of Kansas City, KS DEN-9652-9-0001 02/99 32,864 — —

City of Homestead, FL ATL-10730-9-0001 03/99 — — 622,019

City of Pittsburg, KS DEN-10587-9-0001 03/99 — — —

Texas Engineering

Extension Service

DEN-10586-9-0001 03/99 194,129 194,129 —

NOAA West Virginia High

Technology Consortium

Foundation

ATL-10634-9-0001 03/99 358,199 — —

TA-NIST Apex Medical, Inc., MA DEN-10921-9-0001 10/98 1,347 — —

Precision Castparts

Corporation, OR

DEN-10737-9-0001 10/98 41,194 — —

The East Development

Group, Inc., MA

DEN-11121-9-0001 10/98 728 — —

IBIS Associates, Inc., MA DEN-10909-9-0001 11/98 42,870 42,870 —

U.S. Surgical Corporation,

CT

DEN-10980-9-0001 12/98 — — —

Scientific Measurement

Systems, Inc., TX

DEN-10763-9-0001 01/99 15,132 — 2,260,802

GenPharm International,

Inc., CA

DEN-10791-9-0001 03/99 504,465 307,236 —

MultiCell Associates, Inc.,

RI

DEN-10934-9-0001 03/99 45,430 3,212 —

Note: The questioned costs and unsupported costs include only the federal share of the total questioned and unsupported costs cited in the reports.

Tables and Appendixes

March 1999 Commerce IG Semiannual Report 101
Tables and Appendixes

Appendix B. Processed Reports

The Office of Inspector General reviewed and accepted 288 financial-related 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 100

International Trade Administration 4

Minority Business Development Agency 4

National Institute of Standards and Technology 51

National Oceanic and Atmospheric Administration 16

National Telecommunications and Information Administration 25

Multi-Agency 25

Agency Not Identified 63

Total 288

* Includes 40 ATP program-specific audits.

*

102 Commerce IG Semiannual Report March 1999
Appendix B-1. Processed Financial-Related Audits

Agency Auditee Number Date

Questioned

Costs

Unsupported

Costs

Funds to

Be Put to

Better Use

EDA Del Norte Economic

Development Corporation, CA

ATL-9999-9-1009 02/99 $145,667 — —

Town of Troy, NC ATL-9999-9-1029 02/99 14,553 — —

California Association for Local

Economic Development

ATL-9999-9-1039 02/99 12,059 12,059 —

City of Chula Vista, CA ATL-9999-9-1040 02/99 11,727 — —

City of Waterville, ME ATL-9999-9-1070 02/99 — — —

Kittitas-Yakima Economic

Resource Development District,

WA

ATL-9999-9-1107 02/99 407,800 407,800 —

City of Savannah, GA ATL-9999-9-1137 02/99 — — —

Gadsden County Board of

Commissioners, FL

ATL-9999-9-1196 02/99 — — —

Virginia Biotechnology

Research Park Authority

ATL-9999-9-1237 03/99 891,350 891,350 —

ITA Environmental Export Council,

DC

ATL-9999-9-1045 03/99 2,439 2,439 —

NOAA Massachusetts Biotechnology

Research Institute, Inc.

ATL-9999-9-1001 02/99 3,312 — —

University of Southern

Mississippi

ATL-9999-9-1161 03/99 12,275 12,275 —

State of Wisconsin ATL-9999-9-1188 03/99 14,056 — —

State of Connecticut ATL-9999-9-1191 02/99 — — —

TA-NIST Kent Seafarms Corporation

(dba Aquatic Systems), CA

ATL-9999-9-0001 10/98 377,585 377,585 —

InStream Corporation, MA ATL-9999-9-0004 10/98 467,277 — —

Tropel Corporation, NY ATL-9999-9-0008 10/98 147,216 147,216 —

Note: The questioned costs and unsupported costs include only the federal share of the total questioned and unsupported costs cited in the reports.

Tables and Appendixes

March 1999 Commerce IG Semiannual Report 103
Definitions of Types of OIG Reviews

and Financial Statements Audit Terms

Audits

Performance Audits — These audits look at 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.

Financial-Related Audits — These audits review

the Department’s contracts, grants, cooperative

agreements, loans, and loan guaranties. They assess

compliance with laws, regulations, and award terms;

adequacy of accounting systems and internal controls; allowance of costs; and the degree to which a

project achieved the intended results.

Financial Statements Audits — The CFO Act, as

amended by Government Management Reform Act,

requires federal agencies to prepare annual financial

statements and to subject them to audit. The OIG is

responsible for conducting these audits and reporting

the results to the Secretary.

Inspections

Operational Inspections — These are reviews of

an activity, unit, or office, or a contractor or organization that receives funds from the Department.

They focus on an organization, not a whole program, and are designed to give agency managers

timely information about operations, including

current and foreseeable problems.

Program Evaluations — These are in-depth

reviews of specific management issues, policies, or

programs.

Systems Evaluations — These are reviews of system development, acquisitions, operations, and

policy in order to improve efficiency and effectiveness. They focus on Department-wide computer

systems and other technologies and address all

project phases, including business process

reengineering, system definition, system development, deployment, operations, and maintenance.

OIG Reviews

Financial Statements Audit Terms

Overview — This required component of financial

statements is to provide a clear, concise description

of the entity’s programs, activities, and results. It

contains the entity’s performance measures and

serves as a link between the statements and the

requirements of GPRA.

Trend Analysis — This analysis of performance

data from multiple years allows conclusions to be

drawn about an entity’s progress over time in

improving its results. To facilitate this analysis, the

entity should present data from several prior years,

projected data for the following year, and a

comparison of actual versus targeted performance.

Unqualified Opinion — The financial statements

present fairly, in all material aspects, the entity’s

financial position and results of operations.

Qualified Opinion — Except for the effects of the

matter(s) to which the qualification relates, the

financial statements present fairly, in all material

respects, the entity’s financial position and results of

operations.

Adverse Opinion — The financial statements do

not present fairly the entity’s financial position or

results of operations.

Disclaimer of Opinion — The auditor does not

express an opinion on the financial statements.

104 Commerce IG Semiannual Report March 1999
Glossary of Abbreviations

ABC .................................................................................................................................... American Business Center

AFOS ..................................................................................................... Automation of Field Operations and Services

AIT.................................................................................................................................. American Institute in Taiwan

ATP ............................................................................................................................. Advanced Technology Program

AWIPS ........................................................................................... Advanced Weather Interactive Processing System

BEA ............................................................................................................................... Bureau of Economic Analysis

BXA .......................................................................................................................... Bureau of Export Administration

CAMS ............................................................................................... Commerce Administrative Management System

CFO .......................................................................................................................................... Chief Financial Officer

DCS 2000........................................................................................................................... Data Capture System 2000

EDA ................................................................................................................ Economic Development Administration

EPA ......................................................................................................................... Environmental Protection Agency

ESA ................................................................................................................Economics and Statistics Administration

EU ....................................................................................................................................................... European Union

FARS ........................................................................................................ Financial Accounting and Reporting System

FEMA .......................................................................................................... Federal Emergency Management Agency

FFMIA .............................................................................................Federal Financial Management Improvement Act

GAO ....................................................................................................................................General Accounting Office

GPRA ......................................................................................................... Government Performance and Results Act

GSA ........................................................................................................................... General Services Administration

IPA ................................................................................................................................ independent public accountant

ITA ..........................................................................................................................International Trade Administration

MBDA........................................................................................................... Minority Business Development Agency

MEP ................................................................................................................... Manufacturing Extension Partnership

NASA ................................................................................................. National Aeronautics and Space Administration

NIST .................................................................................................. National Institute of Standards and Technology

NMFS ......................................................................................................................National Marine Fisheries Service

NOAA ............................................................................................ National Oceanic and Atmospheric Administration

NPOESS .............................................................. National Polar-orbiting Operational Environmental Satellite System

NSRDS ...................................................................................................... National Standard Reference Data System

NTIA ............................................................................National Telecommunications and Information Administration

NTIS ............................................................................................................... National Technical Information Service

NWS .................................................................................................................................... National Weather Service

OIG ................................................................................................................................... Office of Inspector General

OMB ...................................................................................................................... Office of Management and Budget

PTFP.................................................................................................... Public Telecommunications Facilities Program

PTO ............................................................................................................................... Patent and Trademark Office

RLF ................................................................................................................................................ revolving loan fund

S&E ........................................................................................................................................... Salaries and Expenses

TA ...................................................................................................................................... Technology Administration

TIIAP .......................................................... Telecommunications and Information Infrastructure Assistance Program

TPCC ......................................................................................................... Trade Promotion Coordinating Committee

US&FCS ........................................................................................................... U.S. and Foreign Commercial Service

USEAC .........................................................................................................................U.S. Export Assistance Center

WCF........................................................................................................................................... Working Capital Fund

Y2K .............................................................................................................................................................. year 2000

March 1999 Commerce IG Semiannual Report 105
Office of Inspector General

Organization Chart

OIG Points of Contact

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

Congressional Liaison............................. (202) 482-3052

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

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

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

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

REQUESTS FOR REPORTS:

Telephone ........................................ (202) 482-0231

Internet E-Mail .................................. oigreports@doc.gov

OIG HOTLINE:

Telephone ........................................ (202) 482-2495 or (800) 424-5197

Internet E-Mail .................................. oighotline@doc.gov

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

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

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

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