GAO 

United States Government Accountability Office

Report to Congressional Committees

UNITED STATES 

MERCHANT MARINE 

ACADEMY 

Internal Control 

Weaknesses Resulted 

in Improper Sources 

and Uses of Funds; 

Some Corrective 

Actions Are Under 

Way 

August 2009 

GAO-09-635 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

August 2009

UNITED STATES MERCHANT MARINE 

ACADEMY 

Internal Control Weaknesses Resulted in Improper 

Sources and Uses of Funds; Some Corrective 

Actions Are Under Way 

Highlights of GAO-09-635, a report to 

congressional committees 

The U.S. Merchant Marine 

Academy (Academy), a component 

of the Department of 

Transportation’s Maritime 

Administration (MARAD), is one of 

five U.S. service academies. The 

Academy is affiliated with 14 nonappropriated fund instrumentalities 

(NAFI) and two foundations. 

GAO was asked to determine 

whether there (1) were any 

potentially improper or 

questionable sources and uses of 

funds by the Academy, including 

transactions with its affiliated 

organizations; (2) was an effective 

control environment with key 

controls in place over the 

Academy’s sources and uses of 

funds; and (3) were any actions 

taken, under way, or planned to 

improve controls and 

accountability. GAO analyzed 

selected transactions from fiscal 

years 2006, 2007, and 2008 to 

identify improper or questionable 

sources and uses of funds and 

reviewed documents and 

interviewed cognizant officials to 

assess the Academy’s internal 

controls, and identify corrective 

actions to improve controls. 

What GAO Recommends

GAO makes a series of 

recommendations directed at 

improving internal controls and 

accountability at the Academy and 

to address issues surrounding the 

improper and questionable sources 

and uses of funds. The Department 

commented that MARAD will 

produce a comprehensive strategy 

and corrective action plan to 

address our recommendations. 

GAO identified numerous instances of improper and questionable sources and 

uses of funds by the Academy and its affiliated organizations. These 

improprieties and questionable payments GAO identified demonstrate that, 

while MARAD and the Academy have been taking action to improve the 

Academy’s internal controls, the Academy did not have assurance that it 

complied with applicable fund control requirements, including the 

Antideficiency Act (ADA). Further, the Academy had numerous breakdowns 

in its important stewardship responsibilities with respect to maintaining 

accountability over the receipt and use of funds. For example, GAO identified 

improper and questionable midshipmen fee transactions related to: (1) fee 

collections and uses of fees unrelated to goods and services provided to all 

midshipmen, (2) fee collections that exceeded the actual expense to the 

Academy for the goods or services, and (3) the use of accumulated excess 

midshipmen fees for improper and questionable purposes. 

GAO found that a weak overall control environment and the flawed design 

and implementation of internal controls were the root causes of the 

Academy’s inability to prevent or effectively detect numerous instances of 

improper and questionable sources and uses of funds. Specifically, GAO found 

that there was a lack of awareness or support for strong internal control and 

accountability across the Academy at all levels and risks, such as those that 

flow from a lack of clear organizational roles and responsibilities and from 

significant activities with affiliated organizations. The internal control 

weaknesses GAO identified were systemic and could have been identified in a 

timely manner had Academy and MARAD management had a more effective 

oversight and monitoring regimen. For example, GAO found that the Academy 

did not routinely prepare financial reports and information for use by internal 

and external users. 

GAO found that various actions were taken and in process that were intended 

to improve the Academy’s internal controls, including actions to address 

issues of accountability with its affiliated organizations. For example, a 

permanent position of Assistant Chief Financial Officer (CFO) for the 

Academy was established in March 2009 with direct reporting responsibility to 

the MARAD CFO. This action provides a senior financial official at the 

Academy with authority to conduct needed oversight and monitoring of 

financial activities on a real time basis. Further, following discussions GAO 

had with Department and MARAD officials, the MARAD CFO took steps to 

secure and protect accumulated reserves held in commercial bank accounts 

of an affiliated organization. However, even though MARAD and the Academy 

have taken actions, much more needs to be done, including determining the 

amount of midshipmen fees that were used to cover official Academy 

expenses, performing a comprehensive analysis of the risks posed by the 

Academy’s organizational structure and its relationships with its affiliated 

organizations, and establishing and implementing policies, procedures, and 

internal controls over many Academy activities. 

View GAO-09-635 or key components. 

For more information, contact Jeanette 

Franzel at (202) 512-2600 or 

franzelj@gao.gov. 
Page i GAO-09-635 

Contents 

Letter 1

Background 3 

Improper and Questionable Sources and Uses of Funds 10 

Weak Control Environment and Flawed Academy Internal Controls 23 

Actions by the Department, MARAD, and the Academy to Address 

Certain Accountability and Internal Control Challenges 33 

Conclusion 35 

Recommendations for Executive Action 36 

Agency Comments and Our Evaluation 46 

Appendix I Objectives, Scope, and Methodology 48 

Appendix II Department of Transportation, MARAD, Academy, 

and Affiliated Organization Relationships 52 

Appendix III Academy Expenses by Category, Fiscal Years 2006 

and 2007 53 

Appendix IV The Antideficiency Act 54 

Appendix V Comments from the Department of Transportation 56 

Appendix VI GAO Contact and Staff Acknowledgments 59 

Tables 

Table 1: Listing of Merchant Marine Academy Non-Appropriated 

Fund Instrumentalities (NAFI) and Foundations and Their 

Purposes 6 

Table 2: Academy Sources and Amounts of Funding, Fiscal Years 

2006 and 2007 7 

 Merchant Marine Academy 
Table 3: Payments Made by the Academy to Affiliated NAFIs, Fiscal 

Years 2006 and 2007 8 

Table 4: Categories of Midshipmen Fees, Fiscal Years 2006 and 

2007 Collections, Total for the 2 Fiscal Years 9 

Table 5: Examples of Questionable Payments from the Prior Years’ 

Midshipmen Fee Reserves by the FCO NAFI on Behalf of 

the Academy 14 

Table 6: Questionable Payment Transactions Related to the 

GMATS’s Use of the Kings Pointer, Fiscal Years 2006 and 

2007 20 

Table 7: Revenue and Expense Recognized by the Academy from 

Agreements between GMATS and Other Federal Agencies, 

Fiscal Years 2006 and 2007 30 

Figure 

Figure 1: Overview of Key Components Involved in Carrying out 

Academy and Academy-Related Activities 5 

Abbreviations 

ADA Antideficiency Act 

DRM Department of Resource Management 

FCO Fiscal Control Office 

GMATS Global Maritime and Transportation School 

NAFI Non-appropriated fund instrumentality 

MARAD Maritime Administration 

MWR Morale, welfare, and recreation 

SP&C Sail, Power and Crew Association 

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Page ii GAO-09-635 Merchant Marine Academy
Page 1 GAO-09-635 

 

United States Government Accountability Office

Washington, DC 20548 

 

August 10, 2009 

The Honorable Patty Murray 

Chairman 

The Honorable Christopher S. Bond 

Ranking Member 

Subcommittee on Transportation, Housing and Urban Development, 

 and Related Agencies 

Committee on Appropriations 

United States Senate 

The Honorable John W. Olver 

Chairman 

The Honorable Tom Latham 

Ranking Member 

Subcommittee on Transportation, Housing and Urban Development, 

 and Related Agencies 

Committee on Appropriations 

House of Representatives 

The U.S. Merchant Marine Academy (Academy), one of five United States 

service academies, is located in Kings Point, New York, and provides 4-

year undergraduate educational programs for men and women 

(midshipmen) to become shipboard officers and leaders in the 

transportation field. Graduates from the Academy receive Bachelor of 

Science degrees and U.S. Coast Guard licenses as deck or engineering 

officers, or both, and a commission in the U.S. Naval Reserve or another 

uniformed service. For the most recent academic year ending June 2009, 

there were about 940 Academy midshipmen. The Academy is a component 

within the Department of Transportation’s Maritime Administration 

(MARAD). The Academy also is affiliated with 14 non-appropriated fund 

instrumentalities (NAFI) and two private foundations. 

A February 2008 MARAD report on the Academy’s fiscal years 2006 and 

2007 activity concluded that the Academy lacked adequate controls to 

comply with laws and regulations governing the obligation and 

expenditure of federal resources, and identified possible Antideficiency 

Act (ADA) violations.1

 An ADA violation occurs when a federal officer or 

1

 Report to the Deputy Secretary of Transportation, Internal Controls Review of the U.S 

Merchant Marine Academy, February 6, 2008, from the Maritime Administrator. 

 Merchant Marine Academy
 

employee incurs obligations or makes expenditures in excess or in 

advance of appropriations or employs personal services, among other 

things.2

 Appendix IV provides more detail on the requirements of the ADA. 

In light of these issues, you requested that we determine whether there 

(1) were any potentially improper or questionable3

 sources and uses of 

funds by the Academy, including transactions with its affiliated 

organizations; (2) was an effective control environment with key controls 

in place over the Academy’s sources and uses of funds, including 

transactions with its affiliated organizations; and (3) were any actions 

taken, under way, or planned to improve internal controls and 

accountability over the Academy’s funds and other resources. 

To address the first two objectives, we reviewed the 2008 MARAD report 

and selected laws, regulations, policies, and procedures related to the 

Academy and its affiliated organizations’ operations and related financial 

activities. We obtained an understanding of the sources and uses of funds 

for the Academy and its NAFIs, including the Academy’s appropriated 

funds. We assessed the Academy’s internal controls against our Standards 

for Internal Control in the Federal Government and related guidance.4

 We 

also interviewed staff and officials from the Department of Transportation 

(the Department), Office of Inspector General for the Department, 

MARAD, the Academy, and its affiliated organizations to obtain an 

understanding of their roles and responsibilities, the internal control 

environment at the Academy, and controls over the Academy’s sources 

and uses of funds with its affiliated organizations. We obtained a database 

of Academy expenses at the transaction level covering fiscal years 2006 

and 2007, the time period covered by MARAD’s February 2008 internal 

 

2

 31 U.S.C. §§ 1341-42, 1349-51, 1511-19. 

3

 We considered transactions associated with sources and uses of funds to be questionable 

if (1) the source of funds was not supported by sufficient documentation to enable an 

objective third party to determine the purpose of the funds received or there was a possible 

violation of law, regulation, or policy, or (2) the use of funds was not supported by 

sufficient documentation to enable an objective third party to determine if it was a valid 

use of government funds or there was a possible violation of law, regulation, or policy. 

4

 GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 

(Washington, D.C.: November 1999); Internal Control Management and Evaluation Tool, 

GAO-01-1008G (Washington, D.C.: August 2001); Guide for Evaluating and Testing 

Controls Over Sensitive Payments, GAO/AFMD-8.1.2 (Washington, D.C.: May 1993); and 

Strategies To Manage Improper Payments: Learning From Public and Private Sector 

Organizations, GAO-02-69G (Washington D.C.: October 2001). 

Page 2 GAO-09-635 Merchant Marine Academy
 

control review, and analyzed the transactions to identify indications of 

improper or questionable sources and uses of funds. We also analyzed 

midshipmen fees collected by one of the Academy’s NAFIs and the use of 

those midshipmen fees for calendar years 2006 and 2007, and other 

sources and uses of funds for fiscal years 2006 to 2008. On the basis of this 

information and analytical procedures, we selected transactions that 

appeared to have a higher risk of being improper. We reviewed available 

documentation supporting selected transactions and also obtained 

explanations from Academy and NAFI officials for these transactions. The 

results of our work are not generalizable to the population of transactions 

as a whole because we selected transactions on a nonstatistical basis. 

Consequently, there may be other improper or questionable sources and 

uses of funds that our work did not identify. 

To address our third objective, we obtained relevant documentation on 

actions taken, under way, or planned, including an October 2007 MARAD 

order establishing the Academy’s Fiscal Oversight and Administrative 

Review Board.5

 We also interviewed officials from the Department, the 

Office of Inspector General for the Department, MARAD, and the Academy 

to obtain information on actions taken, under way, or planned. Additional 

details on our scope and methodology are in appendix I. 

We conducted this performance audit from June 2008 to August 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

Background 

Academy and NAFI 

Relationships 

The Academy is headed by a Superintendent. The Superintendent reports 

directly to the head of MARAD, the Maritime Administrator. MARAD, an 

agency of the Department, is responsible for overseeing and monitoring 

the Academy. A Deputy Superintendent and four Assistant 

Superintendents—Administration, Regimental Affairs, Academic Affairs, 

 

5

 Maritime Administrative Order No. 150-3, October 1, 2007. 

Page 3 GAO-09-635 Merchant Marine Academy
 

and Plans, Assessment, and Public Affairs—report directly to the 

Superintendent and are the principal officials responsible for carrying out 

the Academy’s operations. Academy components with respect to the 

issues discussed in this report include the following. 

• The Department of Resource Management (DRM) provides bookkeeping, 

payroll, and other administrative support services for the Academy. 

Further, for most of fiscal years 2006 and 2007, the director of DRM was 

also the head of the Fiscal Control Office (FCO) NAFI. During fiscal years 

2006 and 2007, the Director of DRM reported to the Academy’s Deputy 

Superintendent. When the position of Deputy Superintendent was not 

occupied, the Director of DRM reported directly to the Superintendent. 

• The Department of Waterfront Activities operates the waterfront area of 

the Academy’s property, maintains the Kings Pointer and other training 

vessels, and provides training to midshipmen. Further, the Department of 

Waterfront Activities collaborates with two NAFIs on waterfront related 

activities (the Sail, Power and Crew Association, and the Global Maritime 

and Transportation School (GMATS)), and the Sailing Foundation, a 

private non-profit foundation. The Director of Waterfront Activities 

reported to the Deputy Superintendent, or when that position was not 

occupied, the Director reported directly to the Superintendent. 

• The Department of Information Technology provides information 

technology services for all Academy operations and midshipmen. The 

Director of Information Technology reported to the Deputy 

Superintendent or when that position was not occupied, the Director 

reported directly to the Superintendent. 

• The Department of Health Services provides medical and dental services 

to midshipmen. The Director reported to the Assistant Superintendent for 

Administration as well as the Deputy Superintendent or the 

Superintendent. 

An overview of the organizational relationships of the Department of 

Transportation, MARAD, selected components within the Academy, as 

well as the Academy’s affiliated NAFIs and foundations is provided in 

figure 1. 

Page 4 GAO-09-635 Merchant Marine Academy
 

Figure 1: Overview of Key Components Involved in Carrying out Academy and Academy-Related Activities 

Source: GAO.

Department of

Transportation

Secretary

MARAD

Administrator

Academy

Superintendent

Deputy Superintendent

4 Assistant Superintendents

Department of Resource Management

Department of Waterfront Activities

Department of Information Technology

Department of Health Services

Other component units

14 Non-Appropriated Fund

Instrumentalities (NAFI)

Including:

Fiscal Control Office

Global Maritime and

 Transportation School

Athletic Association

Sail, Power and Crew Association

2 private foundations

Sailing Foundation

Alumni Foundation

The Academy carries out its mission and operations primarily using 

appropriated funds. The Academy’s 14 affiliated NAFIs operate using the 

proceeds from their own operations, rather than with appropriated funds. 

NAFIs are organizations that typically provide for the morale, welfare, and 

recreation (MWR) of government officers and employees. These are items 

and services that support the efforts of government employees and 

officers to carry out the government’s business by fulfilling their MWR 

needs. For example, tailoring, hair cuts, and laundry services provided by 

the Academy’s NAFIs are examples of MWR services that generally should 

not be paid from appropriated funds. In addition to the 12 MWR type 

NAFIs, the Academy has two other affiliated NAFIs. The Fiscal Control 

Office (FCO) provides bookkeeping, payroll, and other administrative 

support services and the Global Maritime and Transportation School 

(GMATS) provides training to other federal agencies and to the maritime 

industry. The activities of the FCO with respect to the issues discussed in 

this report include the following. 

• The FCO was responsible for bookkeeping, payroll, and administrative 

support services for 12 of the other 13 NAFIs and also handled payroll for 

the Athletic Association. The Athletic Association handled its own 

bookkeeping, and the GMATS handled all of its own bookkeeping and 

payroll functions. The FCO was also responsible for the collection of all 

Page 5 GAO-09-635 Merchant Marine Academy
 

midshipmen fees for the Academy and the payment of amounts to other 

NAFIs, vendors and others from the fees collected. The FCO also collected 

funds from GMATS that were provided for the use and benefit of the 

Academy. Further, the FCO was responsible for maintaining books and 

records for “prior years’ reserves” from the excess of midshipmen fees 

collected over payments made as discussed in this report. The FCO 

maintained various commercial checking accounts for activities related to 

its collection and payment responsibilities for Academy funds. The 

functions of the FCO and DRM staff and managers were interchangeable. 

The manager of the FCO (the same individual as the head of DRM) 

reported on FCO matters to the Deputy Superintendent or when that 

position was not occupied, the FCO manager reported directly to the 

Superintendent. 

The Academy’s 14 affiliated NAFIs and 2 affiliated foundations are listed in 

table 1. 

Table 1: Listing of Merchant Marine Academy Non-Appropriated Fund 

Instrumentalities (NAFI) and Foundations and Their Purposes 

14 affiliated NAFIs Purpose 

• American Merchant Marine 

Museum 

Maintain maritime museum. 

• Athletic Association Enhance midshipmen educational experience 

through participation in athletic activities. 

• Chapel Fund Provide funding to chaplains for conducting 

religious functions and services for midshipmen.

• Cultural Events Promote midshipmen participation in cultural 

activities. 

• Employees Association Promote and support the interests of Academy 

employees. 

• Faculty and Staff Housing Administers faculty and staff housing. 

• Fiscal Control Office (FCO) Provide bookkeeping, payroll and other 

administrative support services for NAFIs. 

• Global Maritime and 

Transportation School (GMATS) 

Provide education and training to other federal 

agencies and to the maritime industry. 

• Melville Hall Provide dining, lodging, and meeting facilities. 

• Midships Publications Publish the official Academy yearbook. 

• Music Program Support Academy Choir, Glee Club, and Chapel 

Choir. 

• Regimental Morale Fund 

Association 

Support provision of morale, welfare, and 

recreation activities for midshipmen. 

• Sail, Power and Crew Association 

(SP&C) 

Promote boating, recreational, and sports 

activities. 

Page 6 GAO-09-635 Merchant Marine Academy
 

14 affiliated NAFIs Purpose 

• Ship’s Service Store Provides books, uniforms, tailoring, barbering, 

and other services to midshipmen. 

2 affiliated foundations 

• USMMA Alumni Foundation Provides financial support for charitable, 

scientific, and educational purposes by raising 

and distributing funds from alumni. 

• USMMA Sailing Foundation Receives and administers charitable gifts from 

the general public in support of the Academy. 

Source: GAO analysis. 

Appendix II provides more detail on the relationships and financial activity 

between the Academy and its affiliated organizations. 

Academy Funding and 

Expenses 

Table 2 shows the amount and sources of the Academy’s funding for fiscal 

years 2006 and 2007. Amounts received by the Academy for capital 

improvement, totaling $15.9 million and $13.8 million for fiscal years 2006 

and 2007, respectively, were to be used for capital assets, including certain 

related expenses. 

Table 2: Academy Sources and Amounts of Funding, Fiscal Years 2006 and 2007 

 FY 2006 FY 2007

Annual funding 

Appropriated funds allotted from MARAD for: 

 Salaries and benefits 23,512,000 25,800,000 

 Other expenses 23,379,665 22,967,930 

Reimbursable agreementsa1,650,473 4,759,769 

Gifts and bequestsb2,151,046 2,615,871 

Other 597,806 861,233 

Total annual funding $51,290,990 $57,004,803 

No-Year funding 

Capital improvement fundsc15,932,920 13,848,894 

Total annual and no-year funding $67,223,910 $70,853,697

Source: GAO analysis of MARAD’s unaudited Academy data. 

a

Reimbursable agreements are typically arrangements with another federal agency that contain the 

terms for providing goods or services on a reimbursable basis. 

b

Gifts and bequests represent donations from affiliated foundations. 

c

Capital improvement funds are provided under appropriations that remain available for an indefinite 

period. 

Page 7 GAO-09-635 Merchant Marine Academy
 

The Academy’s payments to NAFIs and total expenses for fiscal years 2006 

and 2007 are shown in Appendix III. The Academy’s payment activity with 

its 14 NAFIs was significant in relation to the Academy’s total expenses. 

For fiscal year 2006 Academy expenses of $55.7 million included $9.6 

million to its affiliated NAFIs, representing over 17 percent of total 

Academy expenses. Similarly, for fiscal year 2007, Academy expenses of 

$62.0 million included $13.4 million to its NAFIs, representing over 21 

percent of total Academy expenses. Payments to NAFIs were generally 

classified in the Academy’s financial records as contractual services; 

operations and maintenance; and gifts and bequests. The total amount of 

payments that the Academy made to its NAFIs in fiscal years 2006 and 

2007 are shown in table 3. 

Table 3: Payments Made by the Academy to Affiliated NAFIs, Fiscal Years 2006 and 

2007 

Dollars in thousands 

NAFIs FY 2006 FY 2007

Fiscal Control Office 5,528.7 5,398.0

Global Maritime and Transportation School 1,428.9 4,609.1

Ship’s Service Store 1,454.7 1,542.7

Athletic Association 534.9 1,201.4

Sail, Power and Crew Association 580.8 414.9

Music Program 45.6 139.2

Melville Hall 15.9 48.4

Regimental Morale Fund Association 15.0 45.0

Chapel Fund 10.9 5.6

American Merchant Marine Museum - 1.0

Cultural Events - - 

Employee Association - - 

Faculty and Staff Housing - - 

Midships Publications - - 

 Total $ 9,615.4 $13,405.3 

Source: GAO analysis of NAFI data. 

Page 8 GAO-09-635 Merchant Marine Academy
 

The Academy is to provide each midshipman with free tuition, room and 

board6

 as well as limited medical and dental care.7 However, under 

MARAD regulations,8

 the Academy requires each midshipman to pay fees 

for items or services generally of a personal nature (hereafter “goods or 

services” or “personal items”) each academic year. The Academy treats all 

fees collected as non-appropriated funds when the good or service is 

provided by a NAFI, such as services for laundry and haircuts that are 

provided by the Ship’s Services Store, or by a department of the Academy, 

such as Information Technology that provides internet services and 

personal computers to the midshipmen. The FCO collects all midshipmen 

fees on behalf of the Academy and also makes payments to vendors and 

others from the fees collected. For fiscal years 2006 and 2007, the FCO 

collected about $7 million in total midshipmen fees.9

 In the 2007-2008 

academic year, fees collected represented $15,560 per midshipmen over 

the course of a 4-year education and ranged in amount from $2,410 to 

$7,020, depending on class year. Details on midshipmen fee collections for 

fiscal years 2006 and 2007 are shown in table 4. 

Midshipmen Fees 

Table 4: Categories of Midshipmen Fees, Fiscal Years 2006 and 2007 Collections, 

Total for the 2 Fiscal Years 

Categories of midshipmen 

fees 

FY 2006 

Collections 

FY 2007 

Collections Total

Activity fees $ 874,222 $ 864,370 $ 1,738,592

Information technology 423,253 416,056 839,309

Computers 649,637 628,630 1,278,267

Medical 460,503 460,901 921,404

Laundry and tailoring 489,704 491,758 981,462

All other 593,940 631,677 1,225,617

 Total $ 3,491,259 $ 3,493,392 $ 6,984,651

Source: GAO analysis of unaudited FCO data. 

 

6

 46 U.S.C. § 51314(a). 

7

 46 C.F.R. § 310.62(a). 

8

 46 C.F.R. § 310.62(b). 

9

 Midshipmen are assessed fees for the academic year beginning July 1 and ending June 30. 

Our review of fee collections and uses of fees covered the Academy’s fiscal years ending 

September 30. 

Page 9 GAO-09-635 Merchant Marine Academy
 

Improper and 

Questionable Sources 

and Uses of Funds 

Our review identified instances of improper and questionable sources and 

uses of funds by the Academy and its affiliated NAFIs, some of which 

violated laws, including the ADA. Specifically, we identified improper and 

questionable sources and uses of midshipmen fees and questionable 

financial activity associated with GMATS and other NAFIs. The improper 

and questionable activities and transactions that we identified 

demonstrate the Academy did not have assurance that it complied with 

applicable fund control requirements, including those in the ADA. Further, 

the Academy could not effectively carry out its important stewardship 

responsibilities with respect to maintaining accountability over the 

collection and use of funds, including assuring that funds were collected 

and used only for authorized purposes. As discussed in this report, the 

primary causes of these improper and questionable sources and uses of 

funds can be attributed to a weak control environment and the flawed 

design and implementation of internal controls at the Academy, including 

inadequate oversight and monitoring by the Academy and MARAD. 

Improper and 

Questionable Collection 

and Use of Midshipmen 

Fees 

MARAD regulations provide that the Academy can collect fees from all 

midshipmen to pay for “personal” goods and services. However, we found 

a number of improper and questionable activities concerning the 

Academy’s and its affiliated NAFIs’ collection and use of midshipmen fees. 

Specifically, we identified improper and questionable midshipmen feerelated transactions with respect to: (1) collections for goods and services 

that were not the midshipmen’s responsibility, (2) collected amounts that 

exceeded the actual expense to the Academy for the goods or services 

provided to the midshipmen, and (3) the use of accumulated fee reserves 

for questionable purposes. We also identified improper and questionable 

uses of the fees collected. 

For fiscal years 2006 and 2007, the Academy collected fees of 

approximately $7 million from midshipmen. We nonstatistically selected 

four midshipmen fee categories for review. We found that the total fees 

collected for these four midshipmen fee categories of about $1.5 million 

were questionable because they did not appear to be items of a personal 

nature to each midshipman, but rather, expenses that would normally be 

paid by the Academy from appropriated funds. Specifically, over the 2006 

and 2007 fiscal years, we found that the Academy collected questionable 

midshipmen fees for waterfront activities, processing services, 

information technology services, and medical services. We also identified 

potentially improper payments from these questionable fee collections 

totaling approximately $1.2 million that were paid to NAFIs and vendors, 

including the Sail, Power and Crew Association (SP&C) for waterfront 

Fee Collections and Uses of 

Fees not Related to Goods and 

Services Provided to All 

Midshipmen 

Page 10 GAO-09-635 Merchant Marine Academy
 

activities, the FCO for processing services, and vendors for information 

technology services. There may be other improper and questionable 

collections and uses of midshipmen fees that our review did not identify. 

To the extent these collections and the uses of these funds improperly 

covered Academy expenses that are chargeable to Academy 

appropriations, the Academy improperly augmented its appropriated 

funds, which may have resulted in violations of the ADA, 31 U.S.C. 

§1341(a), by incurring obligations or expenditures in excess of available 

appropriations.10 We did not independently assess the amount of such 

improper augmentations.11

• Waterfront activities: We found that for the 2006 and 2007 fiscal years, a 

total of $318,187 was collected from all midshipmen for these activities. All 

fees collected for waterfront activities do not represent personal 

midshipmen services that qualify as chargeable to all midshipmen because 

not all midshipmen used the Academy’s waterfront facilities. For example, 

such waterfront activities as sailing competitions, varsity water sport 

teams, and power vessel training are elective activities in the Academy’s 

curriculum for midshipmen. 

• Processing services: We found that for the 2006 and 2007 fiscal years, the 

FCO collected $65,712 from the midshipmen for FCO’s processing 

services. The FCO retained all processing fees without adequate 

supporting documentation for how the amount collected was determined, 

why a processing fee was due, or why the amount should be funded by 

collections from all midshipmen. Processing expenses incurred by FCO 

represent administrative expenses. The administrative expenses may be 

attributable to services provided by FCO to midshipmen. However, 

without adequate supporting documentation, we could not make such a 

determination. 

• Information technology services: We found that for the 2006 and 2007 

fiscal years, the Academy collected $839,309 from the midshipmen for 

 

10 The Academy can avoid ADA violations resulting from improper augmentations if it 

adjusts its appropriations accounts by charging them for such expenses, provided 

sufficient amounts are available in the accounts. It could transfer available unobligated 

balances to the non-appropriated fund accounts or account for the constructive receipt and 

use of the non-appropriated funds to the extent that the Department can exercise some 

legal authority to receive and use them absent additional appropriations. 

11 In addition, by collecting amounts that are used to cover expenses that are more 

accurately characterized as tuition, room, or board, the Academy may have violated the 

statutory prohibition on charging midshipmen for such expenses. See 46 U.S.C. § 51314. 

Page 11 GAO-09-635 Merchant Marine Academy
 

information technology services. Such services are not all “personal” to 

the Academy’s midshipmen. However, the Academy used these fees to 

support operations of the Department of Information Technology that are 

otherwise funded by Academy appropriations. 

• Medical services: We found that for the 2006 and 2007 fiscal years the 

Academy used $2,293,884 in appropriated funds to pay for medical and 

dental services for midshipmen under a contractual agreement with a local 

hospital. However, it also collected $288,813 in midshipmen fees for the 

same services. Academy officials did not provide us with any support for 

how the annual amounts assessed midshipmen for contracted hospital 

services were determined. The midshipmen fees collected were, according 

to Academy officials, held by the FCO in a reserve for “rainy-day” 

purposes. We were told by the same officials that the fees collected from 

the midshipmen represented the amount the Academy believed to be 

necessary to cover possible rate adjustments under the contract with the 

hospital. We reviewed the payments by the Academy to the hospital for the 

years 2006 and 2007 and found that the amounts paid based on actual 

usage were less than the estimated expense per the contract. 

In addition to assessing and collecting fees unrelated to goods or services 

that are personal to all midshipmen, we found that the Academy collected 

fees from midshipmen that exceeded its actual expenses for providing 

goods or services to its midshipmen. For example, the Academy collected 

$2,400 from each plebe midshipman during fiscal years 2006 and 2007 for 

computers, including a printer and peripheral equipment. For the 2006 and 

2007 fiscal years, available records show the Academy collected a total of 

$1,278,266 from the midshipmen in fees for these personal computers and 

related equipment. Over the same period, the Academy paid a total of 

$863,859 to vendors for computers and related equipment—leaving an 

excess of $414,407 in collections over the related expenses. Thus, the 

amount collected from the midshipmen for computers represented 148 

percent of the actual expense to the Academy for these items over a 2-year 

period. Academy officials told us they were aware of these excessive 

collections, but did not take action to refund excess collections or reduce 

fees charged the midshipmen for this equipment, but instead chose to 

utilize the excess collections to support its operations. 

Midshipmen Fee Collections 

Exceeded Actual Expenses 

Page 12 GAO-09-635 Merchant Marine Academy
 

The Academy, using the FCO, had inappropriately used “off-book” 

reserves accumulated from the excess of midshipmen fees collected over 

payments made to vendors and others for goods and services.12 For 

example, a “Superintendent’s Reserve” was created and used to make 

discretionary payments authorized by the Academy Superintendent.13 Our 

review of available records determined that for the 3 years ended 

September 30, 2008, deposits to the “off-book” reserves totaled $1,325,669 

and payments and transfers from the account totaled $605,347, with a 

balance of $999,315 at September 30, 2008. We found no evidence that the 

$605,347 in payments from these “off-book” reserves were for purposes 

consistent with the fee collections. 

Questionable Use of Excess 

Midshipmen Fee Collections 

Consequently, we consider the entire $605,347 in payments from these 

reserves as questionable and, to the extent used to cover Academy 

expenses, constitute an improper augmentation of the Academy’s 

appropriations, which result in violations of the ADA, 31 U.S.C. §1341(a) if 

the obligations incurred exceed available appropriations. For example, use 

of the excess fee amounts to support the Academy’s Department of 

Information Technology constitutes an improper augmentation of the 

Academy’s appropriation for its operations. We did not independently 

assess the amount of such improper augmentations. 

As summarized in table 5, and briefly discussed in the text that follows the 

table, our analysis of FCO’s records of 10 payments selected on a 

nonstatistical basis illustrates the types of questionable payments made 

from FCO’s accumulation of excess midshipmen fees from prior years’ 

midshipmen fee reserves during the 3-year period ending September 30, 

2008, on behalf of the Academy. 

 

12After the end of an academic year, the FCO typically transferred the excess of 

midshipmen fees collected over payments made to a commercial bank account that was 

not reflected in the books and records of the Academy (“off-book”). FCO tracked the 

accounts’ transaction activity using off-line (“cuff”) records. 

13 Our review identified 3 separate “Superintendent’s Reserves” in operation at the 

Academy. This superintendent’s reserve was created from excess fees collected from 

midshipmen; another superintendent’s reserve was created from appropriated funds 

inappropriately “parked” with the FCO; and a third superintendent’s reserve was used for 

funds received from GMATS as payments for its use of Academy facilities. 

Page 13 GAO-09-635 Merchant Marine Academy
 

Table 5: Examples of Questionable Payments from the Prior Years’ Midshipmen Fee Reserves by the FCO NAFI on Behalf of 

the Academy 

Payment no. Amount Payee Description Date 

1 $ 4,965 Blackbaud Accounting system for FCO July 23, 2008 

2 59,464 FCO Payroll cost for an Academy employee October 25, 2007 

3 3,000 [name of individual redacted] Settlement of complaint September 27, 2007 

4 42,000 American Merchant Marine 

Museum 

Start up Museum NAFI September 26, 2007 

5 68,708 FCO Adjustment to payroll expense of the 

Regimental Morale Fund Association NAFI 

June 27, 2007 

6 4,000 Campus Speak Education program on alcohol for midshipmen February 5, 2007 

7 7,245 Weight Watchers International Weight control program January 11, 2007 

8 53,093 FCO—Academy Midshipmen 

Fees Account 

To transfer prior years’ midshipmen reserve 

money to current year’s midshipmen fees 

account 

September 21, 2006 

9 2,700 Hendrickson Truck Center Automatic tire chain system for Academy 

ambulance 

August 18, 2006 

10 71,833 GTSI Corporation Portion of payment for computer equipment 

lease 

December 15, 2005 

$317,008 Total 

Source: GAO analysis. 

1. Blackbaud accounting system for the FCO: This system is used by FCO 

to provide bookkeeping services for the 12 NAFIs for which the FCO 

provides such service. The total consulting fee and installation cost for 

the system, per a February 2008 contract, between the vendor and the 

FCO was $75,000. As a NAFI system, the entire cost of the new system 

should have been funded using non-appropriated funds. Through 

January 2009, we found that payments of $51,173, including the $4,965 

payment we reviewed, were made to the vendor using midshipmen 

fees. An additional $10,581 was paid using Academy appropriated 

funds, $5,963 was paid using FCO funds, and $5,963 was paid using 

GMATS funds. Academy officials said that midshipmen fees as well as 

Academy appropriated funds were used to partially fund the system 

because other funding was not available at the time to pay the 

Blackbaud invoices. 

2. Payroll costs for Academy employee: An Academy official said that the 

payment was to transfer funds from the midshipmen fee account to the 

FCO’s account to cover the payroll for the upcoming fiscal year for an 

Academy employee that reported directly to the Academy’s academic 

dean. 

Page 14 GAO-09-635 Merchant Marine Academy
 

3. Settlement of complaint: The payment support consisted of a copy of 

the check stub with the notation “Settlement fee for EEO complaint.” 

No documentation was provided to us to support why such a payment 

should be funded using midshipmen fees. 

4. Donation to start-up Museum NAFI: The payment support consisted of 

a copy of the payment stub with the notation “To start-up Museum 

NAFI.” No documentation was provided to us on how the payment 

related to fees collected from midshipmen. 

5. Payroll for Regimental Morale Fund Association NAFI: The support for 

this payment was a check stub with the explanation: “To cover the 

amount due to FCO for Morale Fund payroll according to a June 30, 

2006 FCO analysis.” No information was provided as to why payroll of 

the Regimental Morale Fund Association NAFI would be paid from 

midshipmen fees. We were told that of 45 employees of the Morale 

Fund, 25 were paid from non-appropriated funds, 19 were paid from 

appropriated funds, and 1 was paid with a combination of 

appropriated and non-appropriated funds. The payment support 

indicates that the payment is for adjustments to the payroll costs for 

several of the persons paid from non-appropriated funds. 

6. Education program on alcohol: Payment was for an educational 

program for the midshipmen on alcohol. Academy officials did not 

provide any explanation as to why this item of expense was not 

considered as an ordinary and necessary expense of the Academy 

payable from appropriated funds. 

7. Weight control program: Payment was for “At Work Series,” a Weight 

Watchers International program. However, we were provided with no 

information on either why this item was not considered a personal 

expense of the midshipmen in the weight control program, or why the 

item was not considered a necessary expense of the Academy payable 

from appropriated funds. 

8. Transfer to current year’s midshipmen fees account: The only 

documentation supporting this payment was a copy of the payment 

voucher with the explanation “transfer prior year computer money to 

current.” An FCO official told us that the payment was to transfer prior 

year midshipmen fees for computer services—excess of collections 

over payments made for goods and services—to the current years 

midshipmen fees account to be used to pay for numerous invoices to 

the Academy from a provider of information technology services. 

Academy officials did not provide any information on why expenses 

Page 15 GAO-09-635 Merchant Marine Academy
 

payable from the Academy’s appropriated funds would be paid from 

midshipmen fees collected. 

9. Tire chain system for Academy ambulance: Academy officials did not 

provide us with any information on why this item was not considered a 

necessary expense of the Academy payable from appropriated funds, 

rather than from funds collected through midshipmen fees. 

10. Computer equipment lease: The $71,833 in midshipmen fee reserves 

was paid toward a $106,217 installment on a 3-year computer 

equipment lease (under a “lease to purchase agreement”). The balance 

of the installment payment was paid with current year midshipmen 

fees. Payments totaled $318,651 under this agreement and the amount 

funded with prior years’ midshipmen fees was $178,050 (including the 

$71,833 above) and $140,601 was funded with current year midshipmen 

fees over 3 fiscal years. An Academy official told us that prior years’ 

and current year’s midshipmen fees were used for these payments 

because “the Academy did not have sufficient appropriated funds to 

dedicate to this purchase.” Academy officials did not provide any 

information on why amounts payable from the Academy’s 

appropriated funds would be paid, in part, from midshipmen fees 

collected. 

The Academy did not provide us with any information as to why excess 

fees collected from all midshipmen and transferred to prior years’ reserves 

were considered an appropriate source of funds for any of these 

payments. 

Questionable Financial 

Activity with GMATS and 

Other NAFIs 

We found that the Academy (1) improperly entered into sole-source 

agreements with GMATS to provide training services to other federal 

agencies and (2) inappropriately accepted and used GMATS funds. In 

addition, we found other improper and questionable transactions, 

including the Academy’s obligating and transferring appropriated funds to 

the FCO in order to preserve or “park” the funds for future use, and the 

Athletic Association NAFI’s retention of fees paid to this NAFI for use of 

the Academy’s property. 

Page 16 GAO-09-635 Merchant Marine Academy
 

During fiscal years 2006 and 2007, the Academy improperly entered into 

over $6 million in agreements with GMATS to provide training services to 

other federal agencies on a non-competitive basis by GMATS. The 

Academy accepted interagency orders under the Economy Act14 as legal 

authority for its use of sole-source procurements. Based on our review of 

the transactions between the Academy and GMATS, we concluded that the 

Academy’s non-competitive awards to GMATS and the lack of proper 

contractual agreements under the Federal Acquisition Regulation may be 

improper procurements.15 For example, the Department provided us with 

no documentation to support a legitimate justification for the Academy’s 

non-competitive awards to GMATS. Although the services were provided 

by GMATS to the Academy (that, in turn, provided the services to other 

federal agencies under the Economy Act) under what likely constitute 

improper non-competitive contracts, the Department did not provide us 

with information supporting its reimbursements to GMATS of 

approximately $6 million for its costs under these agreements.16

Improper Contracting for 

GMATS NAFI Training to Other 

Agencies 

During 2006 and 2007, the Academy also received funds from the GMATS 

NAFI and directed the GMATS NAFI to make payments on the Academy’s 

behalf without clear legal authority. Specifically, in fiscal years 2006 and 

2007, we found that the FCO received $193,022 and $186,113, respectively, 

which were described in GMATS records as annual contributions for the 

benefit of the Academy of 5 percent of GMATS’s gross profits. The records 

of GMATS further described these amounts as funds to be utilized by the 

Academy for incremental costs incurred from GMATS’s use of the 

Academy’s campus facilities. The Academy did not have records or 

analysis of whether the amount received bore any relationship to 

estimated or actual costs the Academy may have incurred. We also found 

that GMATS made payments to the FCO that were held in a reserve for 

subsequent disbursement at the direction of Academy officials. We were 

told that the payments to the FCO were to compensate the Academy for 

various items such as use of the engineering lab; use of the ship’s bridge 

simulator, a specialized training device; and use of a professor’s time—all 

for GMATS business. According to GMATS records, the amount paid by 

GMATS Funds Used to 

Improperly Augment Academy 

Funds 

 

14 31 U.S.C. § 1535. 

15 B-289605.2, July 5, 2002; B-235742, Apr. 24, 1990; 68 Comp. Gen. 62 (1988); 64 Comp. Gen. 

110 (1984) 

16 B-199533, Aug. 25, 1980; 58 Comp. Gen. 94, 100 (1978). 

Page 17 GAO-09-635 Merchant Marine Academy
 

GMATS for these items totaled $52,124 in 2006; Academy officials told us 

that this practice was discontinued in 2007. 

In February 2008, the Administrator reported to the Deputy Secretary of 

Transportation that the use of these reserves may have violated the ADA’s 

prohibition on obligating or expending amounts in excess of available 

appropriations.17 We found that the Academy also may have violated the 

“Miscellaneous Receipts” statute, 31 U.S.C. § 3302(b),18 by failing to 

immediately deposit all the funds received from GMATS into the general 

fund of the U.S. Treasury.19 Further, the use of the Superintendents 

Reserve fund for official Academy expenses appears to constitute an 

improper augmentation of the Academy’s appropriated funds, which 

results in violations of the ADA, 31 U.S.C. §1341(a), if the obligations 

incurred exceed available appropriations. 

We found that the Academy improperly entered into agreements with the 

FCO NAFI to prevent a cumulative total of almost $389,000 in annual 

appropriations from expiring (“parking funds”) at the ends of fiscal years 

2006 and 2007. The Academy later transferred the $389,000 to the FCO for 

future use rather than allowing the funding to expire in accordance with 

the appropriation account closing law, 31 U.S.C. §1553. For example, one 

agreement for $200,000 stated that the purpose was to provide accounts 

payable services to the Academy during fiscal year 2007 year-end. These 

agreements were improper because there was no underlying economic 

substance to them and there was not any description of deliverables under 

the agreement, such as a statement of work. We were told that the 

agreement with FCO was entered into to reserve funds at the end of the 

year that would otherwise have expired. 

Improper Use of Contracting to 

“Park” Funds That Would 

Otherwise Expire 

We also found that, of the $389,000 received from the Academy, FCO used 

approximately $175,000 to subsequently pay for items of expense and, at 

the direction of MARAD, returned $214,000 to the Academy in March 2008. 

In addition, we found that in October 2007, FCO transferred $270,000 from 

 

17 31 U.S.C. § 1341(a) 

18 Absent other specific statutory authority, all officers of the government receiving funds 

for the benefit of the government must promptly deposit such funds into the general fund 

of the U.S. Treasury. 

19 In a September 3, 2008, letter to the Department’s General Counsel, we solicited 

information and the Department’s legal views on this potential violation, but the 

Department has not responded. 

Page 18 GAO-09-635 Merchant Marine Academy
 

this reserve to the FCO’s payroll checking account for what FCO officials 

described as a “payroll loan”. The loan was repaid in full on December 11, 

2007. However, Academy officials told us they did not have any support 

and that their inquiries on this issue had not produced an explanation as to 

why Academy resources would be used for a loan to the FCO. We were 

told by FCO officials that the transactions were based on a need for the 

funds as determined by staff and that no formal loan documents or other 

written supporting documentation existed. 

The Secretary of Transportation reported to the President, the Congress, 

and the Comptroller General in March 2009, numerous unidentified 

transactions in fiscal years 2005, 2006, and 2007, totaling $397,740, as 

violations of section 1341(a)(1)(B) of the ADA, which prohibits the 

involvement of the government in a contract or obligation before an 

appropriation is made.20 As discussed above, the Academy recorded 

obligations against its fixed-year appropriated funds to reflect transfers to 

the FCO, via a MARAD “Form 949.” MARAD officials investigated 

transactions occurring in fiscal years 2005, 2006, and 2007 to determine if 

these transfers constituted illegal “parking” of fiscal year appropriations 

and violations of the ADA.21 They found that the executed forms, in a net 

amount totaling $397,740, did not represent bona fide needs of the 

Academy for specific goods or services at the time they were made and, 

therefore, did not reflect valid obligations.22 Recording invalid obligations 

against current fixed-year appropriations for the purpose of using the 

appropriations in a subsequent year constitutes illegal parking of the 

funds. 

We found questionable billing and payment transactions related to the use 

of the Academy’s training ship and other Academy boats. Specifically, we 

found that the SP&C NAFI, and not the Academy, billed the user of the 

Kings Pointer, GMATS. The GMATS NAFI used the Academy’s 224-foot 

training vessel, the Kings Pointer, as well as other Academy vessels, to 

provide training and education to other organizations or individuals from 

Questionable Billing and 

Payment Transactions Related 

to Use of the Training Vessel 

Kings Pointer

 

20 Heads of agencies are required to report immediately to the President and the Congress 

violations of the ADA. A copy of the report must be transmitted concurrently to the 

Comptroller General, 31 U.S.C. §1519, 1351. 

21 Our review of transactions covered only fiscal years 2006 and 2007. 

22 MARAD found that the Academy recorded additional invalid obligations on the MARAD 

Form 949, but after the MARAD investigation, the funds were returned as improper 

payments and credited to Academy appropriation accounts. 

Page 19 GAO-09-635 Merchant Marine Academy
 

the marine community during fiscal years 2006 and 2007. GMATS remitted 

payments to the Academy for the use of its vessels, for which the Academy 

then remitted a portion of the funds to another Academy NAFI (the Sail, 

Power and Crew Association) and retained a portion. Available records 

show that of the $366,906 the Academy received for use of the Kings 

Pointer during fiscal years 2006 and 2007, the Academy made payments 

totaling $217,848 to SP&C. The portion of fees the Academy received that 

were remitted to the SP&C varied from about 50 percent of receipts to 

over 70 percent based on directions received from SP&C. However, no 

documentation was provided to support the amount or percentages of 

these Academy payments to the SP&C. Further, we found that the 

Academy may have violated the “Miscellaneous Receipts” statute, 31 

U.S.C. §3302(b), by failing to immediately deposit all the funds received 

from GMATS into the general fund of the U.S. Treasury. Finally, without 

adequate supporting documentation, the entire $217,848 in Academy 

payments to the SP&C related to the outside use of the Kings Pointer

during fiscal years 2006 and 2007 is questionable. 

Table 6: Questionable Payment Transactions Related to the GMATS’s Use of the 

Kings Pointer, Fiscal Years 2006 and 2007 

Transactions FY 2006 FY 2007 Total

GMATS payments to the Academy $166,153 $200,753 $366,906

Academy payments to SP&C $ 96,388 $121,460 $217,848

Funds retained by Academy $ 69,765 $ 79,293 $149,058

Source: GAO analysis of unaudited Academy, SP&C, and GMATS data. 

We found that the Athletic Association NAFI operated camps and clinics 

on Academy property and that the Athletic Association NAFI, and not the 

Academy, was compensated for the use of government property. We also 

found that instructors who were compensated in part by the Academy 

participated in these commercial activities on Academy property in return 

for a share of the proceeds from those activities. 

Questionable Use of Academy 

Property, Payments to 

Academy Employees, and 

Retention of Fees by Athletic 

Association NAFI 

During fiscal year 2008, the Athletic Association collected $94,077 in fees 

for conducting athletic camps and clinics. Of the funds collected, $72,847 

was paid to instructors, $19,327 was retained by the Athletic Association 

as a facility fee, and $1,903 was either retained by the Athletic Association 

or used for other payments not identified in our review. 

According to Athletic Association staff, $62,122 of the $72,847 paid to 

instructors were payments for fee-sharing arrangements with 6 

Page 20 GAO-09-635 Merchant Marine Academy
 

instructors, 5 of whom are current or former Academy employees. 

Further, an Academy official described the Athletic Association’s retention 

of $19,327 as being essentially the net profit from the camps and clinics 

that was retained as a facility fee. However, no portion of the $19,327 was 

paid to the Academy for the use of the Academy’s facilities. 

Academy payroll activities contributed to three separate violations of the 

ADA. First, the Academy incurred approximately $525,000 more for 

salaries and benefits in fiscal year 2006 than the $23,512,000 appropriated 

for its salaries and benefits.23 The payments were for performance awards 

that Academy personnel earned in fiscal year 2006 that the Academy 

erroneously charged against fiscal year 2007 appropriations. Academy 

officials told us the amounts could not be corrected with prior year’s funds 

because the Academy lacked a sufficient unobligated balance in its fiscal 

year 2006 salaries and benefits appropriation to transfer the charge from 

the fiscal year 2007 appropriations. This resulted in a violation of the 

ADA,24 which was included in the Secretary’s reports of March 9, 2009, to 

the President and the Congress that included multiple ADA violations. 

Academy Payroll Activities 

Contributed to Three Separate 

Violations of the ADA 

Second, in March 2009 the Secretary of the Department of Transportation 

reported to the President and the Congress that the Department violated 

section 1342 of the ADA, which prohibits the acceptance of voluntary 

services and the employment of personal services. Specifically, it 

determined the Academy paid over $4 million in both fiscal years 2006 and 

2007 under agreements with the FCO for illegal personal services from the 

Academy’s NAFIs that were provided by as many as 90 employees who 

performed exclusively Academy functions, and reported to Academy 

supervisors. These expenses were recorded as contracted services in the 

Academy’s books and records. The Secretary concluded that many 

agreements called for the employment of personal services, which are 

characterized as an employee-employer relationship. 

For example, an agreement between the FCO and the Academy for 

information technology services, dated November 14, 2006, and as 

modified through August 16, 2007, provided that the Academy would pay 

FCO $941,681 during fiscal year 2007 for services described in the 

 

23 Public Law Number 109-115 (Nov. 30, 2005) appropriated $122,249,000 in fiscal year 2006 

under the MARAD Operations and Training account, of which $23,512,000 (after a 1 percent 

rescission) was for salaries and benefits of Academy employees. 

24 31 U.S.C. §1517(a)(2), 1341(a). 

Page 21 GAO-09-635 Merchant Marine Academy
 

agreement as professional services to the Department of Information 

Technology, and administrative support services. A supporting schedule to 

the agreement detailed the annual salaries for 11 staff by name, the general 

schedule (GS) equivalent grade for each staff except 1, the amounts for the 

salaries of 2 NAFI contractors, and amounts for fringe benefits and cost of 

living adjustments. The information technology agreement covered all the 

staffing needs for the Academy’s Department of Information Technology 

except for one individual. Thus, through this agreement the Academy paid 

100 percent of the salary and benefit costs for all 11 FCO staff and the full 

cost of the NAFI contractors listed. Each of the staff covered by the 

agreement with the FCO performed Academy functions under the 

supervision of a government employee, but the expense for their services 

was classified as contract services and not as payroll. 

A similar agreement for services related to athletics, dated November 14, 

2006 as modified through August 16, 2007, between the FCO and the 

Academy provided that the Academy would pay the FCO $481,132 during 

fiscal year 2007 for services described in the agreement as professional 

services to the Academy’s Department of Athletics. The supporting 

schedule to the agreement detailed the annual salary amount for 32 staff 

by name and amounts for fringe benefits and cost of living adjustments. 

The Academy was responsible for 40 to 100 percent of the total cost by 

individual. These expenses were also classified as contract services and 

not as payroll. 

We asked Academy and MARAD officials for an analysis supporting the 

portion of the payroll that was assigned to the Academy under the 

agreement for information technology and athletics services. We were told 

by the Academy’s Assistant CFO and the MARAD CFO that there was no 

overall analysis that would support the distribution of amounts between 

the Academy’s appropriated funds and NAFI expense for the payroll 

covered by any of the agreements between the Academy and the FCO. 

In addition to the issues discussed above, the Secretary reported in the 

March 2009 report to the President and the Congress that the Academy 

also violated section 1342 of the ADA over the past 4 years by employing 

about 50 adjunct professors under illegal personal services contracts 

valued at $2.4 million. The Academy funded these services out of the 

Academy’s fiscal year appropriations that were unavailable for salaries. 

Page 22 GAO-09-635 Merchant Marine Academy
 

We found that a weak overall control environment and the flawed design 

and implementation of internal controls were the root causes of the 

Academy’s inability to prevent, or effectively detect, the numerous 

instances of improper and questionable sources and uses of funds 

discussed previously. Specifically, we found the Academy lacked an 

accountability structure that clearly defined organizational roles and 

responsibilities; policies and procedures for carrying out its financial 

stewardship responsibilities; an oversight and monitoring process; and 

periodic, comprehensive financial reporting. We found that there was little 

evidence of awareness or support for strong internal control and 

accountability across the Academy at all levels, and risks, such as those 

that flow from a lack of clear organizational roles and responsibilities and 

from significant activities with affiliated organizations, that were not 

addressed by Academy management. The internal control weaknesses we 

identified were systemic and could have been identified in a timely manner 

had Academy and MARAD management had in place a more effective 

oversight and monitoring regimen. Further, we found that the Academy 

did not routinely prepare financial reports and information for use by 

internal and external users that could have helped to identify the improper 

and questionable sources and uses of funds. 

Weak Control 

Environment and 

Flawed Academy 

Internal Controls 

Risks Posed by Academy 

and NAFI Relationships 

Are Not Adequately 

Managed 

An entity’s organizational accountability structure provides the framework 

within which its activities for achieving its mission objectives are planned, 

executed, and controlled. The process of identifying and analyzing risk is a 

critical component of effective internal control. GAO’s Internal Control 

Implementation Tool25 provides that management should periodically 

evaluate its organizational structure and the risks posed by its reliance on 

related parties and the significance and complexity of the activities it 

undertakes. Further, as discussed previously, one of the primary 

requirements of the ADA is to establish accountability for the obligations 

and expenditure of federal funds. In carrying out its mission operations, 

the Academy has close relationships with its 14 affiliated NAFIs and 2 

foundations. Therefore, it is important for the Academy to recognize and 

appropriately manage the risks posed by the organizational and 

transactional relationship between it and its NAFIs. These risks and the 

volume of activities between the Academy and the NAFIs should have 

 

25Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.: 

August 2001). 

Page 23 GAO-09-635 Merchant Marine Academy
 

signaled to Academy management that there was a need for strong 

oversight and accountability over these activities and relationships. 

Our review indicated that 11 NAFIs do not have approved governing 

documents, such as charters and by-laws, and the remaining 3 NAFIs with 

approved governing documents perform some duties and functions which 

fall outside of the narrow scope of authority set out in those documents. 

Further, the relationships between the Academy and its 14 NAFIs are 

complex, and we found that they often involve numerous financial 

transactions, the business purpose of which is frequently not readily 

apparent. As such, it is not always clear where the respective 

responsibilities of the Academy and its NAFIs begin and end. 

In addition, we found that the Academy did not address the risks posed by 

its organizational structure, including not establishing a system of checks 

and balances over the sources and uses of funds with its NAFIs. Further, 

the inappropriate practices and improper use of Academy resources by 

Academy managers that we found occurred and continued for years. For 

example, the collection of questionable midshipmen fees for hospital 

services, among others: the accumulation of excess fees “off-books” in 

commercial bank accounts for discretionary or “rainy day” purposes: and 

the preserving or “parking” of Academy appropriated funds with the FCO, 

all occurred within a culture of lax accountability involving both Academy 

and NAFI management that was accepting of these types of activities. 

Further, the risks posed by the Academy’s relationship with its NAFIs led 

to improper transactions. For example, as previously discussed in this 

report, GMATS provided a percentage of its profits each year to the FCO 

for the benefit and use of the Academy. However, there was no agreement 

covering these transactions. We also found insufficient review of the 

Academy’s use of GMATS funds and no indication that there was 

consideration of the legality or appropriateness of those transactions. 

There was also insufficient consideration of the legal and internal control 

ramifications of Academy agreements with the FCO for personal services. 

As previously discussed in this report, the services provided by these 

agreements totaled over $4 million per year, which represented about 17 

percent of the annual Academy appropriation for salaries and benefits. 

Also, the Academy did not provide us with information on the authority for 

establishing the prior years’ reserves, or the rules, policies, and procedures 

for operation of the reserves, including, for example, specifics on 

authorized uses of the funds. 

Page 24 GAO-09-635 Merchant Marine Academy
 

Standards for Internal Control in the Federal Government26 provides that 

for an agency to run and control its operations, it must have relevant, 

reliable information, both financial and non-financial. For example, those 

charged with governance should have timely information on the amount 

and sources of the Academy’s resources. This includes information on the 

Academy’s appropriated funds as well as funds it receives from other 

sources, such as midshipmen fees and receipts from affiliated 

organizations for goods and services provided to them by the Academy. 

If such information had been produced routinely by the Academy and 

made available to decision makers and those charged with governance, 

they may have identified red flags that signaled the need for attention. For 

example, financial reports for the Academy that provided detailed 

financial information may have signaled the need for inquiry as to the 

reasons for such things as the Academy annually paying approximately $4 

million from appropriated funds for contracted personal services and 

reflecting such expenses as other than payroll in its books and records. 

We found that for fiscal years 2006 and 2007, the Academy did not 

routinely prepare financial reports separately presenting information on 

all its financial activities, including its sources and uses of funds, and 

amounts due to and from others. The Academy’s activities are included in 

MARAD’s financial reports, but its activity and balances are not separately 

identified.27 As a result, users of MARAD’s financial reports could not 

readily identify the sources and uses of funds attributable to the Academy 

or the amounts due to and from others by the Academy. Such information 

is typical in financial reports and statements. 

Financial Reporting Not 

Comprehensive and Did 

Not Address All Legal 

Requirements 

Academy Did Not Routinely 

Prepare Financial Reports 

We found that the Academy prepared and reported selected financial 

information from time to time for use by its managers. However, Academy 

officials told us that such reports were sporadic, unreliable, and were not 

used for decision making. For example, the head of the Academy’s 

Department of Information Technology told us that, among other things, 

the expense and obligation information that he received was typically not 

timely and that the information provided to him was inaccurate and could 

not be relied upon. An Assistant Superintendent told us that he did not 

typically receive financial information on the significant business activities 

 

26 GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

27 MARAD’s financial information is included in the Department’s annual audited financial 

statements that are contained in its performance and accountability reports. 

Page 25 GAO-09-635 Merchant Marine Academy
 

that he was responsible for, including a $6 million, 5-year contract for 

medical services with a local hospital. We also found that comprehensive 

financial reports on Academy activities and balances were not routinely 

prepared and made available for review by Academy or MARAD 

management. 

The Academy did not fully comply with a legal requirement to annually 

provide the Congress with a statement of the purpose and amount of all 

expenditures and receipts. We reviewed the reports submitted to the 

Congress for fiscal year 2008 and found that the reports included some, 

but not all expenditure and receipt information. For example, the reports 

included information on gifts and bequests received and tuition receipts by 

GMATS. However, the reports did not include any information on gifts and 

bequests received by the Academy and paid to others,28 receipts and 

expenditures of GMATS, or midshipmen fees collected or expenditures 

made from the fees collected by FCO. The inquiry and analysis necessary 

to prepare and file a complete report may have provided information to 

address the issues we discussed previously in this report involving GMATS 

and midshipmen fees. The MARAD CFO told us in August 2008 that the 

Academy would take actions to include information for all NAFIs and 

midshipmen fee activities in future reports to the Congress. However, we 

were subsequently told that such information was not included in the May 

2009 report that accompanied the Department’s budget justification 

document because the necessary analysis had not been completed. 

MARAD officials subsequently told us that they would submit an amended 

report with this data. 

Academy Did Not Comply with 

Congressional Reporting 

Requirements 

Further, we found that the Department did not comply with a 1994 legal 

requirement to annually report to Congress any changes in midshipmen 

fee assessments for “any item or service” in comparison with fees assessed 

in 1994.29 We identified changes in the nature and the amount of fees 

collected by the Academy from 1994 forward that were not reported by the 

Department to the Congress. A MARAD official told us that changes in the 

 

28 In 2008, MARAD questioned the authority of the Academy to accept gifts or donations 

exceeding $2,500, which was the maximum amount delegated by the Secretary and MARAD 

for acceptance. MARAD requested and Congress granted unlimited authority to MARAD to 

accept gifts for the Academy and the NAFIs in the Duncan Hunter National Defense 

Authorization Act for Fiscal Year 2009, Pub. L. No. 110-417, div. C, title XXXV, §3506(g), 122 

Stat. 4356, 4764 (October 14, 2008). 

29 46 U.S.C. § 51314(b). Congressional notification of any changes to the fees or changes 

since 1994 is also required by the statute. 

Page 26 GAO-09-635 Merchant Marine Academy
 

fees had occurred since 1994, but he did not know why the reports had not 

been filed. Had changes in midshipmen fees over the last 15 years been 

reported to the Congress, red flags may have been raised about the 

increases and the total amount of midshipmen fees being charged that 

could have been addressed by those charged with oversight and 

monitoring. Further, a systematic process to identify changes in 

midshipmen fees from year to year and to report the changes to those 

officials charged with reporting to the Congress on these matters may 

have functioned as an important early detection control. 

Limited Oversight and 

Monitoring In Place to 

Assure Effective 

Accountability over 

Academy Resources 

Standards for Internal Control in Federal Government provides that an 

entity’s control environment should include management’s framework for 

monitoring program operations to ensure its objectives are achieved. 

However, the absence of effective oversight by MARAD contributed 

directly to the opportunity for improper practices and questionable 

activities and payments and for the continuation of such practices over 

long periods of time without detection. Our review found a number of 

instances in which effective oversight procedures could have helped 

identify and address the Academy fund control deficiencies we discussed 

previously. For example, we found that MARAD did not have or did not 

enforce basic prevention and detection controls such as requiring periodic 

financial reports of Academy’s sources and uses of funds or performing 

high level analytical reviews of reported revenues and expense of the 

Academy. Also, MARAD did not enforce the existing policies for 

monitoring of NAFI activities, such as the requirements for submission 

and review of annual audited financial statements for each NAFI.30

We found a wide range of activities between the Academy and its 14 NAFIs 

that lacked transparency and for which there was insufficient review and 

consideration by Academy and MARAD officials. Some of these activities 

were reflected in the Academy’s books and records, and some were 

apparent only from looking beyond the form of the transaction to find 

underlying cross subsidies and barter arrangements. For example, we 

found there were no independent reviews, either by the Academy, by 

MARAD officials, or by both, conducted before entering into agreements 

for training services that were provided to external federal agencies by 

GMATS and not the Academy. 

 

30 MARAD Order No. 400-11, August 14, 2000. 

Page 27 GAO-09-635 Merchant Marine Academy
 

Our analysis of costs charged against the Academy’s no-year capital 

improvement appropriation identified some costs that were recorded as 

repairs and maintenance expenses that appeared to represent capitalizable 

assets.31 For example, under the no-year capital improvement 

appropriation, we identified $779,731 of recorded expenses in 2007 for 

payments to one vendor for items of furniture and equipment. The MARAD 

CFO told us that he was aware that timely reviews were not performed of 

the Academy’s expenses in either 2006 or 2007. Such reviews are 

important because of the large amount of capital improvement projects at 

the Academy and could have identified items that should have been 

capitalized with necessary adjustments made before the books were 

closed for the year and financial and budgetary reports prepared. The 

Academy received $15.9 million and $13.8 million for fiscal years 2006 and 

2007, respectively, in no-year appropriations for its capital improvement 

projects.32

Inadequate Accountability over 

Capitalizable Assets 

At our request MARAD reviewed selected categories of expenses for fiscal 

years 2006 and 2007 and identified $3,380,528 for 2006, and $1,695,670 for 

2007 (including the $779,731 described above) that should have been 

capitalized as assets. The payments were appropriately funded using the 

Academy’s no-year appropriations. These officials told us that adjustments 

to correct for the errors of $5,076,198 were made during fiscal year 2009. 

MARAD also identified additional expenses of $1,459,103 and $1,972,622 

for 2006 and 2007, respectively, which were improperly funded with the 

no-year capital improvement appropriation. In June 2009, these officials 

told us that adjustment to correct for these errors would also be 

considered before the close of fiscal year 2009 in conjunction with the 

other matters that we identified in this report that may require adjustment 

to the Academy’s appropriation accounts. 

 

31 According to Statement of Federal Financial Accounting Standards (SFFAS) No. 6, 

Accounting for Property, Plant, and Equipment, the criteria for an item to be capitalized 

as an item of property, plant, or equipment asset are that the item have an estimated useful 

life of 2 years or more, not be intended for sale in the ordinary course of operations, and be 

acquired or constructed with the intention of being used, or being available for use, by the 

entity. Repairs and maintenance expenses are typically recognized in the year when they 

are incurred, whereas the cost of capitalizable assets are recognized as expenses in the 

years in which the asset is used. 

32 These funds are provided by no-year appropriation accounts which remain available for 

an indefinite period. 

Page 28 GAO-09-635 Merchant Marine Academy
 

Lack of Controls and 

Accountability over the 

Collection and Use of 

Midshipmen Fees 

The Academy lacked adequate procedures and controls to maintain 

effective accountability over the amounts charged to midshipmen and to 

ensure that midshipmen fees collected were used only for their intended 

purpose—- covering the costs of goods or services provided to the 

midshipmen that are generally of a personal nature. The Academy has no 

policy on what midshipmen fees activity and balances should be reflected 

in its official records and reports or what is properly excludable. As 

discussed previously, these deficiencies resulted in the Academy’s 

charging midshipmen fees for items that were not of a personal nature and 

in amounts that were in excess of the related expenses for the goods or 

services. Further, the treatment of midshipmen fee activities “off-book” 

did not provide necessary accountability for the collection and use of the 

fees. 

We also found that the FCO’s records did not consistently support the 

activity in the midshipmen fee accounts. DRM, FCO, and Academy staff 

and officials, as well as the Academy’s Assistant CFO informed us that the 

support we requested for specific transactions could not be located, 

including memorandums from staff and officials describing or authorizing 

fees or supporting amounts collected or paid. We were also told that the 

activities reflected in the bank accounts that held the prior years’ reserves 

were not reconciled to FCO records for any month in the 3 years covered 

by our review. We found that reports provided to us for monthly activity—

increases and decreases—in reserve balances for each of the separate 

categories did not always reflect complete information on the sources and 

uses of the reserves. For example, we found that the FCO’s September 

2007 activity report for the prior years’ reserves account included 

transactions that reduced the reserve account balances for 4 of the 8 

reserve sub accounts by a total of $100,000, but did not identify the payee 

or other information on the use of funds. FCO staff told us that this 

difference was due to an error. The Academy’s Assistant CFO told us that 

no further documentation or explanation for this activity was available. 

As indicated, the FCO was responsible for paying bills using midshipmen 

fees that were presented for processing by officials with responsibility for 

Academy departments such as Health Services and Information 

Technology as well as requests for payments from the Academy’s 

Superintendent and other officials. However, we found that FCO staff did 

not appropriately question the items presented for payment to determine 

the sufficiency of the support for the payment that was requested. 

Page 29 GAO-09-635 Merchant Marine Academy
 

The Academy entered into agreements to provide training services to other 

federal agencies that were provided by GMATS and not the Academy. 

Federal accounting standards provide that an entity should recognize 

revenue and expenses when the entity provides goods or services to 

another entity in an exchange, such as by contracting to provide training 

to another entity.33 However, we found that the Academy recognized 

revenue and expenses even though it was not a party to the exchange of 

services and resources. These improperly recognized revenues and 

expenses were reflected in MARAD’s budget and financial reports. 

Further, the Academy paid GMATS for the funds received from other 

federal agencies when reviewing and approving officials did not have 

proper support for the payments. A summary of the revenue and expenses 

that the Academy recorded for transactions between GMATS and other 

federal agencies is shown in table 7. 

Lack of Accountability 

over GMATS Training 

Activities and Funding 

Table 7: Revenue and Expense Recognized by the Academy from Agreements 

between GMATS and Other Federal Agencies, Fiscal Years 2006 and 2007 

Accounting records of Academy FY 2006 FY 2007

Revenue – from other federal agenciesa$1,650,473 $4,759,769 

Expense – payments to GMATSb$1,428,948 $ 4,609,113

Source: GAO analysis of unaudited Academy data. 

a

Amounts per the Academy’s data. These amounts represent funds received from federal agencies 

for training provided by a non-federal entity, GMATS. 

b

Amounts per the Academy’s data. These amounts represent payments by the Academy to GMATS 

for funds received by the Academy from federal agencies. 

In addition, the Academy did not provide proper accountability for the 

acceptance and use of annual contributions from GMATS by using another 

NAFI, the FCO, as recipient of the funds on behalf of the Academy. Neither 

the receipt nor the use of those funds was reflected in the Academy’s 

accounting records. Further, the amounts accepted for the Academy by 

the FCO from GMATS were not supported by appropriately detailed 

billings or analysis from the Academy to GMATS. Instead, the amounts of 

contributions paid from GMATS to the Academy were unilaterally 

determined by GMATS and were paid to the FCO and, at times, directly to 

vendors on behalf of the Academy. 

 

33 Statement of Federal Financial Accounting Standards (SFFAS) No. 7, Accounting for 

Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and 

Financial Accounting. 

Page 30 GAO-09-635 Merchant Marine Academy
 

Federal accounting standards provide that entities should establish 

accruals only for amounts expected to be paid as a result of transactions 

or events that have already occurred.34 Further, federal appropriation law 

provides that such accruals, which are legal obligations, must represent a 

bona fide need of the agency for the fiscal year in which the accrual is 

recognized and that there must be appropriations available to charge.35

However, we found the Academy inappropriately recorded over $389,000 

during fiscal years 2006 and 2007. Academy officials accomplished these 

transactions by preparing agreements between the Academy and FCO 

using the Department’s form MA 949, Supply, Equipment or Service 

Order/Contract. We also found unauthorized and unsupported loans to the 

FCO from the Academy funds that were improperly “parked” with the 

FCO. The Academy lacks adequate controls to prevent these improper 

transactions. 

Controls Ineffective in 

Preventing Improper 

Accruals and “Parking” 

Funds 

No Policies or Procedures 

in Place for Usage Fee 

Revenues from the 

Training Vessel Kings 

Pointer and Other 

Academy Training Vessels 

We found the Academy lacked policies and procedures and adequate 

internal controls over the use of Academy training vessels. For example, 

controls did not specify required documentation or approval for payments 

with respect to the GMATS’s use of the Academy’s Kings Pointer during 

fiscal years 2006 and 2007, and the related transfer of funds to the SP&C 

NAFI. GMATS would pay the Academy for the full amounts billed by 

SP&C. However, the Academy would pay a portion of the funds received 

from GMATS to the SP&C. Academy payments to the SP&C for the use of 

the Kings Pointer, totaling $217,848 for the 2-year period of our review, 

were questionable in that (1) they were determined on a case-by-case basis 

by the SP&C management and (2) no supporting documentation was 

provided for these payments. We also found that the usage rates for use of 

the Academy’s training vessels was not supported and not based on 

consideration of current costs of operation. 

Billings to others for the use of government-owned property should be 

made by the government agency, in this case the Academy, that owns the 

property. The SP&C’s billing to others for the use of Academy-owned 

vessels and directing how much of the usage fees the FCO should remit to 

 

34 Statement of Federal Financial Accounting Standards (SFFAS) No. 5, Accounting for 

Liabilities of the Federal Government. 

35 31 U.S.C. § 1502(a). Agencies may incur obligations against fixed-year appropriations 

before they expire only for bona fide needs that arise during the period of availability of the 

appropriation. 

Page 31 GAO-09-635 Merchant Marine Academy
 

the Academy and to itself demonstrates how intertwined the activities and 

personnel of the Academy’s Waterfront Department were with those of the 

SP&C. Further, these activities, along with the Academy’s payment of 

funds to the SP&C without sufficient support for those payments, 

illustrates the lack of control over the source and use of the Academy’s 

financial resources. 

We were also told that the underlying study and analysis to determine 

hourly usage fees charged for Academy marine asset use during fiscal 

years 2006 and 2007 was performed in 1996 or 1997. However, we were 

told that supporting documentation was not retained either for the initial 

rate study or for the rates in the updated 2004 and 2008 rate booklets. We 

also found that the hourly rates per the 2008 rate booklet did not change 

from those in the 2004 rate booklet and had not changed from those used 

in 1996-1997. Consequently, the Academy has no assurance that the usage 

fees cover the full cost of operating the Kings Pointer and other Academyowned boats. 

Lack of Policies and 

Procedures and Controls 

Over Use of Athletic Fees 

Fees for the use of government-owned property should be the property of 

the agency that holds it, in this case the Academy. However, we found the 

Academy and its Athletic Association NAFI lacked policies and procedures 

and other internal controls to properly account for the uses of fees 

collected by the Athletic Association from conducting athletic camps and 

clinics using the Academy’s athletic facilities. 

Controls Ineffective in 

Preventing Improper 

Payroll-Related 

Transactions 

We found that the lack of controls over Academy payroll activities resulted 

in the over expenditure of payroll in relation to appropriations and 

arrangements for illegal personal services. Also, for fiscal years 2006 and 

2007, approximately half of the Academy’s annual appropriations were 

designated for payroll; however, we found that internal controls over 

payroll were inadequate and did not reflect consideration of the limits on 

annual appropriations or the risks posed by errors or weaknesses in the 

administration of payroll activities. 

For example, Academy internal controls did not prevent improper payrollrelated transactions that violated the ADA. Specifically, MARAD stated 

that challenges in working with MARAD’s own payroll process and 

systems contributed to delays in determining actual payroll expenses for 

Academy employees. The payroll for these federal employees is processed 

by the Academy’s DRM using MARAD’s existing arrangement with another 

federal agency as the payroll servicer. 

Page 32 GAO-09-635 Merchant Marine Academy
 

Further, the Academy used NAFI employees performing work for the 

Academy under Academy employees’ supervision to assist in carrying out 

Academy mission functions. The FCO and other NAFIs would hire staff as 

employees of their own organizations and then contract with the Academy 

for a fee, which the NAFIs then used to pay the payroll and related 

expenses of the NAFI staff. Annually, the Academy would execute 

agreements with the NAFIs to provide the Academy with services using 

one of the Department’s standard forms designed for use with external 

parties (MA 949, Supply, Equipment or Service Order/Contract). These 

expenses were recorded as contracted services in the Academy’s books 

and records. There was insufficient consideration by Academy officials of 

the legal and internal control ramifications of these personal services 

agreements. The Administrator reported to the Deputy Secretary in his 

February 2008 report that the relationships between the Academy and 

individual employees appeared to constitute one of personal services, 

which reflect an employer-employee relationship instead of an 

independent contractual one. The expenses for the services provided by 

these agreements totaled over $4 million per year, which represented 

about 17 percent of the annual Academy appropriation for salaries and 

benefits. 

Over the course of our review, we found that various actions were taken, 

and were in process, that were intended to improve the Academy’s and its 

affiliated organizations’ internal controls. For example, on October 1, 2007, 

MARAD established the Academy Fiscal Oversight and Administrative 

Review Board (Oversight Board).36 The Oversight Board is chaired by the 

MARAD CFO and is charged with providing fiscal oversight and 

administrative management of the Academy in coordination with the 

Maritime Administrator and other MARAD and Academy officials. Another 

significant action was the creation in July 2008 of the position of Assistant 

Chief Financial Officer for the Academy with direct reporting 

responsibility to the MARAD CFO. This position was initially temporary, 

but made permanent in March 2009. It provides for a senior financial 

official at the Academy to conduct oversight and monitoring of Academy 

financial activities on a real time basis. This action, combined with much 

needed organizational support by MARAD officials, provides an important 

signal emphasizing a focus on the importance of financial accountability. 

Actions by the 

Department, MARAD, 

and the Academy to 

Address Certain 

Accountability and 

Internal Control 

Challenges 

 

36 Maritime Administrative Order No. 150-3, October 1, 2007. 

Page 33 GAO-09-635 Merchant Marine Academy
 

MARAD also subsequently submitted a legislative proposal to Congress 

seeking authority to convert the NAFI positions to civil service 

employment positions. In the Duncan Hunter National Defense 

Authorization Act for Fiscal Year 2009,37 Congress provided the 

Administrator with authority to appoint current NAFI employees to 

competitive civil service positions for terms of up to 2 years. Further, 

MARAD submitted a legislative proposal to Congress seeking statutory 

authority to enter into personal services contracts with part-time adjunct 

professors. In the Duncan Hunter National Defense Authorization Act for 

Fiscal Year 2009,38 Congress provided the Administrator with temporary 

authority for the 2008-2009 academic year to contract with up to 25 

individuals to provide personal services as adjunct faculty. 

We also found that the Department and MARAD made a number of 

improvements in its controls during the course of our review. For 

example, following discussions with the Department’s Chief Financial 

Officer, the MARAD CFO, and the Inspector General and staff during 

October 2008, the MARAD CFO shortly thereafter took steps to secure and 

protect the accumulated prior years’ balances—held in commercial bank 

accounts—of midshipmen fees that totaled approximately $1 million as 

well as excess funds from the current year’s fees that also may be as much 

as $1 million. 

We also found that action has been taken or is under way on a number of 

other important issues as well, including: 

• MARAD directed the Academy to stop facilitating reimbursable contracts 

on behalf of GMATS. 

• A billing methodology for certain services provided by the Academy to 

GMATS is under development. 

• The use of FCO to obtain over $4 million a year in illegal personal services 

was discontinued in 2008. 

• MARAD is working with Academy officials to address the inappropriate 

commingling of activities that we describe in this report involving the 

Academy athletics and waterfront departments and certain NAFIs. 

In October 2008, the Maritime Administrator announced the selection of a 

new Superintendent. We met with the Superintendent, the MARAD CFO, 

 

37 Pub. L. No. 110-417, div. C, title XXXV, § 3506(h), 122 Stat. 4356, 4765 (Oct. 14, 2008). 

38 Pub. L. No. 110-417, div. C, title XXXV, §§ 3506(a)-(f), 122 Stat. 4356, 4763 (Oct. 14, 2008). 

Page 34 GAO-09-635 Merchant Marine Academy
 

and the Academy’s Assistant CFO to discuss the Academy’s significant 

flaws in controls and the business risks that our work was identifying. We 

also communicated our view that the Academy should aggressively move 

forward with change efforts and not wait for a formal report from us with 

targeted recommendations for action. The Superintendent agreed with our 

suggestions. 

On March 9, 2009, the Secretary reported several violations of the ADA at 

the Academy to the President, the Congress, and the Comptroller General, 

as required by the act. The Secretary estimated that the multiple violations 

totaled as much as $20 million. Further, the Secretary reported that 

corrective and disciplinary action had been taken with respect to the 

officials responsible for the violations and that MARAD and the Academy 

had revised internal control procedures and taken actions and had other 

actions under way to improve internal controls at the Academy. 

Finally, the Omnibus Appropriations Act, 2009, placed certain restrictions 

and limitations on the use of appropriations made for the Academy for 

fiscal year 2009.39 For all apportionments made (by the Office of 

Management and Budget) of these appropriations for the Academy, the act 

required the Secretary to personally make all allotments to the MARAD 

Administrator, who must hold all of the allotments. In addition, the act 

conditioned the availability of 50 percent of the amount appropriated on 

the Secretary’s, in consultation with the MARAD Administrator, 

completing and submitting to the congressional appropriations 

committees a plan on how the funding will be expended by the Academy. 

The problems we identified concerning improper or questionable sources 

and uses of funds involving the Academy and its affiliated organizations, 

including the known and possible violations of the ADA described in this 

report, undermines the Academy’s ability to carry out its basic 

stewardship responsibilities and to comply with the ADA and other legal 

and regulatory requirements, and may also impair its ability to efficiently 

achieve its primary mission—to educate midshipmen. These problems can 

be attributed to a weak overall control environment and the flawed design 

and implementation of internal controls. Revelations of such activities call 

into question the stewardship responsibilities of the Academy and signal 

failures of oversight and governance responsibilities. Moreover, such 

Conclusion 

 

39 Pub. L. No. 111-8, div. I, title I, 123 Stat. 524, 943 (Mar. 11, 2009). 

Page 35 GAO-09-635 Merchant Marine Academy
 

activities reflect unmitigated risks posed by the Academy’s close 

organizational and transactional relationships with its NAFIs, including the 

lack of clearly defined roles and responsibilities. If such improper and 

questionable activities are not prevented or detected in a timely manner, 

they may adversely impact the Academy’s credibility. 

The Academy, MARAD, and the Department have begun important steps to 

improve the control environment and address internal control weaknesses 

at the Academy, including new leadership at the top and newly energized 

oversight and monitoring practices. However, a comprehensive strategy 

for addressing these weaknesses and establishing internal control policies 

and procedures across virtually all aspects of the Academy’s financial 

activities are not yet in place. Further, given the amount of improper and 

questionable uses of funds detailed in this report, MARAD and the 

Academy should consider recovering funds that were improperly paid. 

Vigilance by MARAD and the Department in their oversight and 

monitoring of the Academy and greater transparency in the Academy’s 

relationships and transactions with its affiliated organizations will be 

crucial to achieving effective accountability over the Academy’s funds and 

other resources. Sustained commitment to sound accountability practices 

by leaders and management at the Department, MARAD, and especially at 

the Academy will be critical to long-term success. 

We make 47 recommendations to the Department of Transportation 

directed at improving internal controls and accountability at the Academy 

and to address issues surrounding the improper and questionable sources 

and uses of funds. 

Recommendations for 

Executive Action 

We recommend that the Secretary of the Department of Transportation 

take the following actions: 

To determine whether the Academy complied with the ADA, we 

recommend that the following actions be taken: 

• Determine whether legal authority exists to retain payments to the 

Academy from GMATS, both in Academy appropriations accounts and 

in commercial bank accounts of affiliated organizations, and if not, 

adjust the Academy’s appropriations accounts to charge available 

Academy appropriations and expense accounts for the amount of 

official Academy expenses that were paid by funds received from 

GMATS or paid directly by GMATS on behalf of the Academy. To the 

Page 36 GAO-09-635 Merchant Marine Academy
 

extent that insufficient appropriations remain available for these 

expenses report ADA violations as required by law. 

• Determine the amount of midshipmen fees that were used to cover 

official Academy expenses without legal authority to do so and adjust 

the Academy’s accounts, as necessary, to charge available 

appropriations for such expenses. To the extent that insufficient 

appropriations remain available, report ADA violations as required by 

law. 

To provide reasonable assurance that the Academy will comply with the 

ADA and other applicable laws and regulations, we recommend that the 

following action be taken: 

• Perform a review of the funds control processes at the Academy and 

take actions to correct any deficiencies that are identified. 

We recommend that the Secretary of the Department of Transportation 

direct the Administrator of MARAD, in coordination with the 

Superintendent of the Academy, to take the following actions: 

To improve the design and operation of the internal control system at the 

Academy, we recommend that the following actions be taken: 

• Establish a comprehensive risk-based internal control system that 

addresses the core causes and the challenges to proper administration 

that we identify in this report, including the risks and challenges that 

flow from the close organizational and transactional relationships 

between the Academy and its affiliated organizations and implement 

internal controls that address the elements of our Standards for 

Internal Control in the Federal Government, including the role and 

responsibilities of management and employees to establish and 

maintain a positive and supportive attitude toward internal control and 

conscientious management, and the responsibility for managers and 

other officials to monitor control activities. 

• Implement a program to monitor the Academy’s performance, 

including: reviews of periodic financial reports prepared by Academy 

officials; and reviews of the Academy’s documentation and analysis 

from its review of its periodic financial reports and associated items, 

such as the results of its follow-up on unusual items and balances. 

Page 37 GAO-09-635 Merchant Marine Academy
 

To improve internal controls over activities with its affiliated 

organizations, we recommend that the Academy take the following 

actions: 

• Perform a comprehensive review and document the results of an 

analysis of the risks posed by the Academy’s organizational structure 

and its relationships with each of its affiliated organizations, including: 

address the inherent organizational conflicts of interest that we 

identify in this report regarding Academy managers having 

responsibility for activities with affiliated organizations that are in 

conflict with the managers’ Academy responsibilities, and determine 

whether the current organizational structure should be maintained or 

whether an alternative organizational structure would be more 

efficient and effective, while at the same time reducing risk and 

facilitating improvement in internal control and accountability. 

• Require that all affiliated organizations have approved governing 

documents and that the functions they will perform in the future are 

consistent with their scope of authority. 

• Perform an analysis to identify each activity involving the Academy 

and its affiliated organizations and for each activity determine: the 

business purpose; the reason for Academy involvement; the business 

risk that each activity presents; and if the activity complies with law, 

regulation, and policy. Design a robust system of checks and balances 

for each activity with each affiliated organization that is consistent 

with the business risk that each activity presents considering, among 

other things, the nature and volume of the activities with each 

affiliated organization. 

• Establish formal written policies and procedures for each activity 

involving the Academy and an affiliated organization and specify for 

each activity: the required documentation requirements, necessary 

approvals and reviews, and requirements for transparency (e.g., 

require regular financial reports for each activity for review and 

approval by Academy management and MARAD officials charged with 

oversight). Establish internal controls for each activity with each 

affiliated organization, including (1) the planned timing of performance 

of the control activity (e.g., periodic reconciliations of billings with 

collections); (2) the responsibilities for oversight and monitoring and 

the documentation requirements for those performing oversight and 

monitoring functions; and (3) the necessary direct, compensating and 

mitigating controls for each activity. 

Page 38 GAO-09-635 Merchant Marine Academy
 

To improve accountability and internal controls over midshipmen fee 

activities and to resolve potential issues surrounding the past collections 

and uses of midshipmen fees, the Academy should take the following 

actions: 

• Perform an analysis to identify all midshipmen fee collections for fiscal 

years 2006, 2007, and 2008, to include: identifying those items for 

which the fee collected is attributable to (1) an activity between the 

midshipmen as customer and a NAFI as service provider (e.g., 

collections for haircuts); and (2) an activity between the midshipmen 

as customer and the Academy as service provider (e.g., collections for 

personal computers). 

• Determine if the (1) fee collected for each item was for a personal 

item of the midshipmen and consistent with law, regulation, and 

policy for such collections; (2) amount of the fee collected for each 

item was properly supported, based on, among other things, an 

analysis of the cost to the Academy for the good or service; and (3) 

amount collected exceeded the cost of the good or service. 

• Determine if any liability may exist for collections that (1) are not 

consistent with law, regulation, and policy as personal items of the 

midshipmen; (2) were not properly supported, in whole or part; 

and (3) exceeded the cost to the Academy for the good or service. 

• Perform an analysis to identify all payment activity and other uses of 

the funds collected for midshipmen fees for fiscal years 2006, 2007, and 

2008, to include: reviewing payment activity to identify the payees, 

amounts, and other characteristics of the uses of the funds collected 

and conducting a detailed review of payment activity and other uses 

(e.g., transfers to prior years’ reserves) for items considered as high 

risk. 

• Review all questionable payments, and other questionable uses of 

funds, such as transfers to commercial checking accounts for the 

excess of collections over funds used, as well as the questionable 

payments that we identify in this report. 

• For each payment and other use of funds that is determined to be 

for other than a proper governmental purpose and that is not 

consistent with law, regulation, and policy, consider pursuing 

recovery from the organization or individual that benefited from 

the payment. 

Page 39 GAO-09-635 Merchant Marine Academy
 

• Establish policies and procedures that require those charged by the 

Academy with the responsibility for midshipmen fee collections and 

payments to: (1) maintain detailed accounting records for all 

midshipmen fee activity that reflect accurate and fully supported 

information on collections, payments, and other activity that is 

consistent with document retention practices; (2) implement written 

review and approval protocols for all midshipmen fee collections and 

uses of funds consistent with policies and procedures established by 

the Academy and MARAD; and (3) provide monthly detailed reports of 

all midshipmen fee activity in the aggregate and by item to Academy 

and MARAD officials. 

• Establish policies and procedures and perform the necessary analysis 

to support annual reports to the Congress to address changes in “any 

item or service” in midshipmen fees from that existing in 1994 as 

required by law. 

• Establish written policy and criteria for determining the baseline items 

that are properly due from midshipmen for personal items, the amount 

of fees to be collected (based on underlying studies), and the approved 

uses of the fees collected. 

• Establish written policy for the underlying analysis that is required and 

the approvals that must be obtained before changes are made in the 

baseline of midshipmen fee items, or before a change is made in the 

amount of such fees, or in the approved uses of the fees collected. 

• Utilize the information obtained from the analysis of midshipmen fees 

collected in prior years and other work to determine the amount of 

midshipmen fees that should be charged to midshipmen for personal 

items in subsequent years. 

• Establish written policy for internal reviews of monthly reports of 

midshipmen fee activity and balances, identified anomalies, and 

questioned items as well as the results from the associated follow-up. 

• Perform an analysis to determine whether and, if applicable, the extent 

to which appropriated funds and midshipmen fees collected should be 

used to pay for contracted medical services. 

Page 40 GAO-09-635 Merchant Marine Academy
 

To improve internal controls over financial information, the Academy 

should take the following actions: 

• Implement financial reporting policies and procedures that, among 

other things, will provide visibility and accountability to Academy 

activities and balances to facilitate oversight and monitoring, 

including: (1) periodic reporting of actual and budget amounts for 

revenues and expenses for the current and cumulative period; (2) 

periodic reporting of amounts for activity and balances with affiliated 

organizations in detail; and (3) identification of items of revenue and 

expense for each funding source, including annual and no-year 

appropriated funds and other collections. 

• Implement comprehensive policies and procedures for the review of 

financial reports, to include requiring: reviews by the preparers of the 

financial reports as to their completeness and accuracy; evidence of 

departmental management reviews; and written records of identified 

anomalies and questioned items, as well as requirements for 

maintaining evidence of the results from associated follow-up on all 

identified anomalies and questioned items. 

• Identify and evaluate the potential misstatements of amounts in the 

financial records for the Academy in fiscal years 2006, 2007, and 2008 

to determine if restatement or reassurance of budget and financial 

reports and statements prepared from those records is appropriate, 

including: 

• $5,076,198 of errors in accounting for repairs and maintenance 

expenses and capital additions, and $3,431,725 of expenses that 

were improperly funded with no-year capital improvement 

appropriations; 

• $6,410,242 and $6,038,061 of recorded revenue and expenses, 

respectively, from GMATS training programs; 

• amounts for midshipmen fee collections and payment activity 

including effects on reported revenues, expenses, assets and 

liabilities; and 

• amounts for sources and uses of funds handled “off- book” that we 

identify in this report, including transactions in three 

Superintendent’s Reserves and with GMATS and FCO. 

Page 41 GAO-09-635 Merchant Marine Academy
 

• Implement policies and procedures to obtain the information 

necessary to timely comply with the requirement identified in this 

report for annual reports to the Congress that provides all expenditure 

and receipt information for the Academy and its affiliated 

organizations. 

To improve accountability and internal controls over the acquisition of 

personal services from NAFIs, and to resolve potential issues surrounding 

past personal services activities and payments, the Academy should take 

the following actions: 

• Perform an analysis to identify the nature and full scope of personal 

services activities and the associated sources and uses of funds to 

include a review of all questionable payments, including those that we 

identify in this report for personal services totaling more than $8 

million for fiscal years 2006 and 2007. For each such personal services 

arrangement: (1) determine if the amounts paid were consistent with 

the services received by the Academy; (2) quantify the amounts, if any, 

paid by the Academy for personal services that were not received by 

the Academy; and (3) document the decisions made with respect to 

any payments by the Academy for personal services that were not 

received, including decisions to seek recovery from other 

organizations for such amounts. 

• Develop written policy guidance on acquiring services from NAFIs that 

complies with the requirements of law, regulation, and policy on the 

proper use of funds by the Academy. 

To address funds held in commercial bank accounts of the FCO from prior 

years’ reserves and Superintendent’s Reserves and to resolve issues 

surrounding the past collections and uses of funds for excess midshipmen 

fee collections, the Academy should take the following actions: 

• Perform an analysis to identify all activities in the prior years’ and 

other reserves including all sources and uses of funds for fiscal years 

2006, 2007 and 2008. 

• Review all the questionable payments and other activity, including 

payments that we identify in this report that according to FCO 

records total $605,347. 

• For each payment that is determined to be for other than a proper 

governmental purpose and that is not consistent with law, 

Page 42 GAO-09-635 Merchant Marine Academy
 

regulation, and policy, consider pursuing recovery from the 

organization or individual that benefited from the payment. 

• Investigate the unexplained $100,000 transaction(s) in September 2007 

per the off-line or “cuff” accounting records maintained by FCO and 

take actions as appropriate. 

• Finalize actions to protect and recover Academy funds held in 

commercial bank accounts by the FCO from current and prior years’ 

midshipmen fees that totaled approximately $2 million at September 

30, 2008. 

• Require that: (1) bank reconciliations be prepared for all activity in the 

commercial bank accounts of the FCO used for these reserves during 

fiscal years 2006, 2007 and 2008; (2) documentation be prepared for all 

questionable items as well as the related follow-up; and (3) going 

forward such bank reconciliations be timely prepared and 

independently reviewed by Academy staff with no direct involvement 

in the reconciliations or the activity in the bank accounts. 

To improve internal controls over activities with GMATS, the Academy 

should take the following actions: 

• Perform an analysis to identify all activities between the Academy and 

the NAFI, GMATS, during fiscal years 2006 and 2007 and determine for 

each activity: the nature of the activity; the amounts collected by the 

Academy or others for the benefit of the Academy; the nature and 

amounts paid, by the Academy or by others for the benefit of the 

Academy from the funds collected; the business purpose; the reason 

for Academy involvement; and if the activity complies with law, 

regulation, and policy. 

• For each payment that is determined to be for other than a proper 

governmental purpose and that is not consistent with law, regulation, 

and policy, consider pursuing recovery from the organization or 

individual that benefited from the payment. 

• Establish formal written policies and procedures that, among other 

things, specify the allowable activities and transactions between the 

Academy and GMATS, and details the necessary approvals and reviews 

required for each activity. 

• Establish targeted internal controls for each direct and indirect activity 

between the Academy and GMATS. 

Page 43 GAO-09-635 Merchant Marine Academy
 

To improve internal controls over accruals and to resolve potential issues 

surrounding past “parking” of appropriated funds, the Academy should 

take the following actions: 

• Perform an analysis to identify all activities involving accrual accounts 

used to “park” appropriated funds with the FCO, including all sources 

and uses of funds for fiscal years 2006 and 2007. 

• For each payment that is determined to be for other than a proper 

governmental purpose, consider pursuing recovery from the 

organization or individual that benefited from the payment. 

• Establish written policy guidance on the accrual of items of expense at 

year-end. 

• Establish targeted internal controls that, among other things, provide 

the criteria for accruals, specify the documentation requirements for 

accruals, and provide management’s review and approval procedures. 

To improve internal controls over activities from usage of the training 

vessel—Kings Pointer and other Academy-owned boats—by others, the 

Academy should take the following actions: 

• Perform an analysis to identify all activity involving the use of the 

Kings Pointer and Academy-owned boats by others, including all 

sources and uses of funds for fiscal years 2006 and 2007. 

• Identify and recover the cost of any unreimbursed nongovernmental uses, to the extent authorized by law. 

• For each payment, including payments to affiliated organizations, 

that is determined to be for other than a proper governmental 

purpose and that is not consistent with law, regulation, and policy, 

consider pursuing recovery from the organization or individual that 

benefited from the payment. 

• Establish written policies and procedures to govern the use of the 

Academy-owned training vessel the Kings Pointer and other boats, 

including addressing issues for ship’s crews, insurance, security, billing 

procedures, and other responsibilities. 

• Perform or contract out for a comprehensive usage-rate study to 

establish usage rates. Such a study should include (1) consideration of 

the full cost to the Academy of the training vessels and other boats, 

Page 44 GAO-09-635 Merchant Marine Academy
 

including salaries and benefits of Academy personnel, major repairs, 

routine maintenance, non-routine maintenance and long-term repairs, 

fuel and dockage; and (2) identification of indirect expenses and 

imputed costs as appropriate (e.g., depreciation). 

• Establish policy for the timing and extent of the analysis required for 

periodic updates to the usage-rate study. 

• In coordination with the Department or MARAD legal counsel, as 

appropriate, determine if the Academy had the legal authority to retain 

and use any collections from the use of the Academy-owned training 

vessel the Kings Pointer and other boats; otherwise, deposit them in 

the general fund of the U.S. Treasury. 

To improve internal controls over camps and clinics operated by the 

Athletics Association NAFI or others on Academy property, the Academy 

should take the following actions: 

• Perform an analysis to identify practices at the Academy involving 

camps and clinics operated by the Athletics Association or others 

using Academy property and other assets. Document the nature and 

scope of such activities, including all sources and uses of funds for 

fiscal years 2006 and 2007 and take corrective action on any improper 

transactions. 

• Establish written policies and procedures for camps and clinics 

operated by the Athletics Association NAFI or others on Academy 

property. 

• Establish targeted internal controls that include: approvals required; 

costs to be recovered by the Academy; requirements (such as advance 

approval) for participation by Academy employees in the activities; 

and other matters of importance such as, insurance requirements, 

security, and required accountings to be provided to the Academy on 

the sources and uses of funds from each event. 

Page 45 GAO-09-635 Merchant Marine Academy
 

To improve internal controls over processing of vendor invoices and 

accounting for repairs and maintenance expenses and additions to capital 

assets, the Academy should take the following actions: 

• Perform an analysis to identify the causes of the errors in the 

recording of repairs and maintenance expenses that should have been 

capitalized totaling $5,076,198, and $3,431,725 of expenses that were 

improperly funded with the no-year capital improvement 

appropriation, during fiscal years 2006 and 2007. 

• Establish written policies and procedures for repairs and maintenance 

expenses and capital asset additions that require: (1) periodic reviews 

of recorded amounts for repairs and maintenance expenses and capital 

asset additions to identify and timely address issues requiring 

management attention; and (2) correction of errors before financial 

reports are prepared from the books and records. 

• Establish polices and procedures for periodic reporting of financial 

information for repairs and maintenance expenses and capital 

additions to assist users in monitoring these items as well as the 

funding sources—annual appropriations or no-year appropriations for 

long-term improvement projects. 

We received written comments from the Department of Transportation on 

a draft of this report (see app. V). The Department stated that the 

Academy and MARAD have initiated many corrective actions to address 

the internal control weaknesses identified in our draft report and that 

management at the Academy, MARAD, and the Department take very 

seriously our findings and recommendations. The Department also stated 

that MARAD will produce a comprehensive strategy and corrective action 

plan to address all of the internal control weaknesses, as well as a detailed 

response to each recommendation. The Department also separately 

provided technical comments that we incorporated, as appropriate. 

Agency Comments 

and Our Evaluation 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. We will then send copies to other appropriate congressional 

committees, the Secretary of Transportation; the Administrator, Maritime 

Administration; and the Superintendent, United States Merchant Marine 

Academy. In addition, the report will be available at no charge on the GAO 

Web site at http://www.gao.gov. 

Page 46 GAO-09-635 Merchant Marine Academy
 

If you or your staff have any questions concerning this report, please 

contact me at (202) 512-2600 or franzelj@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on the 

last page of this report. GAO staff who made key contributions to this 

Jeanette M. Franzel 

report are listed in appendix VI. 

Managing Director 

Financial Management and Assurance 

Page 47 GAO-09-635 Merchant Marine Academy
Appendix I: 

Methodology 

Objectives, Scope, and 

Page 48 GAO-09-635 

Appendix I: Objectives, Scope, and 

Methodology 

This report responds to your request that we study the internal control 

environment and selected activities and expenditures of the Academy and 

its non-appropriated fund instrumentalities (NAFIs), in addition to the 

oversight and monitoring practices by the Maritime Administration 

(MARAD), an operating administration of the Department of 

Transportation. Our specific objectives were to determine whether there 

(1) were any potentially improper or questionable uses of funds by the 

Academy, including transactions with its affiliated organizations; (2) was 

an effective control environment with key controls in place over the 

Academy’s sources and uses of funds, including transactions with its 

affiliated organizations; and (3) were any actions taken, under way, or 

planned to improve controls and accountability over the Academy’s funds 

and resources. 

Objectives 

Scope and Methodology To address the first two objectives, we analyzed whether the Academy’s 

policies and procedures were adequate to ensure that Academy funds 

were used as intended and for proper governmental purposes and 

assessed the Academy’s internal controls over its activity and balances 

against our Standards for Internal Control in the Federal Government, 1

Internal Control Management and Evaluation Tool, Guide for Evaluating 

and Testing Controls Over Sensitive Payments, and Strategies to Manage 

Improper Payments.2

 Specifically, we 

• reviewed laws, regulations, policies, and procedures over Academy 

operations and activities; 

 

1

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999); Under GAO’s Standards for Internal Control in the 

Federal Government, agencies should have internal control sufficient to provide 

reasonable assurance that the objectives of the agency are being achieved and, among 

other things, should (1) establish and maintain a positive and supportive attitude toward 

internal control and conscientious management, (2) identify the risks that may impede the 

achievement of agency objectives, (3) establish effective and efficient control activities that 

help ensure that management’s directives are carried out, (4) ensure that information is 

recorded and communicated to management and others within the organization that need 

it and in a form and within a time frame that enables them to carry out their internal 

control and other responsibilities and (5) internal control monitoring should assess the 

quality of performance over time. 

2

 GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, 

D.C.: August 2001); Guide for Evaluating and Testing Controls Over Sensitive Payments, 

GAO/AFMD-8.1.2 (Washington, D.C.: May 1993); and Strategies To Manage Improper 

Payments, GAO-02-69B (Washington D.C.: October 2001). 

 Merchant Marine Academy
Appendix I: Objectives, Scope, and 

Methodology 

• reviewed the MARAD report and discussed the objectives, scope, and 

methodology of the internal control review with MARAD officials; 

• interviewed selected Department, Department—Office of Inspector 

General (OIG), MARAD, Academy, and NAFI staff and officials to 

obtain an understanding of (1) their roles and responsibilities, (2) the 

internal control environment at the Academy, including the Academy’s 

organizational structure and relationships to the NAFIs and 

management’s attitude towards and knowledge of internal controls; 

(3) the internal controls over selected Academy payments and 

activities with its affiliated organizations—the 14 NAFIs and 2 

foundations; and (4) MARAD and Department practices for overseeing 

and monitoring the Academy; and 

• obtained an understanding of the sources of funding for both the 

Academy and the NAFIs, including the appropriated funds of the 

Academy. 

We obtained a database of Academy expenses at the transaction level 

covering fiscal years 2006 and 2007 and 

• compared these data to amounts reported for the Academy by MARAD 

in the Department’s annual performance and accountability reports; 

• compared the total amounts—MARAD including the Academy—in the 

database provided to us with the amounts in the statements of net cost 

that MARAD submitted to the Department;3

• reconciled the MARAD Statement of Net Cost in the database to the 

Department’s audited financial statements by agreeing the net cost 

amounts for MARAD including the Academy that were reported in the 

audited financial statements and separately identified in consolidating 

statements of net cost schedules for the Department; 

• analyzed Academy and NAFI payments, Academy collections of 

midshipmen fees, and funds from the FCO and GMATS to identify 

selected payments for further testing; and 

• reviewed available documentation supporting selected Academy 

payment transactions and requested additional support and 

explanations from Academy and NAFI officials to justify the purpose 

of these transactions and the sources of funds used. 

 

3

 The Academy did not prepare separate financial statements for fiscal years 2006 and 2007. 

To determine the population of payments and obligations, we worked with MARAD to 

design a data base of such activity for purposes of our audit. 

Page 49 GAO-09-635 Merchant Marine Academy
Appendix I: Objectives, Scope, and 

Methodology 

To review the collection of current year’s fees from midshipmen and use 

of those fees for fiscal years 2006 and 2007, as well as prior years’ reserve 

activity for fiscal years 2006 to 2008, we 

• analyzed the collection and payment activity reflected in records 

maintained by the FCO; 

• requested and reviewed available support to justify the amounts 

collected from the midshipmen; 

• interviewed Academy and NAFI officials with responsibility for 

midshipmen fee collections; 

• discussed the results of our analysis with Academy and FCO officials 

and as appropriate requested additional information and explanations 

from these officials; and 

• considered the support and responses we received to assess whether 

the collection and use of midshipmen fees were questionable. 

We identified numerous improper or questionable activities and uses of 

funds. However, the results of our work are not generalizable to the 

population of transactions as a whole because we selected transactions on 

a nonstatistical basis. We selected transactions that were significant to the 

Academy or the NAFIs and appeared to have a higher risk of being 

improper. Consequently, there may be other improper or questionable 

activities and transactions that our work did not identify. We reviewed the 

March 9, 2009, report of the Secretary to the President, the Vice President 

(as President of the Senate), the Speaker of the House, and the Acting 

Comptroller General to report several violations of the Antideficiency Act 

that occurred over several years and that the Department estimated 

totaled as much as $20 million. 

To address our third objective, we obtained relevant documentation on 

actions taken, under way, or planned, including the MARAD order 

establishing the Academy’s Fiscal Oversight and Administrative Review 

Board.4

During our review, we visited the Academy in Kings Point, New York, and 

MARAD and Department headquarters in Washington, D.C. We also held 

teleconferences with Academy officials in New York and MARAD and 

Department officials in Washington, D.C. We also reviewed prior OIG and 

 

4

 Maritime Administrative Order 150-3, October 1, 2007. 

Page 50 GAO-09-635 Merchant Marine Academy
Appendix I: Objectives, Scope, and 

Methodology 

GAO reports for items of possible relevance to MARAD and Academy 

activities and internal controls. 

We conducted this performance audit from June 2008 to August 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

Page 51 GAO-09-635 Merchant Marine Academy
Appendix II: De

MA

O

partment of Transportation, 

RAD, Academy, and Affiliated 

rganization Relationships 

Page 52 GAO-09-635 

Appendix II: Department of Transportation, 

MARAD, Academy, and Affiliated 

Organization Relationships 

The following presents the organizational environment in which the 

Academy operates and illustrates the nature and amount of some of the 

activity that occurred during fiscal year 2007 between the Academy and its 

affiliated organizations. 

Department of Transportation

2007 Net Cost of Operations: $63.1 billion, including

$931.1 million for MARAD

MARAD

2007 Net Cost of Operations: $931.1 millon, including

$62.0 million for USMMA

USMMA (Academy)

2007 Net Cost of Operations: $62.0 millon, including

$13.4 million for payments to NAFIs

Payments totaling

$13.4 million

for 2007 were

made by the

Academy to

10 of the 14

NAFIs. The

14 NAFIs spent

a total of $24.4

million

The Academy paid

$2.5 million for 2007 

to the NAFIs from gifts and bequests it

received from two

foundations

The NAFIs provide

services to

the Academy

14 NAFIs

2 Foundations

Athletic

Association

Global Maritime and

Transportation School

Melville

Hall

Cultural

Events Sail, Power andCrew Association

Music

Program

Ship’s Service

Store

Midships

Publications

Fiscal Control

Office

Regimental Morale

Fund Association

Faculty and

Staff Housing

Chapel

Fund

American Merchant

Marine Museum

Employees Association

USMMA Alumni

Foundation

USMMA Sailing

Foundation

Gifts and

bequests totaling $2.5

million for 2007

were made by

two foundations to the Academy 

Source: GAO.

 Merchant Marine Academy
Appendix III: Academy Expenses by Category, Appendix III: Academy Expenses by Fiscal Years 2006 and 2007 

Category, Fiscal Years 2006 and 2007 

2006 

Payments to NAFIs Total expenses

Compensation and benefits ( $ 0.4) $ 24,429.7

Travel and transportation 48.7 987.2

Operating expenses: 

Operations and maintenance, utilities, other 1,454.4 12,723.6

Other contractual services 6,059.0 13,399.4

 Total operating expenses 7,513.5 26,123.0

Equipment, depreciation 2,079.3

Gifts and bequests 2,053.6 2,062.4

Total expenses $ 9,615.4 $ 55,681.6

2007 

Payments to NAFIs Total expenses

Compensation and benefits $ 38.1 $ 26,074.1

Travel and transportation 3.4 888.9

Operating expenses: 

Operations and maintenance, utilities, other 1,547.8 12,867.4

Other contractual services 9,339.0 16,025.5

Total operating expenses 10,886.8 28,892.9

Equipment, depreciation 3,686.6

Gifts and bequests 2,477.0 2,482.7

Total expenses $ 13,405.3 $ 62,025.2

Source: GAO analysis of MARAD’s unaudited data for the Academy. 

Note: Total expenses per this table represent the Academy’s expenses that were included by MARAD 

as gross expenses in its statement of net cost for fiscal years 2006 and 2007. Expenses for both 

fiscal years include amounts funded by annual appropriations and multi-year appropriations. 

Page 53 GAO-09-635 Merchant Marine Academy
Appendix IV: The Antideficiency Act Appendix IV: The Antideficiency Act 

The ADA is one of the major laws in the statutory scheme by which the 

Congress exercises its constitutional control of the public purse.1

 The ADA 

contains both affirmative requirements and specific prohibitions, as 

highlighted below. The ADA: 

• Prohibits the incurring of obligations or the making of expenditures in 

advance or in excess of an appropriation. For example, an agency 

officer may not award a contract that obligates the agency to pay for 

goods and services before the Congress makes an appropriation for 

the cost of such a contract or that exceeds the appropriations 

available. 

• Requires the apportionment of appropriated funds and other budgetary 

resources for all executive branch agencies. An apportionment may 

divide amounts available for obligation by specific time periods 

(usually quarters), activities, projects, objects, or a combination 

thereof. OMB, on delegation from the President, apportions funds for 

executive agencies. 

• Requires a system of administrative controls within each agency, 

established by regulation, that is designed to (1) prevent obligations 

and expenditures in excess of apportionments or reapportionments; 

(2) fix responsibility for any such obligations or expenditures; and (3) 

establish the levels at which the agency may administratively subdivide 

apportionments, if it chooses to do so. 

• Prohibits the incurring of obligations or the making of expenditures in 

excess of amounts apportioned by OMB or amounts of an agency’s 

subdivision of apportionments (i.e., “allotments”). 

• Prohibits the acceptance of voluntary services or the employment of 

personal services, except where authorized by law.2

 

1

 “No money shall be drawn from the Treasury, but in Consequence of Appropriations made 

by law.” U.S. Const. art. I, § 9, cl. 7. 

2

 The prohibition against the employment of unauthorized personal services covers 

contracts with individuals who have an employment relationship with the federal agency. 

30 Op. Atty. Gen. 51 (1913). The purpose of this prohibition is to preclude agencies from 

“coercing” Congress into making additional appropriations to cover the cost of the 

additional services. Id. The federal procurement regulations also contain a general 

prohibition against the making of contracts for personal services. FAR § 37.104(b). In this 

context, as explained in a Comptroller General decision, 

Page 54 GAO-09-635 Merchant Marine Academy
Appendix IV: The Antideficiency Act 

• Specifies potential penalties for violations of its prohibitions, such as 

suspension from duty without pay or removal from office. In addition, 

an officer or employee convicted of willfully and knowingly violating 

the prohibitions may be fined not more than $5,000, imprisoned for not 

more than 2 years, or both. 

• Requires that for violations of the act’s prohibitions, the relevant 

agency report immediately to the President and to the Congress all 

relevant facts and a statement of actions taken with a copy to the 

Comptroller General of the United States. 

The requirements of the ADA and the enforcement of its proscriptions are 

reinforced by, among other laws, the Recording Statute, 31 U.S.C. § 

1501(a), which requires agencies to record obligations in their accounting 

systems, and the 1982 law commonly known as the Federal Managers’ 

Financial Integrity Act of 1982, 31 U.S.C. § 3512(c), (d), which requires 

executive agencies to implement and maintain effective internal controls. 

Federal agencies use “obligational accounting” to ensure compliance with 

the ADA and other fiscal laws. Obligational accounting involves the 

accounting systems, processes, and people involved in collecting financial 

information necessary to control, monitor, and report on all funds made 

available to federal agencies by legislation—including both permanent, 

indefinite appropriations and appropriations enacted in annual and 

supplemental appropriations laws that may be available for 1 or multiple 

fiscal years. Executive branch agencies use obligational accounting, 

sometimes referred to as budgetary accounting, to report on the execution 

of the budget.3

 

“[a] personal services contract is one that, by its express terms or as administered, makes 

the contractor personnel appear, in effect, government employees. FAR §§ 37.101, 

37.104(a). The government is normally required to obtain its employees by direct hire under 

competitive appointment or other procedures required by the civil service laws. FAR § 

37.104(a). Obtaining personal services by contract, rather than by direct hire, circumvents 

those laws unless Congress has specifically authorized acquisition of the services by 

contract. Id. Agencies may not award personal services contracts unless specifically 

authorized by statute to do so. FAR § 37.104(b).” Matter of: Encore Management, Inc., B278903.2, Feb. 12, 1999. 

3

The Department must also implement and maintain proprietary (or financial) accounting 

to record financial information that is summarized in financial statements prepared in 

accordance with U.S. generally accepted accounting principles and audited on an annual 

basis. The Department’s audited financial statements include a Statement of Budgetary 

Resources that presents information on the status of appropriations. For a description of 

the different methods for tracking funds in the federal government, see app. III of GAO, A 

Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP (Washington, D.C.: 

September 2005). 

Page 55 GAO-09-635 Merchant Marine Academy
Appendix V: Comments from the Department Appendix V: Comments from the Department of Transportation 

of Transportation 

Page 56 GAO-09-635 Merchant Marine Academy
Appendix V: Comments from the Department 

of Transportation 

Page 57 GAO-09-635 Merchant Marine Academy
Appendix V: Comments from the Department 

of Transportation 

Page 58 GAO-09-635 Merchant Marine Academy
Appendix VI: 

A

GAO Contact and Staff 

cknowledgments 

Page 59 GAO-09-635 

Appendix VI: GAO Contact and Staff 

Acknowledgments 

Jeanette M. Franzel, (202) 512-2600 or franzelj@gao.gov 

In addition to the contact named above, staff members who made key 

contributions to this report include Robert Owens, Assistant Director; Lisa 

Brownson; F. Abe Dymond, Assistant General Counsel; Tony Eason; 

Frederick Evans; Tiffany Epperson; Jehan-Abdel-Gawad; Thomas 

Hackney; Paul Kinney; Scott McNulty; and Meg Mills. 

 Merchant Marine Academy

GAO Contact 

Acknowledgments 

(194766) 
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