Recommendation 2. We recommend that OMS establish procedures to review large contracts
at year end to determine whether goods or services have been received and to establish an
accrual to record the value of the goods/services received.

Finding 3. Obligations not Established for Field Office Lease

The FMC maintains field offices (a.k.a. area offices) in: New York, NY; Miami, FL; New
Orleans, LA; Houston, TX; Seattle, WA; and Los Angeles, CA. The FMC leases office space
from private landlords in some markets and from government agencies in other markets.

The area office in Los Angeles, CA, has a month to month lease with another Federal agency for
office space. When we reviewed lease expense as part of our fieldwork performed in July, 2007,
we learned that the agency had not been billed for this space and had not established an
obligation to record, for budgetary purposes, the rent commitment in dollars.

In August 2007, OMS established the obligation for rent in Los Angeles in the amount of
$10,000. During the same month, OMS contacted the General Services Administration to
establish a Memorandum of Understanding with the Federal agency in Los Angeles and a normal
payment cycle for this space.

Recommendation 3. We recommend that rent obligations are made at the beginning of the
fiscal year for all leased properties, and that the agency establish procedures to ensure that
agency funds are obligated before the next rent cycle begins.

We believe that the implementation of these recommendations will provide the Federal
Maritime Commission with a stronger system of internal controls while also making its
operations more efficient. We will be happy to discuss the details of these recommendations
with you and assist in any way possible with their implementation.

Management comments to this letter are attached in their entirety.
While this report is intended solely for the information and use of the management of the

Federal Maritime Commission, it is also a matter of public record, and its distribution is,
therefore, not restricted.

Donke, Teo, Huh, Bena urgfins Murshadl, EC.

Rockville, Maryland
December 10, 2007

Dembo, Jones, Healy, Pennington & Marshall, P.C.
Certified Public Accountants and Consultants


During fieldwork on the annual financial statement audit for FY 2007, we reviewed the FMC’s
leave error report for pay period No. 20. We identified eight employees with leave balance
errors as identified on leave error reports. These differences were deemed minor, however, we
believe that this reconciliation is important to ensure that the accrued annual leave balances in
the agency’s records and on the agency’s financial statements is accurate.

As most, if not all, errors are occurring when timekeepers either fail to (i) enter corrections into
the STAR after those corrections are made by OFM staff into the NFC system, or (ii) notify
OFM when making the correction into STAR, we believe that many leave error reports can be
prevented by simply having OFM make corrections into both systems at the same time.

Recommendation 1. We recommend that the Office of Financial Management make
corrections in the STAR and NFC payroll systems to centralize and consolidate the leave error
correction function.

Current Year Findings
Finding 2. Accounts Payable are Understated

Accounts payable (or payables) represent amounts owed for purchases of goods or services.
During the year, payables are recorded when an invoice, packing slip or receiving report is
received by the agency. The Office of Management Services (OMS) reviews all obligations at
year end and establishes an accrual for all services and goods received by year end (e.g., to
recognize that money is owed in the period that the goods were received). For example, an
invoice for computer monitors that were delivered on September 15 (FY 2007) may not be sent
by the manufacturer until October 10 (FY 2008). The expense should be recorded on the FY
2007 books because the monitors were received in FY 2007.

We reviewed accounts payable at year end to ensure that all expenses for goods and services
were properly recorded in the appropriate period. During our review, we identified
approximately $16,000 in additional FY 2007 payables that were not recorded by the agency.
Without making the necessary adjustments, the payables would be erroneously recorded as FY
2008 expenses, even though the goods were received in FY 2007. This would understate the
FMC’s liabilities on its financial statements.

Identifying expenses when they occur near the end of the fiscal year is a two-step process
requiring agency staff (generally finance or procurement staff) (i) to identify large contract and
purchase items and to follow up with the contracting officer’s technical representatives or other
contact points to inquire whether the goods were received, or (ii) to estimate the dollar amount of
services that were received since the prior invoice up through the end of the fiscal year
(September 30). The amounts are then accrued as payables.

The OMS’s accrual process did not include this important step, instead relying on invoices
received either in FY 2007 or FY 2008. Invoices that were not received by the agency in time
for its review were not included in the payable amounts. We believe that neglecting this step,
although not material to the financial statements in FY 2007, could have a significant impact on
accruals in years where a large volume of goods/services are delivered near fiscal year end.

Dembo, Jones, Healy, Pennington & Marshall, P.C.
Certified Public Accountants and Consultants


Memorandum

TO : Inspector General DATE: December 6, 2007
we
THROUGH: Deputy Director of Administration

FROM _ : Director, Office of Financial Management
Director, Office of Management Services

SUBJECT: Response to Management Letter Regarding the FY 2007 Financial
Statements Audit

We have received and reviewed the findings and recommendations contained in the
Management Letter for the FY 2007 Financial Statements Audit. We concur with the
recommendations contained therein. Below are corrective action dates we have
established to address the recommendations.

Finding 1. Errors in the Reconciliation of Annual Leave Accrual
Recommendation 1. We recommend that the Office of Financial Management
make corrections in the STAR and NFC payroll systems to centralize and
consolidate the leave error correction function.

OA will amend the rélevant SOP with respect to making corrections in the STAR
and NFC payroll systems to address the recommendation, and will provide advice via e-
mail to all timekeepers and supervisors regarding this change. We have established a
corrective action completion date of March 30, for this action.

Finding 2. Accounts Payable are Understated

Recommendation 2. We recommend that OMS establish procedures to review
large contracts at year end to determine whether goods or services have been
received and to establish an accrual to record the value of the goods/services
received.

OA will incorporate such procedures into an SOP. We have established a

corrective action completion date of March 30, for this action.

Finding 3. Obligations not Established for Field Office Lease
Recommendation 3. We recommend that rent obligations are made at the


Management Letter to
the FY 2007 Audited
Financial Statements
December 12, 2007
A08-02A



beginning of the fiscal year for all leased properties, and that the agency establish
procedures to ensure that agency funds are obligated before the next rent cycle
begins.

OA will incorporate such procedures into an SOP. We have established a
corrective action completion date of March 30, for this action.

)
<Fthay. & Dmbin—

Karon Dbuglass, Director, OFM

Mealal 4. eG

Michael Kilby, Director, OMS

ce? Director, OA
Deputy Director, OA


FEDERAL MARITIME COMMISSION
800 North Capitol Street, N.W.
Washington, DC 20573

December 12, 2007

Tel: (202) 523-5863
Office of Inspector General Fax: (202) 566-0043
E-mail: oig@fme.gov

TO: Commissioner Anderson
Commissioner Brennan
Commissioner Creel \
Commissioner Dye fe j

FROM: Adam R. Trzeciak

Inspector General ~ Is,

SUBJECT: Transmittal of the OIG FY 2007 Management Letter

When performing an audit of an agency’s major financial systems and accounting
processes, auditors often detect deficiencies in internal controls that do not rise to a level
of seriousness to be reported in the auditor’s opinion. These findings are communicated
to the auditee in a management letter. Attached is a copy of the FY 2007 Financial
Statement Management Letter that reports on such findings.

During the annual review, findings within the same general area as earlier
findings are likely to occur. Consequently, the Management Letter begins with reporting
on the status of prior year findings. This is not necessarily an indication that management
is not addressing these issues. Rather, it reflects that certain areas are vulnerable to
accounting errors or system breakdowns and need constant oversight.

This year’s management letter contains the status of one prior-year finding as well
as two new findings.

The OIG will continue to review areas vulnerable to accounting error and report
any findings in next year’s management letter.

I am available to discuss the letter at your convenience.

Attachment


Martin S. Dembo, CPA (Ret)

Dembo, Jones, Healy, Pennington & Marshall, P.C. —_ wiliam c-Pennington, CPA (Ret)

Certified Public Accountants and Consultants Stanley R. Jones, CPA
Joseph T. Healy, r, CPA
Walter C. Pennington, CPA, CVA, CFP®
Donald K. Marshall, CPA, CVA, CFE
Daniel B. Geehreng, CPA
James K. Green, CPA, CFP®

Robert | Tyrrell, JD
Michael R, Mason, JD, CFP®
Stanley M. Sobel, CPA
James C. Fielding, Jr, CPA
Cheryle S.Weal, CPA

es on Robert L. Pillote, jr, JD
Federal Maritime Commission fl

Washington, D.C.

In planning and performing our audit of the financial statements of the Federal Maritime
Commission (FMC) as of September 30, 2007, in accordance with auditing standards generally
accepted in the United States of America and Government Auditing Standards, issued by the
Comptroller General of the United States, we considered the FMC’s internal control over financial
reporting as a basis for designing our auditing procedures for the purposes of expressing our opinion
on the financial statements, and not for the purpose of expressing an opinion on the effectiveness of
the Agency’s internal control. However, based on our audit, we are providing the following findings
and recommendations.

Prior Year Finding - Updated
Finding 1. Errors in the Reconciliation of Annual Leave Accrual

All agency employees are required to complete a timesheet on a biweekly basis to document
hours worked and leave taken during the pay period. The FMC uses the proprietary software
program STAR — System for Time and Attendance Reporting — to record employee work and
leave hours. Timekeepers are responsible for entering the information into the STAR system and
printing a hard copy of the biweekly input for review and certification by the employee and
his/her supervisor. Timekeepers send the certified attendance information to the FMC’s payroll
servicing agent, the U.S. Department of Agriculture’s National Finance Center’s (NFC), via
direct link, for processing.

Notwithstanding the certification process, an employee or timekeeper will, on occasion, discover
an error in the employee’s leave balance(s). According to FMC staff, this error often results
from a breakdown in the above-described certification process. For example, some employees
may not review their biweekly time and attendance information before it is submitted to NFC by
the timekeeper because the employee is on leave or travel when the cards are prepared. Once the
error is detected, the timekeeper notifies FMC’s Office of Financial Management (OFM), who
then manually makes the correction in the NFC system. After this change is made, then OFM
notifies the timekeeper, who then makes the correction in STAR. If the timekeeper makes the
correction in STAR without notifying OFM, or the correction is not made by the timekeeper per
instructions from OFM, a leave error report will be generated by NFC identifying the imbalance
between the two systems.

1

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