United States Merchant Marine Academy: Internal Control Weaknesses Resulted in Improper Sources and Uses of Funds; Some Corrective Actions Are Under Way
Published: 2009-08-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 non-appropriated 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. An ADA violation occurs when a federal officer or  employee incurs obligations or makes expenditures in excess or in  advance of appropriations or employs personal services, among other  things. 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 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, 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. 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  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. 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.
subsections: section_title: Background
subsections: section_title: Academy and NAFI Relationships
paragraphs: 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,  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.
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  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.
Appendix II provides more detail on the relationships and financial activity  between the Academy and its affiliated organizations.
section_title: Academy Funding and Expenses
paragraphs: 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.
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.
section_title: Midshipmen Fees
paragraphs: The Academy is to provide each midshipman with free tuition, room and  board as well as limited medical and dental care. However, under  MARAD regulations, 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. 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.
section_title: Improper and Questionable Sources and Uses of Funds
paragraphs: 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.
subsections: section_title: Improper and Questionable Collection and Use of Midshipmen Fees
paragraphs: 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 fee- related 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.
subsections: section_title: Fee Collections and Uses of Fees not Related to Goods and Services Provided to All Midshipmen
paragraphs: 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  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. We did not independently assess the amount of such  improper augmentations.
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  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.
section_title: Midshipmen Fee Collections Exceeded Actual Expenses
paragraphs: 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.
section_title: Questionable Use of Excess Midshipmen Fee Collections
paragraphs: 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. For  example, a “Superintendent’s Reserve” was created and used to make  discretionary payments authorized by the Academy Superintendent. 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.
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.  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.  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  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.
section_title: Questionable Financial Activity with GMATS and Other NAFIs
paragraphs: 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.
subsections: section_title: Improper Contracting for GMATS NAFI Training to Other Agencies
paragraphs: 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 Act 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. 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.
section_title: GMATS Funds Used to Improperly Augment Academy Funds
paragraphs: 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 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. We found that the Academy also 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. 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.
section_title: Improper Use of Contracting to “Park” Funds That Would Otherwise Expire
paragraphs: 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.
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  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. 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. 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. 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.
section_title: Questionable Billing and Payment Transactions Related to Use of the Training Vessel Kings Pointer
paragraphs: 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  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.
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.
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  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.
section_title: Academy Payroll Activities Contributed to Three Separate Violations of the ADA
paragraphs: 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. 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, which was included in the Secretary’s reports of March 9, 2009, to  the President and the Congress that included multiple ADA violations.
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  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.
section_title: Weak Control Environment and Flawed Academy Internal Controls
paragraphs: 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.
subsections: section_title: Risks Posed by Academy and NAFI Relationships Are Not Adequately Managed
paragraphs: 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 Tool 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  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.
section_title: Financial Reporting Not Comprehensive and Did Not Address All Legal Requirements
paragraphs: Standards for Internal Control in the Federal Government 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.
subsections: section_title: Academy Did Not Routinely Prepare Financial Reports
paragraphs: 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. 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.
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  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.
section_title: Academy Did Not Comply with Congressional Reporting Requirements
paragraphs: 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, 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.
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. 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  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.
section_title: Limited Oversight and Monitoring In Place to Assure Effective Accountability over Academy Resources
paragraphs: 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.
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.
subsections: section_title: Inadequate Accountability over Capitalizable Assets
paragraphs: 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. 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.
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.
section_title: Lack of Controls and Accountability over the Collection and Use of Midshipmen Fees
paragraphs: 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.
section_title: Lack of Accountability over GMATS Training Activities and Funding
paragraphs: 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. 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.
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.
section_title: Controls Ineffective in Preventing Improper Accruals and “Parking” Funds
paragraphs: 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. 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.  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.
section_title: No Policies or Procedures in Place for Usage Fee Revenues from the Training Vessel Kings Pointer and Other Academy Training Vessels
paragraphs: 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  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 Academy- owned boats.
section_title: Lack of Policies and Procedures and Controls Over Use of Athletic Fees
paragraphs: 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.
section_title: Controls Ineffective in Preventing Improper Payroll-Related Transactions
paragraphs: 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 payroll- related 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.
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.
section_title: Actions by the Department, MARAD, and the Academy to Address Certain Accountability and Internal Control Challenges
paragraphs: 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). 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.
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, 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, 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,  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. 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.
section_title: Conclusion
paragraphs: 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  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.
section_title: Recommendations for Executive Action
paragraphs: 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.
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  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.
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.
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.
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.
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.
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,  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.
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 non- governmental 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,  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.
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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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.
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  report are listed in appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
subsections: section_title: Objectives
paragraphs: 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.
section_title: Scope and Methodology
paragraphs: 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,   Internal Control Management and Evaluation Tool, Guide for Evaluating  and Testing Controls Over Sensitive Payments, and Strategies to Manage  Improper Payments. Specifically, we  reviewed laws, regulations, policies, and procedures over Academy  operations and activities;  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;  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.
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.
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  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.
section_title: Appendix II: Department of Transportation, MARAD, Academy, and Affiliated Organization Relationships
paragraphs: 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.
subsections: section_title: Global Maritime and
section_title: Appendix III: Academy Expenses by Category, Fiscal Years 2006 and 2007
paragraphs: Payments to NAFIs Total expenses ( $ 0.4)
section_title: Appendix IV: The Antideficiency Act
paragraphs: The ADA is one of the major laws in the statutory scheme by which the  Congress exercises its constitutional control of the public purse. 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.
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. “ 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., B- 278903.2, Feb. 12, 1999.
section_title: Appendix V: Comments from the Department of Transportation
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: 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.