U.S. Merchant Marine Academy: Additional Actions Needed to Establish Effective Internal Control
Published: 2012-07-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Academy, a component of the Department of Transportations (DOT) MARAD, was established in 1938 and built during World War II to provide undergraduate education programs for midshipmen to become shipboard officers and leaders in the maritime transportation field. DOT allocated $80 million to the Academy for fiscal year 2011 for its operations, CIP, and facilities maintenance.
In August 2009, GAO issued a report that identified numerous internal control deficiencies and made 47 recommendations for corrective action. This report provides the results of GAOs assessment of (1) the extent to which the Academy has taken actions to address the prior recommendations and (2) the Academys CIP oversight. To address these objectives, GAO evaluated corrective actions and supporting documentation; interviewed Academy, MARAD, and DOT officials; and performed walk-throughs of several processes revised in response to GAOs prior recommendations.
section_title: What GAO Found
paragraphs: The U.S. Merchant Marine Academy (Academy) has made progress in improving its internal control since GAOs August 2009 report, but has not yet fully addressed one key recommendation related to fundamental weaknesses in its overall internal control system. GAO found that while the Academy had appointed an Internal Control Officer responsible for coordinating reviews of internal controls, it had not yet established a comprehensive risk-based internal control system to ensure effective and efficient operations, reliable financial reporting, and compliance with laws and regulations, including a monitoring system to help ensure that control deficiencies are proactively identified and promptly corrected. Maritime Administration (MARAD) officials stated that their strategy had been to focus on the deficiencies that could be readily resolved. As of September 30, 2011, Academy and MARAD officials had addressed 32 of the other 46 prior recommendations regarding control activity deficiencies.
Importantly, for many of the specific control-related recommendations that remained open, the Academy and MARAD had not yet identified the cause of the related internal control deficiencies, a critical step for designing effective controls.
GAO also found that the Academy and MARAD have taken steps to improve Capital Improvement Program (CIP) oversight. For example, the Academy filled a new Assistant Superintendent position responsible for oversight of the Academys capital improvements and facilities maintenance. However, the Academy did not yet have an up-to-date, comprehensive plan for capital improvements to provide a basis for oversight. Specifically, the Academy did not have a capital improvement plan that identified long-term capital improvement needs aligned with the Academys strategic objectives, reliable cost estimates for planned improvements, and a phased implementation approach for prioritizing capital improvement needs. Such plan elements are consistent with Office of Management and Budget guidance and GAO-identified leading practices.
section_title: What GAO Recommends
paragraphs: In addition to reiterating the need to fully implement the remaining open recommendations, GAO is making one new recommendation directed at updating the Academys capital improvement plan to include reliable cost estimates and phased investment priorities aligned with the Academys strategic objectives in accordance with leading practices. In commenting on a draft of this report, DOT stated that it had recently established a comprehensive plan to manage CIP, and plans to keep GAO apprised as it completes actions addressing other GAO open recommendations.

section_title: Letter
paragraphs: The U.S. Merchant Marine Academy (Academy), one of five United  States service academies, was established in 1938 to provide 4-year  undergraduate educational programs for men and women (midshipmen)  to become shipboard officers and leaders in the maritime transportation  field. A graduate from the Academy receives a Bachelor of Science  degree and a U.S. Coast Guard license as deck or engineering officer  and a commission in the U.S. Naval Reserve or another uniformed  service. The Academy is a component of, and receives federal funding  and overall policy direction through, the Department of Transportation’s  (DOT) Maritime Administration (MARAD). For fiscal year 2011, DOT  allocated $80 million to the Academy for its operations, capital  improvements, and facilities maintenance. Most of the Academy’s 44  principal facilities were constructed during or shortly after World War II.
In August 2009, we issued a reportin the Academy’s internal control activities and weaknesses in the   that identified numerous deficiencies  Academy’s overall internal control environment that resulted in numerous  instances of improper and questionable sources and uses of funds by the  Academy and its affiliated organizations. Our 2009 report included 47  recommendations to address the deficiencies we identified. You  requested that we update the status of the Academy’s efforts to address  our recommendations from our 2009 report and that we review the  Academy’s oversight of its Capital Improvement Program (CIP).report provides the results of our assessment of (1) the extent to which  the Academy has taken actions to address our prior recommendations  and (2) the Academy’s CIP oversight.
To assess the extent to which actions have been taken to address our  prior recommendations, we (1) evaluated the Academy’s and MARAD’s  corrective actions for each recommendation and supporting  documentation as of September 30, 2011, and—where relevant— reviewed documentation supporting selected transactions to assess the  Academy’s implementation of revised internal control procedures;   (2) interviewed Academy, MARAD, and DOT officials responsible for the  development and implementation of the corrective actions; and   (3) performed walk-throughs of the Academy’s processes as revised in  response to our recommendations.
To assess the Academy’s oversight of its CIP, we (1) interviewed  cognizant agency officials responsible for oversight of the Academy’s  implementation of the program, (2) obtained and reviewed related policies  and procedures and strategic planning documents, and (3) toured the  Academy grounds to observe the current physical condition of buildings  and infrastructure. In addition, we interviewed MARAD human resources  personnel regarding Academy staff resources used to oversee and  manage CIP projects.
During our review, the Academy and MARAD continued to address  internal control weaknesses that were the focus of our prior  recommendations. For this report, we evaluated corrective actions taken  through September 30, 2011, that the Academy, MARAD, and DOT made  us aware of as of February 15, 2012. We will evaluate information that we  receive about additional actions taken as part of our standard, ongoing  recommendation follow-up procedures.
We conducted this performance audit from February 2011 to June 2012  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. Additional details on our scope  and methodology are in appendix I.
subsections: section_title: Background
subsections: section_title: Organizational Structure and Oversight
paragraphs: MARAD is responsible for overall policy direction of the Academy. The  Maritime Administrator issues Maritime Administrative Orders (MAO) and  bulletins establishing policies and providing guidelines for Academy  operations. Additionally, the MARAD Chief Financial Officer (CFO) issues  directives to provide guidance for conducting Academy financial  operations. Since 2010, there have been two MARAD CFOs with an  acting CFO between their appointments. From 2009 through 2011,  MARAD relied on a Fiscal Oversight Board to assist MARAD in the  oversight of the Academy’s operations.
The Academy Superintendent is responsible for day-to-day management  of the Academy and reports directly to the head of MARAD, the Maritime  Administrator. Since September 2008, there have been three Academy  Superintendents, with the Academic Dean serving as Interim  Superintendent between Superintendent appointments. Various  assistant superintendents report to the Superintendent, and various  directors of departments and offices report to the assistant  superintendents. The Office of Academy Operations is led by the  Academy’s CFO, who reports directly to the MARAD CFO. Additionally,  since our 2009 report, four Academy support functionsdirectly to MARAD headquarters offices.
As of September 30, 2011, the Academy was also affiliated with two  nonappropriated fund instrumentalities (NAFI) intended to assist the  Academy in providing programs and services primarily for Academy  midshipmen and employees. One of these NAFIs, the Employee  Association, is intended to promote and support the interests of Academy  personnel. The other is the Regimental Morale Fund Association,  authorized to support morale, welfare, and recreation activities for the  Academy’s midshipmen. In addition, as of September 30, 2011, four other  NAFIs were in transition for closure (see table 1).
Additionally, the Academy also received financial support from two private  foundations, the U.S. Merchant Marine Academy Alumni Association and  Foundation and the Sailing Foundation. These foundations use funds  provided by Academy alumni to provide financial support for the  Academy’s charitable, scientific, and educational activities. See figure 1  for an overview of DOT, MARAD, and Academy organizational  relationships.
Our 2009 reportdeficiencies as well as weaknesses in the Academy’s control  environment. Specifically, we found that flawed design and  implementation of internal controls were the root causes of the  Academy’s inability to prevent or detect numerous instances of improper  and questionable sources and uses of funds that we identified.  Additionally, we found that 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. As a result, our 2009 report included a  total of 47 recommendations for corrective action.   on the Academy identified numerous internal control  Of the 47 recommendations, we made 1 overarching recommendation  concerning actions needed for the Academy to establish effective overall  internal control. Specifically, we recommended that the Secretary of  Transportation direct the Administrator of MARAD, in coordination with  the Superintendent of the Academy, to establish a comprehensive, risk- based internal control system to address the core causes of the control  deficiencies identified in our 2009 report, including delineating the roles  and responsibilities of management and employees to establish and  maintain a positive and supporting attitude toward internal control and  conscientious management, and the responsibility of managers to monitor  control activities.
The remaining 46 recommendations related to control deficiencies  associated with the following activities:
Academy training vessel use, personal service acquisitions,
NAFI camps and clinics using Academy facilities, midshipmen fee accountability, accountability for Academy reserves,
Academy and NAFI governance structure, financial reporting,  fund accountability, and  capital asset repairs and improvements.
section_title: Actions Taken to Address Prior Recommendations
paragraphs: Our review of the Academy’s and MARAD’s efforts to address the issues  reported in our 2009 report found that the Academy and MARAD had not  yet established a comprehensive, risk-based system of internal control at  the Academy. The Academy and MARAD both focused their initial efforts  on the more readily correctible deficiencies in the Academy’s controls  over specific activities. As a result, the Academy and MARAD had made  substantial progress in addressing weaknesses related to specific control  activities by successfully implementing 32 of the 46 control deficiency- related recommendations identified in our 2009 report. For example, the  corrective actions taken to improve controls were sufficient for us to  conclude that all recommendations related to training vessel use,  personal service acquisitions, accountability for Academy reserves, and  NAFI camps and clinics using Academy facilities were successfully  implemented.
subsections: section_title: Additional Action Needed to Establish Overall, Risk- Based Internal Control System
paragraphs: Our review found that actions taken by the Academy and MARAD through  September 30, 2011, were not sufficient to fully address our overarching  recommendation related to the establishment of a comprehensive, risk- based internal control system at the Academy, a positive and supportive  attitude toward internal control, and an associated system of monitoring  internal control effectiveness. Standards for Internal Control in the  Federal Government provides that internal control should (1) serve as  the first line of defense in preventing and detecting errors and fraud,   (2) provide for an assessment of external and internal risks to the entity,  and (3) provide for internal control monitoring. Monitoring is critical to  ensure that findings of audits or other reviews are promptly resolved and  to assess the ongoing effectiveness of controls. However, our review  found that the Academy had not yet taken actions sufficient to address  the core cause of many of the control deficiencies identified in our 2009  report. Understanding the causes of internal control deficiencies is critical  to designing effective, risk-based controls that can help prevent  questionable transactions in the future. For example, as discussed later in  this report, the Academy took action to correct errors we identified in its  accounting for certain capital asset repairs and improvements, but had  not yet taken action to conduct an analysis, as we recommended, to  identify and address the underlying causes of these errors.
Nonetheless, the Academy and MARAD have taken a number of actions  that represent an important first step toward focusing the top-level  attention and accountability needed to establish an effective overall  system of internal control for the Academy. For example, in January  2011, MARAD established and filled an Internal Control Officer (ICO)  position for the Academy. The Academy ICO, who is also the Academy’s  Chief Information Officer, reports to MARAD’s Internal Controls Program  Manager and is responsible for coordinating and leading the Academy’s  reviews of internal controls in accordance with Office of Management and  Budget (OMB) Circular A-123 and the Federal Managers’ Financial  Integrity Act of 1982 (FMFIA). Also, in September 2011, MARAD issued  guidance in MAO 400-11 intended to help clarify the Academy’s oversight  role and responsibilities with respect to the Academy’s affiliated NAFIs.
Despite these completed actions, until Academy and MARAD officials  take additional actions to fully address our recommendation in this area,  their ability to ensure that Academy and MARAD management’s  objectives are carried out, including proactively identifying and correcting  control deficiencies in a timely fashion, will continue to be impaired. Both  the Academy and MARAD focused their initial efforts on the more readily  correctible deficiencies in the Academy’s specific controls, as discussed  later in this report. However, while these efforts are necessary and have a  significant impact on internal control, it is important that the Academy and  MARAD address the long-standing, deeply rooted causes of the specific  control deficiencies we identified and establish processes to ensure that  effective internal control is fully established, maintained, and monitored  over time. In this regard, it is also important that the Academy and  MARAD provide priority attention and focus not only on addressing  questionable transactions we identified in our prior report, but also on the  underlying causes of the specific errors we identified.
section_title: Actions Taken to Address Many of Our Prior Recommendations Related to Specific Control Activities
paragraphs: As of September 30, 2011, Academy and MARAD officials had taken  sufficient actions to address 32 of our 46 prior recommendations intended  to address specific deficiencies in the Academy’s control activities. For  example, officials took steps to fully close all of our previous  recommendations related to controls over training vessel use, personal  service acquisitions, accountability for Academy reserves, and NAFI  camps and clinics using Academy facilities. For the 14 remaining  recommendations, we identified varying levels of action in process as of  September 30, 2011, but none sufficient for us to consider them  effectively implemented. Our conclusions on the status of Academy and  MARAD actions to address our 46 previous recommendations concerning  specific deficiencies in control activities are summarized in table 2,  discussed in summary in the following sections, and discussed in greater  detail in appendix II. Standards for Internal Control in the Federal  Government provides that agencies should take appropriate follow-up  actions to address findings and recommendations of audits and other  reviews. Also, GAO’s Internal Control Management and Evaluation Tool  provides that in taking such actions, agencies are to ensure that the  underlying causes giving rise to the findings or recommendations are  investigated, that actions are decided upon to correct the identified  weaknesses, and that weaknesses are corrected promptly.
Training vessel use. In 2009, we reported that the Academy lacked  policies and procedures and adequate internal controls over the use  of Academy training vessels by outside parties. For example, we  found that the usage rates for Academy training vessels were not  supported and were not based on consideration of current costs of  operation. The Academy and MARAD took steps to address all five of  our recommendations related to internal control deficiencies regarding  outside party use of Academy training vessels. In September 2010,  the Academy issued Superintendent’s Instruction 2010-08, which set  out procedures for outside parties to use and pay for all costs  associated with the use of Academy training vessels. The Academy’s  Department of Waterfront Activities also issued a vessel usage rate  schedule in September 2010 that provided current costs of operation  for use of Academy training vessels. The guidance provides base  hourly, daily, and weekly billing rates that outside parties are to be  charged for using the Academy’s training vessels.
Personal service acquisitions. In our 2009 report,instances in which the Academy entered into illegal personal service  agreements with its NAFIs, whereby NAFI employees performed  exclusively Academy functions and reported to Academy supervisors.  The Academy and MARAD took actions to address both of our  recommendations related to improving internal controls over personal  service acquisitions. To address our recommendations, MARAD  performed an analysis to identify the nature and scope of personal  service arrangements in order to determine whether amounts paid by  the government were consistent with the services received by the  Academy. Using the results of the analysis, MARAD took action to  address all personal service arrangements by either converting  affected NAFI employees to the civil service or transferring them to a  contract. In addition, the MARAD Administrator finalized MAO 400-11  on September 30, 2011, which provided governing principles under  which NAFIs must operate, including that a NAFI must have staff to  conduct its daily operations, and it is not to receive any operating  subsidy from the Academy other than minor incidental support.  Notably, however, MAO 400-11 requires that generally, a NAFI may  not provide goods or services to the Academy.
NAFI camps and clinics using academy facilities. In 2009, we  reported that the Academy lacked policies and procedures and  effective internal controls to help ensure proper accounting for the use  of fees from conducting camps and clinics using Academy athletic  facilities. The Academy and MARAD took corrective actions to  address all three of our recommendations related to NAFI camps and  clinics’ use of academy facilities. Specifically, MARAD engaged the  services of an independent public accounting firm to perform an  analysis to identify NAFI camps, clinics, or fund-raising activities that  used Academy property from fiscal years 2006 through 2008 and  determine the related sources and uses of funds. Based on this  analysis, it was determined that most of the revenue resulting from the  camp and clinic activity was paid to the individuals responsible for  conducting the activities and the residual revenue, deemed nominal,  was identified to have been used to support the general activities of  the NAFI conducting the camp or clinic. Also, Superintendent’s  Instruction 11100.1, dated May 17, 2011, established a written policy  that Academy facilities will not be used for revenue-generating athletic  camps and clinics.selected 2010 and 2011 transactions did not identify any camp or  clinic activity using the Academy’s facilities.
Our review of supporting financial documents for
Midshipmen fee accountability. In 2009, we identified instances of  improper and questionable sources and uses of midshipmen fees, as  well as a lack of adequate procedures and controls to maintain  effective accountability over the amounts charged to midshipmen and  to ensure that midshipmen fees were used only for their intended  purpose. The Academy and MARAD undertook a series of reviews  and completed actions that addressed seven of our nine  recommendations related to midshipmen fee accountability. To  address our recommendations, MARAD established a baseline for  items of a personal nature and related costs to be charged to  midshipmen, beginning with fiscal year 2009. Following an analysis  based on this baseline, MARAD determined that prior years’  midshipmen fees included the costs of items that should have been  paid by the Academy. Consequently, the fees collected from  midshipmen over their 4-year academic program dropped from  $15,500 in fiscal year 2008 to approximately $5,500 in fiscal year  2009. As a result, MARAD proposed a refund of midshipmen fees to  the midshipmen who it was determined had overpaid in academic  years from academic year 2003-2004 through academic year  2008-2009. In February 2012, DOT informed us that MARAD began  making refunds in November 2011 and, as of January 2012, had  reimbursed 83 percent of eligible refund recipients and continued with  its efforts to reach the remaining refund-eligible midshipmen.
One of the two recommendations that remain open relates to  establishing written policies and procedures over (1) processing of  midshipmen fee collections and payments and (2) monthly reporting  for midshipmen fee activity and balances. On May 26, 2010, MARAD  issued MAO 400-15, providing policy guidance governing the setting,  managing, and reporting of midshipmen fees. However, this guidance  did not provide detailed procedures to ensure that staff consistently  and effectively process and account for midshipmen fee activities and  balances. The second of these open recommendations calls for a  determination of the extent to which appropriated funds and  midshipmen fees collected should be used to pay for contracted  medical services. On February 5, 2010, MARAD reported the results  of a joint MARAD and Academy review that identified the types of  medical services provided to the midshipmen, through both  appropriated and nonappropriated funding, and stated that for the  fiscal year 2012 budget development process, the Administrator may  wish to consider guiding the Superintendent to seek alternatives to the  current approach. However, as of September 30, 2011, the Academy  had not yet determined the extent to which appropriated funds and  midshipmen fees collected should be used to pay for contracted  medical service as called for in our recommendation.
Accountability for academy reserves. Our 2009 report identified  inappropriate conversion of “off-book” reserves accumulated from  excess midshipmen fee collections, funds received from the Global  Maritime and Transportation School (GMATS) NAFI for use of the  Academy’s facilities, and expiring appropriated funds that were  deposited to a commercial bank account to fund Academy operations  the following fiscal year. For example, a “Superintendent’s Reserve”  account was created “off book” and used to make discretionary  Academy operations payments authorized by the Academy  Superintendent. The Academy and MARAD have taken corrective  actions sufficient to address all four recommendations related to  accountability for Academy reserves. To address our  recommendations, MARAD engaged the services of a public  accounting firm to perform an analysis of the sources and uses of  funds held in commercial bank accounts during fiscal years 2006  through 2008 to determine consistency with applicable law, regulation,  or policy. A May 19, 2010, MARAD CFO memorandum on the results  of the analysis stated that the review did not identify any evidence that  funds were used inappropriately or for the personal benefit of any  individual and that no inconsistency with law, regulation, or policy was  identified. Accordingly, the MARAD CFO concluded that no further  action was warranted. In addition, the Academy’s changed business  practices discontinued conversion of appropriated and  nonappropriated funds to “off-book” reserves. Further, as a result of  the analysis performed in response to our recommendation, a balance  of approximately $3 million in the commercial bank account  maintained for excess prior-year midshipmen fee collections was  transferred to the U.S. Treasury to assist with the midshipmen fee  refunds.
Academy and NAFI governance structure. Our 2009 report found  that 11 of the 14 NAFIs that provided programs and services for  Academy midshipmen and employees did not have approved  governing documents, such as charters and bylaws, and that the  remaining 3 NAFIs performed some duties and functions that fell  outside the scope of authority set forth in their governance  documents. As a result, we issued eight recommendations related to  improving controls over activities between the Academy and its  affiliated organizations. The Academy and MARAD completed actions  sufficient to address four of our eight recommendations related to  Academy and NAFI governance structure. For example, on  September 30, 2011, MARAD issued MAO 400-11, which provides  policies and general guidelines for the establishment and governance  of NAFIs and their affiliation with the Academy, including charters,  bylaws, and a NAFI governing board. In addition, an independent  public accounting firm’s analysis of activity between the Academy and  its GMATS NAFI did not identify any activity that was inconsistent with  applicable law, regulation, or policy. A May 19, 2010, MARAD CFO  memorandum concluded that none of the NAFI funds were used  inappropriately or for the benefit of any individual and that no further  action was warranted.
Two of the four recommendations that we concluded were not yet  addressed relate to performing an analysis to identify each activity  involving the Academy and its NAFIs and establishing formal written  policies and procedures documenting the (1) planned timing of  performance of each internal control procedure for each NAFI activity,  (2) responsibilities for oversight and monitoring of those internal  control procedures, and (3) direct, compensating, and mitigating  controls for each NAFI activity. Although MAO 400-11 provides  general guidance on NAFI and Academy relationships, it does not  provide the necessary detailed procedures to be followed to ensure  that each NAFI has a robust, risk-based system of checks and  balances with the Academy for each NAFI activity as called for in our  2009 recommendation. As of September 30, 2011, we found that  neither the Academy nor MARAD had performed an analysis aimed at  identifying all activities between the Academy and its ongoing  affiliated organizations. Without identifying such activities and their  associated risks to the Academy, the Academy faces the continued  risk of improper transactions.
The other two open recommendations relate to the relationship  between the Academy and its GMATS NAFI. The recommendations  were intended to address the Academy improperly entering into sole- source agreements with GMATS to provide training to other federal  agencies and improperly accepting and using nonappropriated  GMATS funds. On September 30, 2011, the Maritime Administrator  issued a memorandum rescinding the authority of GMATS to operate  as a NAFI effective August 1, 2012. The memorandum also provided  that GMATS may continue future operations if it is reestablished  under a different operating model. However, because GMATS NAFI  operations have not yet been terminated or reestablished, our two  recommendations in this area remain open.
Financial reporting. In 2009, we found that the Academy did not  routinely prepare financial reports presenting information on all of its  financial activities, including sources and uses of its appropriated and  nonappropriated funds. Instead, we found that the Academy’s  financial reporting was sporadic, unreliable, and, consequently, of  limited value for decision making. The Academy and MARAD  completed actions sufficient to address two of our five  recommendations aimed at improving controls over the Academy’s  financial reporting. MARAD issued CFO Directive 2 in December 2009  and amended it twice in 2010. Directive 2 established procedures for  monitoring Academy financial performance by requiring the Office of  Academy Operations to prepare, review, and provide monthly  financial reports to the MARAD CFO for review. Directive 2 also  provided for following up on, and documenting, unusual items and  balances.
The three recommendations that remain open relate to (1) the  production of financial reports to facilitate oversight and monitoring of  actual and budgeted amounts of revenues and expenses, reporting of  amounts for activities and balances with affiliated organizations, and  the identification of items of revenue and expenses; (2) identification  and evaluation of potential misstatements of amounts in Academy  financial records; and (3) compliance with required annual reporting to  Congress on all expenditures and receipts for the Academy and its  affiliated organizations. CFO Directive 2 provides instructions for the  Office of Academy Operation’s preparation, review, and monitoring of  monthly financial reports on funds allotted to the Academy.  However, it does not require the monthly reports to include  information on all sources and uses of other funds benefiting the  Academy, such as obligation and expenditure activity of expired funds;
CIP and gift and bequest expenditure activity for years following activity for miscellaneous receipts, such as transfer of funds from  closed commercial bank accounts, fees from foreign midshipmen  and for outside use of training vessels, and payments from the  Navy Exchange;  sources and uses of funds maintained in commercial bank  accounts; and  sources and uses of midshipmen fees processed through two  appropriation accounts and one nonappropriation account.
The MARAD CFO told us that the primary intent of Directive 2 is to  report the status of funds allotted to the Academy, but acknowledged  that any additional funds should be identified and reported as well.  Accordingly, the MARAD CFO agreed that CFO Directive 2 reporting  requirements should be updated to require all sources and uses of  Academy funds to be identified and reported to provide visibility over  all Academy accounts and activities necessary to facilitate  comprehensive oversight and monitoring.
With respect to our recommendation to identify and evaluate potential  misstatements of amounts in Academy financial records, MARAD  engaged an independent public accounting firm to determine the  extent of any such misstatements. The review identified approximately  $1.3 million in Academy expenditures funded by midshipmen fees that  should have been funded by appropriated funds. However, as of  September 30, 2011, MARAD had not yet determined whether it  should adjust financial records and reports to reflect the use of  midshipmen fees to augment Academy appropriations. MARAD  officials acknowledged the need to perform additional work to  determine whether adjustments to the Academy’s financial records  and reports are warranted.
In response to our recommendation to provide Congress a statement  on the purpose and amount of all expenditures and receipts of  nonappropriated funds benefiting the Academy and its affiliated  organizations, MARAD issued CFO Directive 3 on December 29,  2009. Directive 3 established procedures for reporting on resources  other than the Academy’s appropriated funds to be included in  MARAD’s annual report to Congress. Specifically, the directive  provides for reporting on the amount, source, intended use, and  nature of such funds. However, based on our review of MARAD’s  fiscal year 2009 annual report to Congress—the most recent report  available as of September 30, 2011—the report did not contain  expenditure information for any of the Academy’s affiliated  organizations and did not provide a purpose for which the  expenditures were made to comply with the reporting requirement as  we recommended.
Funds accountability. In 2009, we found that the Academy did not  have assurance that it complied with applicable funds control  requirements, including those in the Antideficiency Act (ADA). The  Academy and MARAD have taken sufficient actions to implement four  of our seven prior recommendations related to funds accountability.  Specifically, officials investigated and mitigated a potential ADA  violation, completed a series of reviews aimed at resolving past  deficiencies related to “parking” of Academy funds to keep them from  expiring,expense at year-end. With respect to the potential ADA violation,  MARAD’s Chief Counsel determined in 2011 that Academy officials  had retained approximately $200,000 in excess funds from GMATS  which they had no legal authority to retain and had thereby  augmented Academy funds in excess of appropriations made by  Congress during fiscal years 2006, 2007, and 2008. According to an  April 11, 2011, memo signed by the Maritime Administrator, MARAD  determined that sufficient prior-year funds existed to offset the  GMATS-funded Academy expenditures. MARAD adjusted its  accounts accordingly and since these sufficient prior-year funds  existed, MARAD did not exceed its available appropriations in  violation of the ADA. Also, the Academy and MARAD successfully  implemented two recommendations related to “parking” of  appropriated Academy funds by performing a series of reviews to  identify excess Academy funds improperly held in commercial bank  accounts. As a result of these reviews, the Fiscal Control Office NAFI  returned over $214,000 of improperly held excess fiscal years 2006  and 2007 funds to the Academy. The Academy subsequently  deobligated these funds and returned them to their respective  appropriation. Further, the Academy and MARAD have discontinued  use of the Academy’s in-house fund control system and have  transitioned to DOT’s financial accounting system and have revised  the Budget Program Accounting Codes. These actions should provide  more transparent financial reporting and improved oversight.  Additionally, in January 2010, MARAD issued CFO Directive 6  establishing policy and procedures for accounting and recording of  Academy accrual of expenses at year-end. If fully and effectively  implemented, Directive 6 should improve internal control over  accounting and recording of Academy accrual of expenses.   and established written policy on the accrual of items of  The three recommendations that remain open in this area relate to making final notification to Congress of an ADA violation resulting  from midshipmen fees that were used to cover Academy  expenses without legal authority to do so,  implementing corrective actions as a result of a MARAD review in  which it identified weaknesses related to the Academy’s funds  control process, and establishing targeted internal controls, such as management’s  review and approval procedures, over accruals.
According to a March 23, 2011, memorandum to the Maritime  Administrator from MARAD’s Chief Counsel, the Academy violated  the ADA by charging midshipmen fees in excess of authorized levels,  improperly augmenting agency appropriations, and making  expenditures in excess of and in advance of appropriations. As of  June 1, 2012, the required ADA report to Congress had not been filed.  Additionally, the Academy and MARAD had yet to implement  corrective actions as a result of a review of the Academy’s funds  control process. Specifically, on February 1, 2010, the MARAD CFO  completed a review of the Academy’s funds control process and made  five recommendations for process improvements, including that the  MARAD CFO issue a directive establishing policy and procedures  requiring the periodic review and closeout of undelivered orders. The  review also recommended that the MARAD CFO issue policy  guidance to address an internal control weakness regarding  contracting officer approval of Academy invoices. However, as of  September 30, 2011, the MARAD CFO had not issued any guidance  in this area. While MARAD officials told us they had practices in place  for contracting officer approval of invoices, we found that as of  September 30, 2011, MARAD had not documented and disseminated  these practices to Academy acquisition staff in policy guidance, such  as a CFO directive.
Capital asset repairs and improvements. Our 2009 report identified  repair and maintenance (R&M) costs that were improperly charged  against the Academy’s no-year capital asset improvement  appropriation and found that the MARAD CFO did not conduct timely  reviews of the Academy’s capital improvement-related expenses for  fiscal years 2006 and 2007. The Academy and MARAD have taken  corrective action to address one of the three recommendations we  made to improve specific controls related to capital asset repairs and  improvements. On May 25, 2010, the MARAD CFO issued Directive  7, requiring monthly review of recorded amounts of Academy repairs  and maintenance expenses and capital improvement transactions to  identify any anomalies, discrepancies, or questionable entries. Our  work found that the Office of Academy Operations reviewed the  accounting records on a monthly basis in accordance with Directive 7.
The two recommendations that remain open relate to (1) establishing  policies and procedures for reporting financial information on R&M  expenses and capital asset additions to help monitor these items and  (2) performing an analysis to identify the causes of approximately $8  million of errors in recording R&M expenses identified in our 2009  report. While CFO Directive 7 required monthly reporting, we found  that the reports were not distributed to users, such as Academy  department managers, to facilitate monitoring of these items as called  for in our recommendation. With respect to our recommendation to  identify the causes of the errors in recording R&M expenses, we  found that the Academy and MARAD had taken action to reclassify  the transaction errors we identified but had not yet conducted the  recommended root cause analysis needed to identify and address any  systemic issues causing the errors and to prevent such errors in the  future. Consequently, the Academy and MARAD are at risk of  reoccurrences of errors in R&M expense accounting.
section_title: Further Enhancements to Capital Improvement Program Oversight Are Needed
paragraphs: Although the Academy and MARAD have taken steps to improve  oversight of the Academy’s CIP, the Academy does not have a current  comprehensive plan for capital improvements to provide the basis for  oversight of CIP planning and implementation. In response to a May 2009  directive from the Secretary of Transportation, MARAD convened an  independent “Blue Ribbon” advisory panel consisting of senior  government executives to analyze the Academy’s CIP and its investment  priorities. The panel concluded that the Academy’s facilities were  seriously deteriorated and its support buildings were inadequately  maintained. The panel’s March 2010 report, USMMA: Red Sky in the  Morning, provided 11 recommendations, which included linking a  comprehensive Academy strategic plan to its Facilities Master Plan with  capital investments prioritized for a 10- to 15-year period to address the  Academy’s extensive needs. According to DOT officials, MARAD  prepared its USMMA Capital Improvements Implementation Plan in  November 2010 to serve as a road map for implementing the panel’s  recommendations and to identify the Academy’s immediate capital  improvement needs through 2016.
The Academy also established and filled a new position for an Assistant  Superintendent for Capital Improvements and Facilities Maintenance in  2010, designating the new position’s responsibilities to include oversight  of the Academy’s Departments of Capital Improvements and Facilities  Maintenance and the Office of Safety and Environmental Protection. This  position is to provide oversight for the Academy’s CIP and leadership for  strategic planning and accountability related to capital improvement  activities. Further, according to Academy officials, the Academy realigned  its facilities management organizational structure in December 2010 to  reflect that of other academic organizations and service academies and to  improve oversight.
Despite these recent improvements, the Academy has not yet developed  reliable project cost estimates and current phased capital investment  plans aligned with the organization’s strategic objectives, as  recommended by the Blue Ribbon panel in 2010. Guidance issued by  OMB as well as our prior work on leading practices in this area identifies  the need for effective capital planning to provide CIP accountability and  oversight. Our Executive Guide: Leading Practices in Capital Decision- Making summarizes the results of our research on leading capital  planning practices used by state and local government and private-sector  organizations. It includes practical steps for implementing capital planning  effectively and presents examples that illustrate and complement many of  the concepts and specific steps contained in OMB’s Capital Programming  Guide. Our GAO Cost Estimating and Assessment Guide, which  provides best practices for developing, managing, and evaluating capital  program cost estimates, complements the Executive Guide. Fundamental  success factors identified in our Executive Guide include developing long- term capital investment plans that integrate with long-range organizational  strategic objectives, present reliable project cost estimates to inform  decision making, and use a phased priority approach to guide and  schedule capital spending.
The Academy’s Facilities Master Plan, which identified anticipated capital  projects for a 10-year period in three priority phases, has not been  comprehensively updated since 2002. Up-to-date CIP information that  identifies and prioritizes long-range renovation and new construction  projects and provides reliable project cost estimates and completion and  funding timelines would facilitate oversight by helping to assess whether  individual improvements were carried out in a timely and cost-effective  manner and in priority order. We identified instances where improvements  were not carried out in priority order and also identified lengthy delays in  completing some planned capital investments. For example, the 2002  Facilities Master Plan showed that the midshipmen’s primary  commissary, Delano Hall (which serves over 2,000 meals a day to the  Academy’s residential midshipman population), was to have been  refurbished during fiscal year 2002. As of September 30, 2011, the  Delano Hall refurbishment project had not yet broken ground. According  to information that DOT provided in February 2012, several tasks related  to the Delano Hall refurbishment project have been completed, such as  remodeling rest rooms in compliance with the Americans with Disabilities  Act. DOT told us at that time that it expected construction on the  commissary to begin in the summer of 2012 and to be completed by  December 2013.
Preparing the 2010 Capital Improvements Implementation Plan was a  positive step, although the implementation plan acknowledged the need  for a more comprehensive, phased investment plan. For example, the  implementation plan did not present a long-range phased investment plan  and detailed cost estimates. Rather, projects presented were based on  average replacement cost per square foot for federal government  buildings, described in the plan as a “rough order of magnitude estimate.”  Accordingly, the cost estimates presented in the implementation plan did  not consider specific cost factors for capital improvements at the  Academy, such as geographic location, local cost of construction and  labor, and the technology, simulation, and infrastructure requirements of  an institution of higher education. As stated previously and recommended  by the 2010 Blue Ribbon panel, reliable cost estimates and phased  investment priorities for Academy capital projects that are aligned with the  organization’s long-range strategic objectives would help facilitate CIP  oversight. According to DOT officials, the Academy had recently begun  preparing its first strategic plan to define the organization’s goals and  objectives and to help the Academy better prioritize investments.  Specifically, they told us in February 2012 that the strategic planning  process for the Academy is to be led by the Academy’s Acting  Superintendent and is expected to be a multiphased effort beginning with  identification of key internal stakeholders to assist with the development  of critical issues that should be addressed in the strategic plan.
section_title: Conclusions
paragraphs: Clearly articulated top management vision and support will be critical for  fully implementing the open recommendation related to establishing a  comprehensive risk-based system of internal control and related  monitoring. The Academy and MARAD have taken a number of positive  steps, but until Academy and MARAD officials take additional actions to  fully address our recommendation in this area, their ability to ensure that  management’s objectives are carried out, including proactively identifying  and correcting control deficiencies in a timely fashion, will continue to be  impaired. We reiterate the need to continue efforts to complete full  implementation of this recommendation. The Academy and MARAD have  made significant progress in addressing our prior recommendations  related to specific control activities, and their actions effectively  addressed 32 of the 46 recommendations related to deficiencies in  specific controls. We reiterate the need to address the remaining 14  recommendations related to midshipmen fee accountability, Academy  and NAFI governance structure, financial reporting controls, fund  accountability, and controls over capital asset repairs and improvements.
The Academy and MARAD have taken steps to improve CIP oversight  and planning of capital improvement projects at the Academy. However,  the Academy does not have comprehensive, updated information on  capital improvement projects, including reliable cost data, long-range  capital investment plans, and phased priorities. Further, the Academy has  not yet aligned its capital improvement priorities with the organization’s  strategic objectives, a critical factor in providing effective oversight.
section_title: Recommendation for Executive Action
paragraphs: To improve oversight of the Academy’s capital improvement program, we  recommend that the Secretary of Transportation direct MARAD to work  with Academy officials to develop and maintain a current and  comprehensive plan in accordance with leading practices and guidance.  At a minimum, such plan should include an inventory of long-range capital improvements that align with the a phased investment approach for prioritizing capital improvement  Academy’s strategic objectives,  reliable estimates of cost specific to each capital improvement, and  needs.
section_title: Agency Comments and Our Evaluation
paragraphs: On June 19, 2012, DOT provided written comments on a draft of this  report, signed by the Deputy Assistant Secretary for Administration. The  comments are reprinted in appendix III. In its comments, DOT described  steps that the department, MARAD, and Academy are taking to help  prioritize and manage Academy capital improvement projects. DOT  indicated that these actions are aligned with and fulfill the  recommendation in our draft report. Specifically, DOT stated that since  our draft report was issued, the department, MARAD, and the Academy  established a comprehensive CIP that includes a Senior Advisory Council  and working group; a management process that provides a clear and  consistent understanding of project status; and controls for project  selection, management, and completion, including tracking reports,  process documentation, and Senior Advisory Council meetings to monitor  progress.
We are encouraged by the increased oversight these measures would  provide for the Academy’s capital investments. However, it is too soon to  determine the extent to which the new CIP addresses the three specific  elements that our recommendation provided as minimum attributes for a  comprehensive capital improvement plan: an inventory of long-range  capital improvements that align with the Academy’s strategic objectives,  reliable cost estimates specific to each capital improvement, and a  phased investment approach for prioritizing capital improvement needs.  We believe these attributes are critical to facilitating oversight of the  Academy’s capital improvements to ensure that they address the needs  of the midshipmen in accordance with the strategic vision of the  Academy, are undertaken in priority order, and are completed timely and  cost effectively.
DOT also stated that it remains dedicated to the challenging task of  building and operating a comprehensive system of internal controls at the  Academy, including completing action on all recommendations in our prior  report, and will keep us apprised of progress to close out our  recommendations. DOT further stated that it has established a goal of  completing action on all 46 of our specific control-related  recommendations by December 31, 2012.
We are sending copies of this report to the Secretary of Transportation;  Maritime Administrator; and Superintendent, U.S. Merchant Marine  Academy. In addition, the report will be available at no charge on the  GAO website at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-9500 or DavisBH@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 IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To address our objective to assess the extent to which actions have been  taken to address our prior recommendations as contained in our report,  United States Merchant Marine Academy: Internal Control Weaknesses  Resulted in Improper Sources and Uses of Funds; Some Corrective  Actions Are Under Way (GAO-09-635), we interviewed agency officials  and reviewed and analyzed
MARAD summaries of action steps taken in response to our activities and policies, procedures, and memorandums issued by the  U.S. Merchant Marine Academy (Academy) and Maritime  Administration (MARAD); and  laws and regulations governing Academy operations.
In addition, as part of our assessment of recommendations related to  accountability for Academy reserves, financial reporting controls, and  fund accountability, we obtained a database of Academy obligations and  expenditures at the transaction level for fiscal years 2010 and 2011 to  make a nonstatistical selection of transactions to obtain an understanding  of the Academy’s accounting process. We compared these data to  amounts reported for the Academy in the Department of Transportation’s  (DOT) annual performance and accountability reports. We performed  system walk-throughs to gain an understanding of procedures in place.  As part of this assessment, we reviewed and analyzed bank statements; and procurement documentation for selected transactions, including  receipts and disbursements records;  contracts, purchase orders, receiving documentation, invoices, and  disbursement documents and other pertinent supporting documents.
We also reviewed and discussed with appropriate officials the objectives  and scope of a report prepared by an independent public accountant  engaged by MARAD on its analysis of certain prior-year sources and  uses of funds that related to our recommendations.
Further, for some specific recommendations, we reviewed rate schedules,  billings and underlying calculations, payroll records, and congressional  notifications, as appropriate. We also reviewed analyses prepared by the  Academy, MARAD, and certain nonappropriated fund instrumentalities  (NAFI) regarding specific transaction types, such as a midshipmen fee  refund schedule and a summary of payments made by the Global  Maritime and Transportation School (GMATS) NAFI to the Academy.
To assess actions taken to address our recommendations regarding  controls over financial reporting and capital asset repairs and  improvements, we also reviewed monthly reports summarizing  transaction activity and balances.
To address our second objective regarding our assessment of oversight  of the Academy’s Capital Improvement Program (CIP), we interviewed  Academy and MARAD officials and reviewed Academy and MARAD  procedures, monthly reports to MARAD, and monthly analyses prepared  to help ensure that transactions are accounted for properly. We also  reviewed the Academy’s 2002 Facilities Master Plan, a report on the  Academy’s CIP prepared by a Blue Ribbon panel, a follow-up  implementation plan that responded to the Blue Ribbon panel report,GAO and Office of Management and Budget (OMB) guides related to  capital improvements project planning. We also observed the Academy’s  physical plant.
We evaluated corrective actions taken through September 30, 2011, that  the Academy, MARAD, and DOT made us aware of by February 15,  2012. In addition, we reviewed DOT’s Office of Inspector General audit  and investigation reports for the period from January 2010 through March  2012 to determine if any work related to the Academy had been  performed. No audit reports that could have an impact on this  engagement were noted.
We conducted this performance audit from February 2011 to June 2012  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: Status of Prior Recommendations and Description of Corrective Actions Taken
paragraphs: This appendix presents a list of the 47 recommendations that we  previously issued in our August 2009 report along with our analysis of  the implementation status of each recommendation (see table 3). We  evaluated corrective actions taken through September 30, 2011.
section_title: Appendix III: Comments from the Department of Transportation
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jack Warner, Assistant Director;  Crystal Alfred; Francine DelVecchio; Geoff Frank; Pat Frey; Matthew  Gardner; Jehan Abdel-Gawad; Jamie Haynes; Kate Lenane; and Scott  McNulty made key contributions to this report.