U.S.-China Economic And Security Review Commission: Actions Needed to Improve Controls over Key Management Functions
Released: 2007-09-28T00:00:00

Letter

Background

Congress established the U.S.-China Economic and Security Review Commission (USCESRC) on October 30, 2000, through Public Law No. 106-398, which transferred to USCESRC the facilities, material, and staff of the U.S. Trade Deficit Review Commission. According to the commission’s charter, USCESRC must monitor and assess the national security implications of the bilateral trade and economic relationship between the United States and the People’s Republic of China. It must report results of its work in annual reports to Congress, addressing specific economic and security issue areas. The commission has had an annual budget of about $3 million since fiscal year 2005 and has requested an additional $1 million to fund its operations in fiscal year 2008. Appendix III provides additional details on the commission’s appropriations and expenditures.

The commission consists of 12 commissioners, all but 3 of whom hold other positions. The leadership of the Senate and the House of Representatives appoint the commissioners to serve 2-year terms, which are staggered. In turn, the commissioners select a chairman and vice chairman from among themselves. The chairman and vice chairman rotate between Democratic and Republican appointees every year. Currently, a Democratic appointee is serving as chairman and a Republican appointee as vice chairman. The commission meets at the call of the chairman. A majority of commissioners must be present for the commission to conduct business. Appendix II depicts a timeline of commission-related events, including the election dates of all of the chairmen and vice chairmen since the inception of the commission.

Each commissioner is compensated at an hourly rate computed from the annual rate of basic pay prescribed for level IV of the Executive Schedule (ES-IV). Generally, the commissioners submit a signed statement of hours worked on commission activities for a given pay period, and they are reimbursed for that time. However, a commissioner may not be reimbursed more than the annual rate of pay for an ES-IV in a given fiscal year, which was $143,000 for fiscal year 2006.

The commissioners are supported by an executive director, and program and administrative support staff. The current executive director is a senior executive detailed from the Department of Commerce to the commission under a reimbursable agreement. Nine of the 11 staff are excepted service federal employees, who have 1-year appointments and serve at the discretion of the commission. Two administrative staff, including the associate director, work for the commission under 1-year personal service contracts.

To produce its report, the commission undertakes activities such as holding hearings, conducting research, and traveling on fact-finding missions to China and other countries. At the direction of the commission, a commissioner or commissioners may hold hearings. Currently, at least one Democratic appointee and one Republican appointee co-chair each hearing. For example, the commission held 14 hearings in 2005 and 8 hearings in 2006 and plans to hold 8 hearings in 2007. Also, the commission relied on internal research from its professional staff and commission-sponsored external research by subject matter experts.

The Commission Has Not Fully Complied with Its Charter

The commission has not fully complied with the statutory requirements set forth in its charter. The commission has covered the required economic and security issue areas in its reports. However, since it was established in 2000, the commission has issued all of its annual reports after the required deadline and failed to issue an annual report in 2003. According to the commission’s charter, the commission is required to submit an annual report to Congress no later than June 1. The commission submitted interim reports to Congress in 2006 and 2007 in an effort to comply with this deadline. Further, the commission has implemented those FACA provisions it is capable of applying.

The Commission Has Reported on Required Economic and Security Issue Areas

The commission has complied with its statutory charter with regard to the subjects on which it reports and the scope of its activities. The commission has broad discretion to examine matters related to U.S.-China economic and security issue areas. Since the commission was established in 2000, Congress amended the statutory charter twice to modify the language related to the scope of its activities. We compared the mandated issue areas and annual report contents and found the commission’s annual reports covered the statutory economic and security issue areas.

Despite statutory changes to the charter over time to narrow the number and extent of reporting topics, the commission has broad discretion on what specific matters to examine. The commission has the authority to interpret its own regulations and statute. The commission’s statutory charter was amended three times, and the second and third amendments modified the number of issue areas and revised the language related to the scope of the economic and security issue areas. The statutory charter originally mandated that the commission’s annual report “include, at a minimum, a full discussion of” the 10 issue areas. In 2003, the second amendment to the commission’s charter reduced the number of issue areas from 10 to 9 and revised the language related to the scope of reporting to instruct the commission to “focus, in lieu of any other areas of work or study” on the 9 issue areas. In 2005, the third amendment to the commission’s charter reduced the number of issue areas from 9 to 8 and revised the language related to the scope of reporting to instruct the commission to “investigate and report exclusively on each of the following” 8 issue areas. Table 1 compares the issue areas the commission is mandated to report on in the annual report.

Our analysis of the content covered in the commission’s four public annual reports found that the economic and security issue areas were covered as required. We found the commission’s 2002 annual report covered the 10 economic and security issue areas mandated at the time. Some chapters address more than one reporting requirement and are listed multiple times. Furthermore, chapter 4 of the 2002 annual report covers political and civil freedoms, which was not a specified issue area but was within the scope of reporting because the charter originally mandated the commission’s annual report “include, at a minimum,” the 10 issue areas. Appendix IV provides details on the issue areas covered by the commission’s 2002 annual report. We found the commission’s 2004 and 2005 annual reports covered the 9 economic and security issue areas mandated at the time. Appendix V provides details on the 9 issue areas covered by the commission’s 2004 and 2005 annual reports. We found the commission’s 2006 annual report covered the 8 economic and security issue areas currently mandated. See table 2 for the 8 issue areas covered by the commission’s 2006 annual report.

According to the chairman, the commissioners discuss the mandate in relation to the scope of activities and reporting. Furthermore, the commissioners discuss the scope of the issue areas identified in the commission’s statutory charter before reaching consensus on the annual work plan. While acknowledging that the mandate restricts the scope of reporting to the eight issue areas, several commissioners noted that they sometimes debate what the commission should cover under these areas because they leave room for interpretation. The chairman stated that the commissioners use the issue areas to plan commission activities, including research, hearings, and overseas trips.

The commission has broad discretion to conduct activities to fulfill its reporting requirement and can base its reports on a variety of activities. During the commission’s quarterly business meetings at the conclusion of one calendar year and the beginning of the next, commissioners discuss the scope of activities identified by the commission’s statutory charter and reach consensus on the annual work plan. According to its statutory charter, the commission can hold hearings, conduct internal and external research, secure relevant information from U.S. departments and agencies through classified and unclassified briefings, and carry out fact-finding missions abroad. For example, the commission used all of these methods to collect information for the 2006 annual report. Specifically, the commission held eight public hearings on the required economic and security related issue areas and delivered a letter to Congress summarizing significant findings and providing interim recommendations after each. The commission authorized external research contracts on issues, such as China’s antisatellite and space warfare activities and China’s oil and gas investments abroad. The commission received briefings from several U.S. agencies, such as the Department of Defense and the intelligence community. An official commission delegation conducted a fact-finding mission to China, Hong Kong, and Taiwan in June 2006.

During the 2007 reporting cycle, the commission has held five public hearings as of July 2007 and plans to hold three others through September 2007. All examine topics related to the eight mandated economic and security issue areas. The commission also plans to award external research contracts. For example, the commission recently selected a proposal submitted in response to an advertised request for proposals (RFP) and awarded a contract providing for a report tracing the parts and components supply chains for three key U.S. weapon systems. Throughout 2007, the commission plans to receive classified and unclassified briefings from U.S. departments, agencies, and the intelligence community. A commission delegation traveled to China and Hong Kong in April 2007, and another delegation of commissioners and staff traveled to Taiwan and India in August 2007.

The Commission Issued Annual Reports Late or Not at All

Since its inception, the commission has failed to submit its annual report to Congress in time to comply with the statutory reporting deadline. The commission’s charter requires the commission to submit its annual report to Congress no later than June 1 each year. The commission has issued its annual reports late or, in one instance for reasons discussed below, not at all. The commission was established in October 2000 and was not required to submit its first report until March 1, 2002. The charter was amended on November 12, 2001, to change the report issuance date to June 1, 2002. Congress modified the reporting date from March to June because, according to a former executive director, the commission “was getting organized and it would have been difficult to produce a report by March.” Even with the congressional amendment extending the reporting date 3 additional months, the commission issued its 2002 annual report on July 15, 2002.

Our analysis of the commission’s annual report issuance dates reveals inconsistent submission dates, with longer delays in 2005 and 2006. For example, the delays in the issuance dates ranged from 9 days in 2004 to 161 days in 2005. The final 2006 report was issued to Congress 151 days after the deadline. To comply with the June 1 deadline, the commission submitted interim reports in 2006 and 2007. However, the former was 20 days late; the latter was on schedule. In its budget request for fiscal year 2008, the commission has requested the issuance date for the annual report be extended to December 1. Table 3 shows the June 1 annual report issuance dates since the inception of the commission and number of days each annual report was late.

The commission has not issued its annual reports on time because appointment dates for commissioners and the commission work cycle activities are not aligned with the annual report issuance deadline. Figure 1 shows this misalignment. The commission has scheduled its work cycle activities according to when commissioners are appointed, not by the statutory June 1 annual reporting date. Currently, the commission’s work cycle activities for developing, producing, and submitting its annual report to Congress is from January through November. The commission approves its annual work cycle schedule after the new chairman and vice chairman and the new commissioners are in place early in the calendar year.

According to the commission’s charter, the President pro tempore of the Senate, acting on the recommendation of both majority and minority leaders, appoints six commissioners, and the Speaker and the Minority Leader of the House each select three commissioners for 2-year terms that begin in January and end in December of the following year, and they can reappoint commissioners; the terms are staggered. They should appoint commissioners no later than 30 days after the date on which each new Congress convenes. Congress regularly convenes on January 3, unless Congress by law designates a different day to convene. Thus, they normally should appoint commissioners no later than February 2. In practice, they have appointed 26 of 45 commissioners after this date. For example, in 2003, the commission did not produce an annual report because the required number of commissioners to form a quorum was not appointed or reappointed until May 6, 2003, giving the commission only 26 days to issue its annual report by the June 1 deadline. Figure 2 shows the actual ranges of commissioner appointment dates.

The current misalignment makes it difficult for the commission to develop and produce the annual reports on schedule. The chairman, vice chairman, and executive director estimate that the commission needs about 11 months to conduct the work and research necessary to produce a robust annual report that addresses the required economic and security issue areas and that reflects bipartisan consensus. Thus, moving the annual report submission date or the timing of commissioner appointments would provide a work cycle with enough time to develop and produce a report on schedule, according to the commission. If the annual work schedule were aligned with the June 1 deadline, without changing the commissioners’ terms, newly appointed commissioners would be required to participate in determining key findings and recommendations to Congress based on activities that occurred before they were appointed, according to the three most recent chairmen. Furthermore, the composition of the commission could change significantly in the middle of the reporting cycle. For example, in 2007, the 2-year terms of seven commissioners, including the current chairman and vice chairman, will expire on December 31, 5 months before the 2008 report is due. The commission will not have a quorum to conduct its work until at least two commissioners are (re)appointed. In its budget request for fiscal year 2008, the commission has requested Congress to move the annual report issuance date to December 1.

The Commission Has Implemented Applicable FACA Provisions

The commission has, to the extent possible, taken steps to comply with FACA and adhere to those provisions it can implement. FACA was designed to provide for the accountability, management, and transparency of advisory committees located within the executive branch. FACA can apply to federal advisory committees created by the President, other executive branch entities, or an act of Congress. Initially, the legislation establishing the commission exempted it from FACA. In November 2005, Congress amended the commission’s charter so as to apply FACA to its activities. While the commission is in compliance with those provisions of FACA it can implement, according to commissioners and commission officials, implementing some provisions has been problematic.

The commission is an independent legislative branch entity, and neither the legislation mandating applicability of FACA nor its underlying history provides the commission with guidance for how it should implement FACA. The commission therefore consulted with GSA—which is responsible for executive branch compliance with FACA—on how it might implement FACA. Based on these consultations and its own interpretation of FACA, the commission determined that it could implement certain FACA provisions but not others. Table 4 shows the FACA provisions and which of these the commission determined it could implement.

According to GSA officials, the commission has taken reasonable steps to comply with the spirit of FACA. For example, after consulting with GSA, the commission sent an official to a 2-day GSA training session on how to comply with FACA. Also, the commission has adhered to the provisions of FACA that require advisory committees to allow the public to attend meetings and file statements. Specifically, the commission currently advertises its meetings and holds public hearings and open annual report drafting sessions. However, the commission cannot implement the FACA sections imposing certain administrative requirements on agency heads because those sections apply to commissions operating within larger agencies.

Opening annual report drafting sessions to the public is problematic, according to the commission, because the presence of public observers, including Chinese and other international press and foreign officials, inhibits the discussion of economic and security-related issues among commissioners. For example, the 2006 annual report drafting sessions were open to the public, and the commission’s discussions and personal opinions related to findings and recommendations were reported in the national and international press prior to the commission reaching consensus. Additionally, drafts of the commission’s annual report were made available to the media prior to commissioners reaching final concurrence on official findings and congressional recommendations. As a result, the commission included in its fiscal year 2007 budget a request that FACA no longer be applied to it. However, in its fiscal year 2008 budget request, the commission dropped the removal request.

Weaknesses in Current Organizational Structure and Management Policies and Procedures

Weaknesses in the current organizational structure and management policies and procedures hinder the effectiveness of the commission’s operations and put the commission at risk of fraud, waste, abuse, and mismanagement. According to internal control standards for the federal government the organization structure provides the general framework for management to plan, direct, and control operations to achieve its objectives and internal control activities are designed and implemented to help ensure that management’s directives are carried out. Specifically, in terms of its organizational structure, the commission has not formally defined and assigned key duties and responsibilities that are typically divided or segregated among different people in order to reduce the risk of error or fraud. The commission has heavily relied on its associate director for managing most administrative operations and staff, and commissioners have generally played a passive role in the management of the commission. In terms of management policies and procedures, the commission has not appropriately documented and communicated human capital, procurement, ethics, and financial management policies and procedures to commissioners and staff.

Organizational Structure for Managing Operations Has Weaknesses

Weaknesses in the commission’s current organizational structure for managing administrative operations and staff hinder its effectiveness and put the commission at risk of fraud, waste, abuse, and mismanagement. According to the control environment standard, management should ensure that the organizational structure, among other things, is appropriate for the organization’s size and functions, clearly defines areas of responsibility, appropriately delegates authority, and establishes a suitable hierarchy for reporting. Specifically, the commission has not defined and assigned key management duties and responsibilities, which are typically divided or segregated among different people. Also, most if not all of these duties and responsibilities have fallen on a single individual, the associate director.

Commission Has Not Formally Assigned Most Management Duties and Responsibilities

The commission has not formally assigned key management duties and responsibilities in accordance with the control environment standard. Specifically, we found that the commission has not formally assigned human capital, procurement, or budgeting and financial management and reporting responsibilities to any administrative staff. The only exception is that the commission designated the associate director as the ethics officer, making her responsible for, among other things, helping commissioners and staff address ethics and conflict-of-interest matters.

Regardless of its size, under both the control environment standard and human capital principles, an organization should have individuals with specialized knowledge, skills, and abilities necessary to perform one or more of these complex and technical administrative responsibilities effectively. Commission officials told us during our review that they recognize the commission has to clarify administrative roles and responsibilities, identify individuals who will be responsible for them, and segregate duties among staff. Figure 3 shows the organizational structure of the commission and, illustrates, among other things, that the commission formally has an ethics officer but no human capital, procurement, financial, or other administrative officers and no legal counsel.

This failure to formally assign administrative responsibilities across the organization hinders checks and balances and monitoring, undermines segregation of responsibilities, compromises the accountability for and effectiveness of administrative procedures, and puts the commission at risk. For example, the commission has not formally assigned responsibility for procurement to a qualified official. The chairman, executive director, and associate director have played de facto roles as procurement officers by signing contracts, and currently the executive director is acting as procurement officer for most research contracts. In the absence of a formally designated procurement officer, it is not clear who has the authority to negotiate and sign contracts, who should receive goods and services and maintain records, and who should monitor procurement decisions and activities, compromising the integrity of procurement activities. Also, it is not clear whether individuals carrying out these activities have the necessary background, expertise, experience, and training to do so.

Commission Has Relied on Its Associate Director for Carrying Out Most Management Duties and Responsibilities

Since its inception, the commission has delegated to its associate director the responsibility for running most management functions and supervising all administrative staff, thereby creating risks. This concentration of duties and responsibilities is not in accordance with a good internal control environment. Most commissioners have played a limited and passive role in the management of the organization. Most commissioners work part time, and they told us that they focus on producing the annual report rather than on management matters. Under the direction of the chairman and vice chairman, the executive director is responsible for the overall management of the commission, including program as well as administrative operations and staff. However, the executive director has mainly focused on managing the commission’s program operations and staff, which also concentrate on producing the annual report. As a result, the commission has greatly relied on its associate director, who reports to the executive director, chairman, and vice chairman, for leading administrative operations and staff (see fig. 3).

Almost all administrative duties and responsibilities have fallen to the associate director. According to the position description, the associate director must have expert knowledge of federal rules and regulations on human capital, procurement, and budgeting and financial management and reporting, which involve highly legal and technical problems and sensitive issues. Also, the associate director must have knowledge of the commission’s program objectives and policies to carry out a full range of work activities related to operations and administration. In addition, the incumbent must have the ability to work on a bipartisan basis with commission members and to handle administratively confidential and personal information. The associate director told us that her position description accurately reflects her responsibilities.

Moreover, she is responsible for managing nine administrative issue areas. These are broad and varied and include managing budget and financial management; facilities and administrative services; public and media affairs; hearings, briefings, and meetings; and other duties, such as representing the commission in interagency meetings, planning and carrying out administrative projects and studies, and training and supervising subordinate staff.

For example, as the ethics officer, she is responsible for providing ethics training, collecting and reviewing financial disclosure forms, and providing advice on conflict-of-interest matters. Also, she serves as the principal adviser to the executive director and the commission on personnel-related matters; interprets and applies personnel and pay authorities provided to the commission; interprets and applies legislative branch guidance, authorities, and legal requirements and federal personnel regulations and directives affecting the commission; and seeks opinions and guidance from the U.S. Senate Legal Counsel, GSA, and the Office of Personnel Management on personnel matters for which no clear guidance exists.

In addition, in terms of budgeting and financial management and in coordination with the chairman and executive director, she is responsible for developing budget plans, goals, and objectives for overall projects and working with the GSA budget office; developing and reviewing other budget data for automated input into the Office of Management and Budget (OMB) MAX system; responding to OMB requests for supplemental information; developing budget material in support of the commission’s budget requests and congressional budget justifications; supporting the chairman and other commissioners at hearings and generating documents that provide spending authority, OMB apportionment of carryover, and appropriated funds; assuring the accuracy of the monthly and year-end Report of Budget Execution of OMB and the Treasury Department; and monitoring OMB directives for commission application and appropriate action.

To fulfill her duties and responsibilities, the associate director has limited administrative support. Commission officials told us that because the commission is small and has a small budget, it cannot afford to secure the services of management specialists with the expertise that it needs in different areas, including legal expertise on administrative matters. During our review, the commission hired an assistant director/office manager to improve its administrative capabilities. However, this individual has limited responsibilities and does not supervise any administrative staff. We observed that the four other administrative staff worked under the close supervision of the associate director because they were also new hires or because sometimes they could not resolve problems without assistance. It was not clear that some of the administrative staff had the background, experience, and training to carry out responsibilities if the associate director delegates them. For example, a staff member who performs budget and financial management duties has recently required extensive assistance to solve problems related to a financial spreadsheet used in day-to-day operations. Furthermore, she said that she would benefit from training on accounting and related software. We found that commission staff had received little internal or external training.

Concentration of duties and responsibilities creates risks. By concentrating so many responsibilities in one individual, this organizational arrangement, among other things, curtails checks and balances and monitoring, hampers segregation of responsibilities, and requires that this individual have a high level of legal and technical expertise in administrative functions, such as human capital, procurement, and budgeting and financial management and reporting. For example, as the sole purchase cardholder, the associate director has broad authority in procuring supplies and services for the commission. However, as the designated funds’ manager of the commission, the associate director may also approve the payments of these purchases omitting any supervisory review of the purchase card transactions made with commission appropriations.

Concentration of duties and responsibilities also creates risks because key staff may leave the organization. The associate director has been with the commission since its inception. Thus, she has worked with all of the chairmen, vice chairmen, and executive directors of the commission. The associate director is a retired federal official working under a personal services contract for the commission. According to the chairman and executive director, the commission does not have qualified back-up staff or a plan for transitioning staff to take on the associate director’s multiple responsibilities should the associate director leave the commission.

Management Policies and Procedures Have Weaknesses or Are Not Present

The commission’s policies and procedures for managing administrative operations and staff are insufficient, incomplete, or not adequately documented, thereby impairing their effectiveness and putting the commission at risk of fraud, waste, abuse, and mismanagement. Effective internal control activities help ensure that management’s directives are carried out and are an integral part of an entity’s stewardship of government resources. Control activities are the policies, procedures, techniques, and mechanisms that enforce management’s directives, such as the process for approving new hires and authorizing rates of pay. Specifically, despite the commission’s adopting 17 rules and other efforts to put management policies and procedures in place since October 2002, human capital, procurement, ethics, and financial management and reporting policies and procedures are insufficient or incomplete, and many basic operational practices are not documented. We found no evidence that legal and management experts have vetted policies and procedures to ensure they are technically sound, which is a best practice. Furthermore, existing policies and procedures are not fully documented and consolidated in policy and procedures manuals.

Human Capital Policies and Procedures Are Incomplete or Are Missing

The commission’s human capital policies and procedures are insufficient or incomplete. Because of these internal control weaknesses, human capital procedures do not provide reasonable assurance that these activities, such as hiring, evaluating, training, and EEO practices, are performed effectively. Under effective internal control, management should have appropriate, comprehensive, documented, and fair procedures for hiring, training, evaluating, compensating, and terminating staff. Specifically, the commission has only partially implemented formal performance evaluation procedures. Also, it has incomplete formal procedures for hiring and does not have formal procedures regarding training and EEO. Legal and management experts have not vetted human capital policies and procedures to ensure they are technically sound.

The commission did not evaluate any of its staff prior to 2005. Nevertheless, it provided bonuses to staff without having formal ratings in 2004 and 2006. The commission is in the process of implementing staff performance evaluation policy and procedures adopted in May 2006. The commission did not develop and implement these staff evaluation procedures before because, according to commission officials, it did not have the resources to do so. According to the executive director, the commission informally evaluated staff in 2005 and 2006 and will formally evaluate its staff in 2007. The commission’s new employee performance management policy and procedures aim to motivate staff to perform at their highest levels and give supervisors instruments to evaluate employees’ performance. These policies and procedures rely on four tools: a position description for each employee’s position, an employee performance plan, an annual performance evaluation for each employee and, if needed, a performance improvement plan to enhance the performance of an employee whose work is unsatisfactory. The employee performance management calendar starts with the preparation of the employee performance plans in December of the previous year, continues with the staff evaluation period from January to December, and ends with the finalization of individual performance evaluations in February of the following year. Based on these performance evaluations, supervisors recommend salary increases and cash awards in late February. Following these recommendations, the commission may give salary increases and cash awards in March. The commission started implementation of these procedures for calendar year 2007 in December 2006 with the development of individual performance plans and intends to finish implementing the procedures in early 2008. According to the executive director, the implementation is on schedule, and staff have their individual performance plans on file. Because the commission is still implementing the procedures for 2007, we did not evaluate the new policy and procedures.

The commission has incomplete written procedures for hiring staff. Under the charter of the commission, the chairman may appoint, fix the compensation, and terminate the employment of the executive director and any other staff. Under rules 4 and 5 of the commission, as amended in November 2005, the commission must approve the hiring and firing of the executive director, and the chairman and vice chairman must approve the hiring and firing of other staff after consultation with other commissioners. However, beyond these rules, the commission has not formalized its hiring practices through further written procedures that would help ensure that hiring new program and administrative staff is fair, transparent, and competitive. For instance, no procedure in place captures that, since 2006, the commission has developed vacancy announcements, based on its position descriptions, and publicly advertised them through its Web site and various media, such as USAJOBS and the OPM Web site. Furthermore, the roles played by the executive director and the associate director in managing human capital are not formally defined, and the records that the commission and these officials have to keep during hiring are not formalized in written procedures.

The commission does not have written training guidelines for its program and administrative staff. Training allows an organization to invest in its human capital and focus this investment on organizational goals and objectives. It helps ensure that staff have the knowledge, skills, and abilities to fulfill their responsibilities. Internal and external training of administrative staff help them comply with policies and procedures, safeguard resources, and prevent errors. Some of the commission’s program and administrative staff told us that training would help them improve their professional and technical skills. For example, staff mentioned that systematic support for training would help them improve language or technical skills. Staff stated that the commission should have training guidelines in place so that they have a fair opportunity to develop their skills. Staff told us that they had individually requested training support. Without training guidelines, the commission cannot ensure that training supports organizational objectives and that staff has fair access to it.

The commission does not have written equal employment opportunity (EEO) procedures. Although the commission is not subject to EEO legislation, commission officials told us that the commission has followed EEO principles, but it has no written procedures. According to these officials, the commission is aware of the importance of these procedures when, for example, hiring or terminating staff. A lawsuit that the commission settled with a former staff member was partially based on an EEO complaint. In the absence of these EEO procedures, the commission cannot ensure that human capital procedures (such as recruitment, hiring, evaluation, promotion, compensation, awards, and training procedures) are fairly implemented. Also, it cannot monitor EEO-related results.

Procurement Policies and Procedures Show Weaknesses

The commission has some written procedures for research-related procurement, but it does not have written procedures for non-research- related procurement. Because of this internal control weakness, procurement procedures do not provide reasonable assurance that procurement activity is performed effectively and is not subject to fraud, waste, and abuse. Also, procurement procedures need to ensure as much transparency, competition, and accountability as possible. However, legal and procurement experts have not vetted the commission’s procurement rule to ensure that it is technically sound or in accordance with best practices.

Specifically, regarding research-related procurement, rule 12 of the commission states that the chairman and vice chairman must support research contracts after receiving recommendations from the co-chairs of the commission’s research working group. The research working group is responsible for defining research needs and preparing research proposals. It has four members—two co-chairs and two other commissioners. The chairman and the vice chairman select the co-chairs of the group from among the commissioners from different political parties. Rule 12 also says that the full commission must approve research contracts in excess of $25,000.

This research-related procurement procedure does not include practices the commission has used since 2005 to ensure the transparency and competitiveness of its research-related procurement. Under these undocumented practices, for example, if the research working group determines that funding outside research would contribute to the commission’s mission, it prepares a request for proposal (RFP) with support from the commission’s staff. After approving the RFP, the commission puts the RFP on its Web site and disseminates it to selected academic institutions and policy institutes. However, the commission does not use other means to widely circulate the RFP. After examining all of the responses to the RFP, the research working group selects one and recommends it to the chair and vice chair, or to the commission.

In fiscal year 2005, the commission competitively awarded seven research contracts for a total of $105,475 (see app. VI). Only one of these was above $25,000. In fiscal year 2006, the commission competitively awarded five research contracts for a total of $77,926. None of these was above $25,000. During 2007, the commission plans to continue awarding research contracts using these practices.

In contrast, the commission does not have any written procedures in place for nonresearch procurement. This procurement involves a variety of items, such as the costs of hearings, consulting services, and office supplies and equipment. In fiscal years 2005 and 2006, the commission spent about 65 percent and 77 percent, respectively, of its total procurement budget in nonresearch procurement (see apps. VI and VII). In the absence of nonresearch-related procurement procedures, the commission has limited assurance that the procurement is as transparent, competitive, or best value for price as possible, or that responsibilities for it are segregated among qualified staff. For example, as discussed in the following section on financial management and reporting, the commission made significant purchases of office equipment, however, the staff did not document these pricing and purchasing decisions and it is difficult to verify that the best value was obtained. Earlier, we noted the absence of a formally designated procurement officer can compromise the integrity of procurement activities and together with the lack of procedures put the commission at risk of fraud, waste, abuse, and mismanagement.

During our review, we identified a transaction that fell outside the scope of our individual transaction testing. The transaction involved computer consulting work conducted by a relative of the associate director that initially did not appear to be approved by the commission. We learned that the associate director’s son, who is not an employee of the commission and not under formal contract with the commission, had access to the commission’s computer system and the sensitive information it contains. The associate director confirmed that her son had had access to and worked on the system. She explained that her son had set up the computer system for the Trade Deficit Review Commission and was paid for those services by that entity. Subsequently, at its inception, USCESRC inherited this computer system. The associate director told us that 4 years later, in 2004, when the system experienced a major failure due to an external power surge, she obtained expert and consulting services from her son to assist with the recovery of the data and redesign and upgrade of the system, for which the commission paid him $6,600. The associate director acting as contracting/ordering officer approved the invoice authorizing the payment to her son. In addition to the invoice, she also gave us a copy of the statement of work relating to the invoice. We have seen no other documentation relating to this work other than the statement of work and the invoice.

The chairman, vice chairman, and executive director of the commission at that time informed us that they knew the associate director planned to obtain the services of her son, but, because of lack of formal procedures for approving nonresearch procurement, they were unaware of the details. After 2004, when problems arose with the system, he continued to provide assistance and other services without receiving additional reimbursement from the commission. As a part of providing assistance and other services, he had access to the system both at the commission and off site via the Internet. We brought this matter to the attention of the current chairman and executive director, and they told us they were aware that the associate director’s son had worked on the system after 2004 to troubleshoot the system he had developed. In the absence of formal approvals or documentation of his work for the commission after 2004, they were unaware of his providing other services to the commission and about the terms and conditions he was operating under. The current chairman and executive director were confident that he had received no compensation for these services. They also indicated that as a result of our inquiry, they intended to take steps to stop this person from having further access to the computer system and providing further support and services to the commission without the approval of the chairman and vice chairman.

When the commission accepts services without remuneration, as authorized by law, it has to document such action in order to protect the government’s financial interest should the provider of the services submit a payment claim for such services. Further, since this situation involved access to the commission’s computer system, the commission has to document the scope of the access authority granted, which if intentionally exceeded would, among other things, constitute a possible violation of legislation dealing with fraud and related activities in connection with computers.

Ethics Guidelines Have Some Shortcomings

The commission’s ethics procedures for both commissioners and staff have shortcomings. According to guidance for a good internal control environment, management should have appropriate, comprehensive, and documented written ethics policies and procedures and require that all members of an organization periodically acknowledge ethics policy and procedures by signature. Specifically, two rules of the commission provide ethics guidelines for commissioners and staff. According to commission rule 16, commissioners must exercise impartial judgment in performing their duties; may never solicit or accept a gift as part of their official duties, other than a gift of incidental value; may not use their position in the commission or the information they receive as part of their duties for personal gain; and may not receive a present of any kind, other than of incidental value, from China and Taiwan. This existing rule does not include ethics guidelines regarding speaking engagements and payment of related travel expenses. The commission has discussed establishing guidelines on speaking engagements but has not done so, according to commission officials. The commission has not vetted its ethics procedures for commissioners with legal and management experts to ensure these procedures are technically sound, in accordance with best practices.

Commission rule 17 requires staff to comply with Senate ethics rules. In March 2007, the executive director conducted the commission’s first training on the Senate ethics rules for all program and administrative staff. He also gave each staff member a copy of the ethics rules. Previously, he and the associate director, who is the formally designated ethics officer, had discussed these ethics rules with staff individually.

We found no evidence that the commission requires commissioners and staff to periodically acknowledge ethics policy and procedures by signature. In addition, the commission has no rule about entering into contracts with relatives of commissioners and staff, in accordance with best practices.

In terms of financial disclosure, we found that commission officials who should have filed financial disclosure reports had done so, and the reports did not show conflict of interest. Commissioners and staff who are required by the Ethics in Government Act of 1978 to file financial disclosure reports must file the reports with the Secretary of the Senate in its Office of Public Records. Commission officials who earned a rate of pay equal to or in excess of $109,808 for a period equal to or in excess of 60 days must file financial disclosure reports. Senate ethics rules note that public disclosure of an official’s personal financial interests is a key component of an effective code of conduct. After collecting and processing the forms, the Office of Public Records sends the forms to the Senate Select Committee on Ethics and, within 30 days, makes them available to the public electronically. If the committee needs additional information or finds errors in the forms, commissioners and staff may need to file amendments.

According to our review of commission and Senate records, commission officials who should have filed financial disclosure forms had done so since the inception of the commission. The reports covering 2006 were due on May 15, 2007. According to the commission’s ethics officer, six commissioners, including one former commissioner, should have filed these reports. Three of them did so, and the other three requested and received a filing extension until August 15, 2007. The three commissioners who requested extensions filed their reports by the August deadline, according to the associate director.

Commission Has Not Appropriately Documented Its Administrative Procedures

The commission has not sufficiently documented its ethics, human capital, procurement, and budgeting and financial management and reporting policies and procedures to ensure their effectiveness and to inform and guide commissioners and staff. Effective internal control activities would include a comprehensive collection of management policies and procedures, which are properly managed and maintained, so that management and staff can apply these activities properly.

Without a complete collection of comprehensive management policies and procedures, commissioners and staff do not have access to documents in paper or electronic form containing all of the information needed for effectively implementing these policies and procedures, and the commission is at risk, especially if staff responsible for key operations leave the commission. More important, without a systematic effort to consolidate management policies and procedures, some remain incomplete, unwritten, or not vetted by legal and administrative experts. The commission is currently working to consolidate its management policies and procedures by developing office manuals. For example, the commission has in draft a policy manual and a procedures manual. Commission officials acknowledged the need for policy and procedures manuals but told us the manuals have not been completed because of a lack of resources.

Ineffective Internal Control over Financial Management and Reporting

The commission’s internal control over financial management and reporting was not adequate to provide reasonable assurance that financial activities were properly processed and recorded and complied with federal laws and regulations. Effective internal control is the first line of defense in safeguarding assets and preventing and detecting errors and fraud. We noted weak or missing internal control in our examination of the commission’s (1) non-payroll-related transactions, (2) travel and purchase card activity, and (3) time and attendance (T&A) reporting. Our tests of the commission’s non-payroll-related transactions for fiscal years 2005 and 2006 found deficiencies, such as missing or inadequate supporting documentation, lack of proper authorization and approval, and improper classification. The commission’s application of the government travel and purchase card programs lacks written guidance, proper segregation of duties, and adequate training. In addition, we identified questionable purchases of over $13,000 made with the commission purchase card. Our review of the commission’s payroll process for fiscal years 2005 and 2006 showed that the commission’s T&A records were not always validated by the employee or approved in accordance with the policy described by the commission’s management. As a result, the commission’s financial resources are at an increased risk of fraud, waste, abuse, or mismanagement.

Key Controls over Non- Payroll-Related Transactions Are Ineffective

Our tests of the commission’s non-payroll-related transactions for fiscal years 2005 and 2006 found deficiencies such as missing or inadequate supporting documentation, lack of proper authorization or approval, and improper classification. We statistically sampled 59 commission non- payroll-related debit transactions totaling approximately $1.1 million from fiscal years 2005 and 2006. Ten of the 59 transactions had one or more internal control failures, leading us to conclude that the controls commission staff said were in place were not operating effectively. Based on the results of our work, we estimate that the total dollar value of non- payroll-related debit transactions with ineffective controls during the 2- year period we examined is not more than $1.2 million. The following are examples of the type of internal control weaknesses identified in our sample transactions: Four transactions lacked proper documentation to support travel-related expenditures centrally billed to the commission travel credit card. The invoices submitted to GSA for payment processing included only the credit card statement without supporting documentation, such as copies of approved travel authorizations or vouchers and lodging invoices. Although we found annotations on certain credit card statements indicating that amounts were internally cross-referenced by the commission to individuals’ travel vouchers, copies of approved vouchers or support for the lodging expenses incurred were not attached for GSA verification. In other sample items tested, reimbursements for business expenses were processed for commission staff or commissioners with only an e-mail or a handwritten note as supporting documentation. Typically, the invoice or bill from the supplier or vendor represents the claim against the government for the items sent or delivered, and is also used to verify that quantities, prices, and calculations are accurate.

Two transactions were not properly authorized and approved: both were payments under what the commission called a personal services contract for hours worked and miscellaneous business expenses claimed for reimbursement by the associate director. The first transaction, in the amount of $3,823.60, was approved by the office manager, who was subordinate to the contract payee. In the second transaction, for $5,315.69, the contract payee signed the commission chairman’s name approving the payment that the contract payee claimed, and therefore independent verification that the services had been received and conformed to the specifications of the contract was not documented. Although the commission is relatively small, the separation of key duties and responsibilities is a key control to reduce the risk of error or fraud. According to GAO’s Standards for Internal Control in the Federal Government, no one individual should control all key aspects of a transaction.

Our sample included two large transactions totaling $90,075 that were improperly reported as expenses for fiscal year 2006 by the commission at the end of fiscal year 2006. The items, for $70,000 and $20,075, were obligations for renovations to the commission’s office space that were finalized in fiscal year 2007. Because the goods and services had not been received by the end of fiscal year 2006, these two items should not have been reported as expenses in fiscal year 2006. These errors were not detected by commission staff until we questioned the transactions as part of our testing. According to the commission staff, the errors occurred when the commission notified GSA that the funds should be obligated based on the purchase order but mistakenly placed the obligated balances on the pending accruals worksheet submitted to GSA at year end. In following up, we found that the related goods and services were received and paid for in fiscal year 2007.

During our review, we also noted that the commission did not develop or document criteria for official representation expenses or a means to properly track appropriated funds for this purpose. Appropriations for the commission for fiscal years 2005 and 2006 included a provision that no more than $5,000 of the amount appropriated each year was available for official representation expenses, which include entertainment. Representation appropriations permit officials of agencies whose activities involve substantial contact with foreign officials to reciprocate for courtesies extended to them. According to the associate director, this is how the commission has defined its use of representation expense, based upon the commissioners’ discussions. However, neither the decision to limit representation expense to the entertainment of foreign nationals on trips to Asia nor the criteria for classifying transactions as representation expenses has been documented. Also, the commission did not have a formal means to track such transactions for fiscal years 2005 and 2006, as indicated by the manual schedules of representation expenses that were prepared at our request and were adjusted based on our inquiries. The final schedules provided to us for representation expenses for fiscal years 2005 and 2006 totaled $2,687 and $4,996, respectively. However, without definitional guidance and a formal means of accumulating these transactions, it is difficult to determine the completeness and accuracy of the amounts provided. As a result, it is difficult for commission management to know whether the commission kept within its $5,000 statutory limit on representation, and we could not ascertain if it had done so.

Travel and Purchase Card Programs Lack Key Controls

The commission’s travel card and purchase card programs lack written guidance, proper segregation of duties, and adequate training. In addition, we identified questionable purchases of over $13,000 made with the commission purchase card. According to internal control standards, management is responsible for developing policies and procedures that fit the agency’s operation and are an integral part of operations. As discussed earlier, internal control standards also state that key duties need to be divided or segregated among different people to reduce the risk of error and fraud. This should include separating the responsibilities for authorizing, processing, recording, and reviewing transactions, and handling any related assets. Internal control standards also require that all personnel possess and maintain a level of competence that allows them to accomplish their assigned duties, as well as understand the importance of developing and implementing good internal control. This includes identifying appropriate knowledge and skills as well as providing needed training.

Travel Card

We noted a lack of written policies and procedures for authorizing and approving temporary duty travel for commissioners, staff, and invited guests in the 23 travel card transactions we examined for fiscal years 2005 and 2006. The Federal Travel Regulation (FTR) states that internal policies and procedures must be established for processing travel authorizations and travel reimbursements as well as establishing policies and procedures relating to payment of per diem expenses and miscellaneous expenses. The associate director confirmed that the commission applies the guidance in the FTR. The lack of written guidance puts the commission at risk of not processing all travel-related expenses consistently and in accordance with the FTR. In reviewing the travel card transactions, we noted that one cardholder’s purchases totaling approximately $4,000 were for personal use. Although we did not find any indication that the individual sought reimbursement from the commission for these transactions, the FTR states that government-issued travel cards may be used only for official travel-related expenses.

We also found instances where an individual both authorized travel and approved/certified travel expenses for reimbursement. According to our discussion with commission officials and staff, all travel is to be authorized by the commission chairman. In instances where the chairman is the traveler, he or she authorizes his or her own travel. However, the associate director sometimes signs for the chairman authorizing travel. The associate director also prepares travel vouchers claiming reimbursement for travel expenses for the commissioners and staff or designates an administrative assistant to do so. Then, as the designated approving official, the associate director approves the travel voucher claim for reimbursement. We also observed some instances where the associate director signed the traveler’s name and also approved the claim for reimbursement. In order to have proper segregation of duties, no one individual should control all aspects of a transaction. Also, the FTR states that the traveler must ensure all travel expenses are prudent and necessary and submit the expenses in the form of a proper claim. This is documented with the traveler signing the travel voucher in block 13 of Standard Form 1012, whereby the traveler asserts that, “I certify that this voucher is true and correct to the best of my knowledge and belief, and that the payment of credit has not been received by me.” This certification was lacking on several commission travel claims we reviewed because the traveler did not sign the voucher. By not following proper procedures for claiming and reimbursing travel expenses, the commission is subject to an increased risk of fraud or error.

The commission’s associate director, who has responsibility for travel card use and is the approving official, has received no formal training in administering the travel card program. According to GAO’s internal control standards, all personnel need to possess and maintain a level of competence that allows them to accomplish their assigned duties, as well as understand the importance of developing and implementing good internal control. This includes identifying appropriate knowledge and skills as well as providing needed training. Based on the travel vouchers we reviewed, the associate director appeared to be knowledgeable about some travel regulations, such as the disallowance of certain unauthorized expenses on travel claims — including alcoholic beverages or individual entertainment charges on hotel invoices. However, formal training on the FTR could have increased compliance with the FTR, such as submitting claims for payment within 5 days after completing a trip or authorizing first or business class travel as required by the FTR. Of the 22 travel voucher claims we reviewed, only 1 was submitted within the 5-day time period. Also, documentation of FTR-required authorization for first or business class travel was not provided in seven instances.

Purchase Card

The commission did not have written policies and procedures concerning use of the purchase card. The purchase card is used to buy products or obtain services for everyday operations. Although the commission is generally not covered by the Federal Acquisition Regulation (FAR), the commission, as a participant in GSA’s SmartPay Program, is subject to the FAR for purchases of supplies and services made with the government purchase card. The associate director told us she was not aware of the laws, regulations, and procurement policies and procedures under the FAR as it related to the use of the purchase card. Further, she was not aware of any restrictions on the use of the card other than using it for meeting commission objectives. For example, the associate director was not aware of the micro-purchase threshold, currently at $3,000. While we noted over $13,000 of computer hardware and software purchases that appeared on the commission’s June 2006 purchase card statement, each individual item did not exceed the micro-purchase threshold. The commission purchased this computer equipment via the Internet because, according to the associate director, they were the best value. Commission staff did not document these pricing and purchasing decisions and the FAR does not require documentation of competitive quotations solicited under the micro-purchase threshold amount if the contracting officer or other individual appointed for purchases under the purchase card program considers the price to be reasonable. While we noted over $13,000 of computer hardware and software purchases that appeared on the commission’s June 2006 purchase card statement, each individual item did not exceed the micro-purchase threshold. Nevertheless, it is difficult to verify that the best value was obtained without documentation of the pricing decisions.

Although the associate director is officially the sole authorized purchase cardholder for the commission, we identified cases in which the associate director asked other staff to use the purchase card to buy products or obtain services. For those transactions, the staff signed the purchase card receipts even though they were not the authorized cardholder. Sometimes it was not clear who was involved in particular transactions. For example, we reviewed one receipt signed by someone other than the associate director in the amount of $408 for toner cartridges, and the associate director could not tell us whose signature was on the receipt. Effective internal control requires that transactions are authorized and executed only by persons acting within the scope of their authority. This is the principal means of assuring that only valid transactions to commit resources are initiated or entered into.

The commission’s associate director has not received formal training in administering the purchase card program. The associate director purchased bottled water monthly with the purchase card, which is an example of an improper transaction. Improper transactions occur when appropriated funds are used for which appropriations are generally not available. Bottled water is typically considered a personal expense, and appropriated funds may be used for it only with documentation that available drinking water poses a health risk. Training of the purchase cardholder and all staff in the laws and regulations applying to purchase card transactions is an important step in ensuring that the purchase card is not misused.

As shown in table 5, we identified questionable purchases totaling over $13,000 made with the commission purchase card. We considered questionable transactions as those where items were purchased at an excessive cost or for a questionable government need, or the support was insufficient for a determination. They included transactions at Macy’s, Sam Goody, and Corner Bakery.

The associate director told us that all of the questionable purchases we identified were for official commission business. According to the commission, all of the purchases from the Senate gift shop were small items such as pens or business card cases that were presented as gifts during commission fact-finding trips to China and Taiwan. Over three- fourths of the purchases in table 5 were for food, which included catering for commission hearings or quarterly business meetings. According to the associate director, the food was primarily for commissioners, commission staff, and witnesses working exclusively on a particular hearing where it may have been inconvenient or counterproductive to break for lunch. We did observe instances where nongovernmental personnel participated in various panel sessions at certain hearings, and it may have been beneficial for scheduling purposes to provide lunch or other refreshments. However, as a general rule, the government may not furnish free food to employees at their official duty station even when they are working under unusual circumstances.

Time and Attendance Reporting Lacks Proper Approvals

Our review of the commission’s payroll process for fiscal years 2005 and 2006 showed that the commission’s T&A records were not always completed and approved in accordance with the policies and procedures described by the commission. We reviewed all applicable T&A records for four commissioners in fiscal years 2005 and 2006 and found that 37 percent were not reviewed and approved by the executive director in accordance with the described policies and procedures. We also reviewed selected T&A records for three commission staff for fiscal years 2005 and 2006 and found that over one-half were not approved by the executive director, and 10 of the 25 staff T&A records we reviewed were not approved by a certifying officer in accordance with commission policy. According to the commission staff responsible for payroll, the certifying officer is responsible for (1) reviewing T&A records to ensure that each one is properly approved by the executive director and (2) affirming that the hours are accurately entered into the online payroll data entry system that the commission uses to communicate with GSA. Failure to adhere to this policy increases the risk that inaccurate or inappropriate time charges will be entered into the system, resulting in potential errors in wages paid and recorded by the commission. Supervisory authorization and approval is a key part of ensuring the propriety of T&A information. According to GAO’s time and attendance guidance, the supervisor or other authorized official should review and authorize employees’ planned work schedules and applications for leave, and review and approve employee submissions of actual time worked and leave taken, as well as information in T&A reports, and any adjustments or corrections to T&A records.

This lack of T&A oversight is further compounded by the fact that the commission’s 12 members generally had differing approaches to charging time incurred on commission activities. We identified a great range in the number of hours charged by the commissioners in fiscal years 2005 and 2006, from some commissioners who did not charge any time to commission activities, to one commissioner who charged almost 1,900 hours in one fiscal year. We also noted several instances where the number of hours charged to commission activities and paid to a commissioner exceeded the standard 80 hours for the pay period. While exceeding 80 hours in a given pay period is permissible, this practice and other changes to the time and attendance information resulted in numerous manual adjustments to the Commission’s recorded payroll to reflect the excess hours or retroactive time. Manual adjustments can lead to inaccuracies and inconsistencies and provide opportunities for error. Further, manual adjustments increase the importance of reconciliations to ensure that all data are captured and recorded in a timely fashion. The accuracy of time and attendance information is particularly important because the amount of time devoted to commission activities is a factor46 in commission ethics filing requirements.

Conclusions

Congress created the commission almost seven years ago to advise it about the impact of China’s growing economic and military capabilities on the United States. The commission’s primary vehicle for communicating its findings to Congress and the American people is the annual report. However, the commission has issued none by the mandated deadline because the appointment dates for commissioners and the commission’s work cycle schedule are not aligned with the annual report issuance deadline. Seven of the current 12 commissioners’ terms will expire in December 2007, and a reconstituted commission will again face the challenge of meeting a June 1 reporting deadline. Unless the commissioners’ appointment dates and the commission’s work cycle schedule are aligned with the report issuance date, it is unlikely the commission will issue future reports on time.

Officers and employees of the legislative branch who are compensated for a period in excess of 60 days during a calendar year at the annual rate of pay equal to or in excess of 120 percent of the basic rate of pay in effect for the Grade GS-15 of the general schedule must file a public disclosure report with the Senate. controls is heightened by the fact that it is not subject to the degree of oversight and legal requirements of most federal agencies.

Matter for Congressional Consideration

To improve the timeliness of the commission’s annual reports, Congress should consider aligning the commissioners’ appointment dates with the annual report issuance date. Depending on its needs, Congress could, for example, either move the commissioners’ appointment date from January to July, so that the commission has enough time to plan and issue its report by June 1 the following year, or keep the commissioners’ appointment date in January and move the report issuance date to December 1.

Recommendations for Executive Action

To improve management of its operations and reduce risks, the commission should apply internal control standards aimed at (1) strengthening its organizational structure so that key management duties and responsibilities are segregated and (2) improving its management policies and procedures so that they are well-documented, communicated, and consistently applied and reflect expert legal and managerial advice where appropriate.

Specifically, we recommend that the commission take the following five actions: Review the organization’s staffing needs for management functions, including human capital, procurement, budgeting, and financial management; properly segregate key duties and responsibilities among specific officials; and ensure that these officials have appropriate knowledge, experience, and training to perform these management functions.

Fully implement recently developed human capital polices and procedures for evaluating the commission’s professional and administrative staff, and put in place comprehensive written hiring, training, and EEO-related procedures.

Establish comprehensive written research and non-research-related procurement policies and procedures that ensure transparency and competition as much as possible.

Expand the ethics guidance for commissioners to include guidelines for speaking engagements and payment of related travel expenses, and require that commissioners and staff review and formally acknowledge the ethics guidance periodically.

Put in place policy and procedures manuals and obtain advice from legal and management experts to make sure that policies and procedures are technically sound.

Furthermore, to improve internal control over financial management and reporting, the commission should document applicable policies and procedures and communicate them to applicable commission staff, and segregate key duties and responsibilities, to the extent possible, so that no one individual controls all key aspects of a transaction.

Specifically, we recommend that the commissioners take the following three actions: Strengthen key controls over non-payroll-related transactions by ensuring that all transactions are supported by adequate documentation and are properly authorized, approved, and classified; and developing and documenting criteria for classifying transactions for the purpose of official representation, and developing and documenting a means to track such transactions within its accounting and reporting structure.

Implement key controls over the commission’s government travel and purchase card programs by providing training for staff who administer and use the government travel and purchase card programs, and developing and documenting commission policies and procedures with regard to food provided at commission hearings, quarterly business meetings, or any related events, in compliance with federal appropriations law prohibiting free food to government employees.

Conduct all T&A reporting in accordance with commission policies and procedures by checking for proper authorization and approval before processing T&A records as part of the biweekly payroll procedures, and verifying that approval and certification is documented.

Agency Comments and Our Evaluation

We provided a draft of this report to the commission and GSA. We obtained written comments from the commission, which are reprinted with our responses in appendix VIII. GSA had no comments on our draft. The commission concurred with our recommendations and noted that these recommendations have the potential to help ensure that its operations are both legal and appropriate. The commission indicated that it will follow GAO’s internal control standards to develop a plan for addressing our recommendations even though these standards are not binding on legislative branch entities, such as the commission. The commission emphasized that its charter is brief and offered the commission little guidance on what internal control mechanisms it should employ and how they should be structured and applied. Regarding the commission’s request for GAO to serve as the commission’s official legal and management expert, in order to be able to conduct work in accordance with GAGAS, GAO prefers not to accept any nonaudit work that could potentially create an independence impairment in fact or in appearance with respect to the entities it reviews. While GAO is willing to share (nonbinding) advice, the commission is responsible for making such decisions and implementing the policies and procedures to manage its operations. The commission can secure the services of needed legal and management experts by hiring them and developing them through training, for example, or by contracting with outside parties for these services. The commission’s comments on the draft of the report, including the technical comments we received from the executive director, asked that we clarify various parts of our report. We revised our report, as appropriate.

We are sending copies of this report to interested congressional committees, USCESRC, and GSA. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you and your staffs have any questions about this report, please contact me at (202) 512-4347. 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 major contributions to this report are listed in appendix IX.

Appendix I: Objectives, Scope, and Methodology

In this report, we assess the extent to which (1) the U.S.-China Economic Security Review Commission (USCESRC) has complied with its charter, (2) the commission has had an organizational structure and policies and procedures for managing its operations effectively, and (3) internal control over the commission’s financial management and reporting has provided reasonable assurance that resources are not at risk.

To assess the compliance of the commission with its reporting requirements and other provisions specified in its charter, we obtained and analyzed the commission’s statutory charter; pertinent legislation and regulations, such as the Federal Advisory Committee Act (FACA); and related commission documentation. According to its charter, as amended, the commission must implement FACA, which provides a legal and institutional framework for the operation of advisory committees. We observed two quarterly business meetings of the commission on February 2 and May 25, 2007. We interviewed the 12 current commissioners and two former commissioners, including a former chairman of the commission and a commissioner who left the commission when his appointment expired at the end of 2006. Also, we interviewed the current executive director and the two previous executive directors of the commission. We reviewed information and met with officials from the General Services Administration (GSA) and the Congressional Research Service (CRS).

To assess the organizational structure and procedures the commission has in place to manage its administrative operations and staff and achieve its mission effectively, we obtained and analyzed commission records, such as documents describing the organizational structure of the commission and ethics and conflict of interest, human capital, procurement, and financial management procedures that the commission had in place during our review.

In reviewing these organizational structure and policy and procedures, we focused on whether they, as internal control mechanisms, are in accordance with internal control standards for the federal government, such as the internal control environment and internal control activities standards. While these standards are not binding for legislative branch agencies, they are a statement of best practices and adherence to these standards provides reasonable assurance against fraud, waste, abuse, and mismanagement. These standards give management of federal agencies, regardless of size, the responsibility and discretion to develop and implement mechanisms for internal control necessary for achieving organizational objectives, managing operations and staff effectively, and ensuring the agency is not at risk. Effective internal control provides reasonable, not absolute, assurance of meeting agency objectives.

In analyzing the organizational structure and administrative procedures, we assessed whether they were properly documented, communicated, and implemented. In analyzing human capital and equal employment opportunity procedures, we secured commission information and reviewed GAO guidance. A GAO expert reviewed the human capital information. In reviewing procurement procedures, we obtained commission documentation and GAO information. A GAO expert reviewed the procurement information. In reviewing ethics and conflict of interest procedures, we obtained commission documentation and Senate Select Committee on Ethics, and the Secretary of the Senate Office of Public Records information. A GAO expert reviewed the ethics and conflict of interest information.

In assessing the organizational structure and administrative procedures, we observed two quarterly business meetings of the commission on February 2 and May 25, 2007, respectively. We interviewed the 12 current commissioners and 2 former commissioners, including a former chairman of the commission, and a commissioner who left the commission when his appointment expired at the end of 2006. Also, we interviewed the current executive director and the two previous executive directors of the commission. In addition, we interviewed all of the commission staff, including six program staff and six administrative staff. The latter included the associate director and office manager/assistant director who are responsible for administrative matters. We reviewed information and met with officials from the Senate Select Committee on Ethics, and the Secretary of the Senate Office of Public Records.

In order to determine the extent to which the commission effectively executes its financial management and reporting responsibilities in accordance with internal control standards, we gained an understanding of the commission’s overall financial management and reporting process by interviewing the commission officials and staff with those responsibilities. We also spoke with representatives of GSA’s External Services Division to gain an understanding of GSA’s role in the commission’s financial management and reporting process. We used applicable law and commission policy, as well as our standards for internal control in the federal government as our criteria. We developed our understanding of the key processes and controls over non-payroll- related transactions, travel and purchase card transactions, and payroll, from inception at the commission’s office up until the point that the commission submits vouchers to GSA for processing. We then assessed the extent to which certain key controls and procedures were effectively applied to the various types of transactions at the commission.

We selected a statistical sample of 59 debit transactions totaling approximately $1.1 million from a population of 1,991 debit transactions totaling approximately $4.5 million for fiscal years 2005 and 2006 to test specific internal control activities over non-payroll-related transactions, such as adequacy of supporting documentation, evidence of proper authorization or approval, and proper classification. The non-payroll- related population included transactions related to purchasing, travel, leases, payment to contracted employees and other miscellaneous transactions. Results from the statistical sample were projected to the population of non-payroll-related transactions for years 2005 and 2006. To test the reliability of the non-payroll-related transaction data provided, we (1) performed electronic testing of required data elements, (2) reviewed existing information about the data and the system that produced it, and (3) worked closely with commission and GSA officials to identify any data problems. When we found discrepancies such as zero- dollar transactions or those with descriptions we could not understand such as nonfederal summary codes, we brought them to GSA’s attention and worked with them to correct the discrepancies before conducting our analyses. We determined that the data were sufficiently reliable for the purposes of our report.

To examine commission travel card transactions, we obtained a database of commission travel card transactions from Citibank for fiscal years 2005 and 2006 and used data mining techniques to select potentially questionable travel card transactions. Our selections were made based on the dollar amount of an individual transaction, transaction volume on individually billed travel card accounts, group travel events, and any transactions associated with what are generally considered to be popular vacation areas. We traced selected transactions to supporting documentation, examined supporting evidence, and made appropriate inquiries to the associate director for transactions meeting these criteria.

To examine commission purchase card transactions, we obtained a database of commission purchase card transactions from Citibank for July 2005 through June 2006 and used data mining techniques to select potentially questionable purchase card transactions based on merchant category codes. This database covered 3 months of fiscal year 2005 (July 1, 2005, through September 30, 2005) and 9 months of fiscal year 2006 (October 1, 2005, through June 30, 2006) which we considered sufficient for our review.

To test the controls over the commission’s payroll transactions, we used a nonstatistical sample because we could not readily obtain detailed or aggregated salary information in electronic format for either staff or commissioners by fiscal year. We performed analytical procedures to assess if salary expenses were reasonable for fiscal year 2005 and 2006. We nonstatistically selected four commissioners and verified that they were paid at the authorized rates of pay for fiscal years 2005 and 2006. We also nonstatistically selected eight staff and recalculated their respective salaries for fiscal years 2005 and 2006 based on their authorized rate of pay. In order to assess the time and attendance part of the payroll process, we reviewed all T&A records for the same four commissioners for fiscal years 2005 and 2006 to determine whether they were completed and approved in accordance with the policy as described by the commission. We also selected three of the eight staff persons previously sampled nonstatistically, and reviewed all respective T&A records for fiscal years 2005 and 2006 to determine whether they were completed and approved in accordance with commission policy.

We did not audit the commission’s Statement of Budget Execution (Standard Form 133) or the Year-End Closing Statement (Standard Form 2108), nor do we express an opinion on them.

We performed our work from October 2006 to September 2007 in accordance with generally accepted government auditing standards.

Appendix II: Timeline of Events Related to USCESRC

Appendix III: USCESRC Appropriations and Expenses

From its inception in fiscal year 2001 through fiscal year 2007, the commission has received approximately $17.4 million in appropriations to fund its operations, as indicated in table 6. The commission has requested $4 million for fiscal year 2008. According to the commission, the $1 million in additional funding will support, among other things, internal and external research efforts and implementation of GAO recommendations.

The commission’s largest annual expense is for the commissioner and staff salaries, as shown in table 7. Other annual commission expenses include contracting research and professional services, leasing office space in Washington, D.C., and incurring other costs to carry out its mission.

The commission is not subject to any financial reporting or audit requirements. The commission developed a set of rules that require the commission to prepare a report detailing budget and expenditure information to be submitted to the commissioners for their review. The Commission Rules also require quarterly reporting of the status of funds, personnel actions, status of procurement of contracts, and other financial information. According to the executive director, the status of funds report is an internal document used to keep track of commission expenditures against its approved annual spending plan.

The commission entered into an agreement with the GSA Heartland Finance Center in Kansas City, Missouri, to perform financial reporting and accounting each fiscal year. This includes processing (1) obligations and payments that have been authorized by the commission, (2) receipts and disbursements of funds available to the commission from the U.S. Treasury, and (3) all applicable payroll functions. GSA also provides quarterly reports and year-end financial information to OMB and the Department of the Treasury. GSA does not have an oversight role described in its memorandum of understanding with the commission.

Appendix IV: Economic and Security Issues Covered by 2002 USCESRC Annual Report

We found the commission’s 2002 annual report covered the 10 economic and security issue areas mandated at the time. Table 8 provides details on the issue areas covered by the commission’s 2002 annual report.

Appendix V: Economic and Security Issues Covered by 2004 and 2005 USCESRC Annual Reports

We found the commission’s 2004 and 2005 annual reports covered the nine economic and security issue areas mandated at the time. Table 9 provides details on the issue areas covered by the commission’s 2004 and 2005 annual reports.

Appendix VI: USCESRC Procurement, Fiscal Year 2005

Appendix VI: USCESRC Procurement, Fiscal Year 2005 $40,000 Report on advanced technology products for Palo $6,000 U.S. patent laws working paper $3,000 Briefing paper Palo Alto hearing $14,000 Monitor and analyze U.S.-China economic $10,000 Advice, strategies, and facilitation for Seattle hearing $22,475 Report on Chinese plan to acquire and utilize U.S. $10,000 World Trade Organization compliance study for Feb.

Hearing (Feb. 2005)

Bell Harbor International Conference Center, Lotos Club, Stanford University, Prague Security Studies U.S. Senate Catering, Corner Bakery, and others $12,327 D.C. hearings, meetings, and briefings (catering expenses)

Karterian Systems Group Richard Harris $5,800 Media relations for WTO hearing Feb. 3-4, 2005 $18,900 Hearing consulting—multiple hearings $2,000 Media relations for Palo Alto hearing April 22-23, $1,344 Consulting Proliferation Hearing March 10, 2005 Translation of news articles Chinese to English Translations from Czech to English (Prague symposia)

Appendix VII: USCESRC Procurement, Fiscal Year 2006

D.C. hearings, meetings, and briefings (catering expenses)

Office upgrade (construction and materials)

Appendix VIII: Comments from USCESRC

The following are GAO’s comments on the commission’s letter dated September 11, 2007.

GAO Comments

1. In the Highlights and on page 2, it is clear that GAO’s assessment of organizational structure and management policies and procedures is based on internal control standards for the federal government. While these standards are not binding for legislative branch agencies, we advocate all federal entities follow them because they are a statement of best practices and adherence provides reasonable assurance regarding the prevention or prompt detection of fraud, waste, abuse, and mismanagement. We encourage the commission to adopt these standards, which give management of federal agencies, regardless of size, the responsibility and discretion to develop and implement the mechanisms for internal control necessary for providing reasonable assurance that the objectives of the agency are being achieved with regard to effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. 2. We characterize the commission’s views on pages 5 and 46. 3. With regard to the section on internal control over financial reporting, and the projection of the results of the statistical sample over nonpayroll transactions, the commission requested specific wording changes related to the potential impropriety or illegality of all or any specific transactions. We did not make those changes because the objective of the sampling performed was to determine whether the controls over non-payroll-related transactions were in place and operating effectively. As stated in the objectives, scope, and methodology in appendix I, we selected a statistical sample of 59 debit transactions totaling approximately $1.1 million from a population of 1,991 debit transactions totaling approximately $4.5 million for fiscal years 2005 and 2006 to test specific internal control activities over non- payroll-related transactions, such as adequacy of supporting documentation, evidence of proper authorization or approval, and proper classification. The non-payroll-related population included transactions related to purchasing, travel, leases, payment to contracted employees and other miscellaneous transactions. Results from the statistical sample were projected to the population of non- payroll-related transactions for fiscal years 2005 and 2006, where we estimated that the dollar value on non-payroll-related debit transactions with ineffective controls during the 2-year period we examined is not more than $1.2 million. Because this $1.2 million estimate exceeds the tolerable error of $224,715, we concluded that the controls were ineffective as stated in the report. 4. The commission partially disagreed with our observation that free food was being provided to the commissioners because, beginning in fiscal year 2006, it began a practice of deducting the cost of the food from commissioner salaries. We did not review the specific transaction details related to this practice, and we are unable to say to what portion of the $9,386 this practice applies. Further, this practice does not ensure that the commission prevents the use of appropriated funds to furnish free food to government employees and is subject to errors and inconsistencies. 5. On page 46 of the report, we note that GAO prefers not to accept any nonaudit work that could potentially create an independence impairment in fact or in appearance with respect to the entities it reviews.

Appendix IX: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the contact named above, Adam Cowles (Assistant Director), Sharon Byrd, Richard Cambosos, Stephen Donahue, Mark Dowling, Elizabeth Martinez, Mary Arnold Mohiyuddin, Jeremy Rothgerber, Juan Tapia-Videla, McCoy Williams, and Matthew Wood made key contributions to this report. The team benefited from the expert advice and assistance of Martin de Alteriis, Karen Deans, Francine DelVecchio, William Doherty, Etana Finkler, Carol Henn, India Jenkins, Ramon Rodriguez, Debra Rucker, Jena Sinkfield, and William Woods.