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

Letter

Background

Organizational Structure and Oversight

MARAD is responsible for overall policy direction of the Academy. The Maritime Administrator issues Maritime Administrative Orders (MAO) and bulletins establishing policies and providing guidelines for Academy operations. Additionally, the MARAD Chief Financial Officer (CFO) issues directives to provide guidance for conducting Academy financial operations. Since 2010, there have been two MARAD CFOs with an acting CFO between their appointments. From 2009 through 2011, MARAD relied on a Fiscal Oversight Board to assist MARAD in the oversight of the Academy’s operations.

The Academy Superintendent is responsible for day-to-day management of the Academy and reports directly to the head of MARAD, the Maritime Administrator. Since September 2008, there have been three Academy Superintendents, with the Academic Dean serving as Interim Superintendent between Superintendent appointments. Various assistant superintendents report to the Superintendent, and various directors of departments and offices report to the assistant superintendents. The Office of Academy Operations is led by the Academy’s CFO, who reports directly to the MARAD CFO. Additionally, since our 2009 report, four Academy support functionsdirectly to MARAD headquarters offices.

As of September 30, 2011, the Academy was also affiliated with two nonappropriated fund instrumentalities (NAFI) intended to assist the Academy in providing programs and services primarily for Academy midshipmen and employees. One of these NAFIs, the Employee Association, is intended to promote and support the interests of Academy personnel. The other is the Regimental Morale Fund Association, authorized to support morale, welfare, and recreation activities for the Academy’s midshipmen. In addition, as of September 30, 2011, four other NAFIs were in transition for closure (see table 1).

Additionally, the Academy also received financial support from two private foundations, the U.S. Merchant Marine Academy Alumni Association and Foundation and the Sailing Foundation. These foundations use funds provided by Academy alumni to provide financial support for the Academy’s charitable, scientific, and educational activities. See figure 1 for an overview of DOT, MARAD, and Academy organizational relationships.

Our 2009 reportdeficiencies as well as weaknesses in the Academy’s control environment. Specifically, we found that flawed design and implementation of internal controls were the root causes of the Academy’s inability to prevent or detect numerous instances of improper and questionable sources and uses of funds that we identified. Additionally, we found that the Academy lacked an accountability structure that clearly defined organizational roles and responsibilities; policies and procedures for carrying out its financial stewardship responsibilities; an oversight and monitoring process; and periodic, comprehensive financial reporting. As a result, our 2009 report included a total of 47 recommendations for corrective action. on the Academy identified numerous internal control Of the 47 recommendations, we made 1 overarching recommendation concerning actions needed for the Academy to establish effective overall internal control. Specifically, we recommended that the Secretary of Transportation direct the Administrator of MARAD, in coordination with the Superintendent of the Academy, to establish a comprehensive, risk- based internal control system to address the core causes of the control deficiencies identified in our 2009 report, including delineating the roles and responsibilities of management and employees to establish and maintain a positive and supporting attitude toward internal control and conscientious management, and the responsibility of managers to monitor control activities.

The remaining 46 recommendations related to control deficiencies associated with the following activities:

Academy training vessel use, personal service acquisitions,

NAFI camps and clinics using Academy facilities, midshipmen fee accountability, accountability for Academy reserves,

Academy and NAFI governance structure, financial reporting, fund accountability, and capital asset repairs and improvements.

Actions Taken to Address Prior Recommendations

Our review of the Academy’s and MARAD’s efforts to address the issues reported in our 2009 report found that the Academy and MARAD had not yet established a comprehensive, risk-based system of internal control at the Academy. The Academy and MARAD both focused their initial efforts on the more readily correctible deficiencies in the Academy’s controls over specific activities. As a result, the Academy and MARAD had made substantial progress in addressing weaknesses related to specific control activities by successfully implementing 32 of the 46 control deficiency- related recommendations identified in our 2009 report. For example, the corrective actions taken to improve controls were sufficient for us to conclude that all recommendations related to training vessel use, personal service acquisitions, accountability for Academy reserves, and NAFI camps and clinics using Academy facilities were successfully implemented.

Additional Action Needed to Establish Overall, Risk- Based Internal Control System

Our review found that actions taken by the Academy and MARAD through September 30, 2011, were not sufficient to fully address our overarching recommendation related to the establishment of a comprehensive, risk- based internal control system at the Academy, a positive and supportive attitude toward internal control, and an associated system of monitoring internal control effectiveness. Standards for Internal Control in the Federal Government provides that internal control should (1) serve as the first line of defense in preventing and detecting errors and fraud, (2) provide for an assessment of external and internal risks to the entity, and (3) provide for internal control monitoring. Monitoring is critical to ensure that findings of audits or other reviews are promptly resolved and to assess the ongoing effectiveness of controls. However, our review found that the Academy had not yet taken actions sufficient to address the core cause of many of the control deficiencies identified in our 2009 report. Understanding the causes of internal control deficiencies is critical to designing effective, risk-based controls that can help prevent questionable transactions in the future. For example, as discussed later in this report, the Academy took action to correct errors we identified in its accounting for certain capital asset repairs and improvements, but had not yet taken action to conduct an analysis, as we recommended, to identify and address the underlying causes of these errors.

Nonetheless, the Academy and MARAD have taken a number of actions that represent an important first step toward focusing the top-level attention and accountability needed to establish an effective overall system of internal control for the Academy. For example, in January 2011, MARAD established and filled an Internal Control Officer (ICO) position for the Academy. The Academy ICO, who is also the Academy’s Chief Information Officer, reports to MARAD’s Internal Controls Program Manager and is responsible for coordinating and leading the Academy’s reviews of internal controls in accordance with Office of Management and Budget (OMB) Circular A-123 and the Federal Managers’ Financial Integrity Act of 1982 (FMFIA). Also, in September 2011, MARAD issued guidance in MAO 400-11 intended to help clarify the Academy’s oversight role and responsibilities with respect to the Academy’s affiliated NAFIs.

Despite these completed actions, until Academy and MARAD officials take additional actions to fully address our recommendation in this area, their ability to ensure that Academy and MARAD management’s objectives are carried out, including proactively identifying and correcting control deficiencies in a timely fashion, will continue to be impaired. Both the Academy and MARAD focused their initial efforts on the more readily correctible deficiencies in the Academy’s specific controls, as discussed later in this report. However, while these efforts are necessary and have a significant impact on internal control, it is important that the Academy and MARAD address the long-standing, deeply rooted causes of the specific control deficiencies we identified and establish processes to ensure that effective internal control is fully established, maintained, and monitored over time. In this regard, it is also important that the Academy and MARAD provide priority attention and focus not only on addressing questionable transactions we identified in our prior report, but also on the underlying causes of the specific errors we identified.

Actions Taken to Address Many of Our Prior Recommendations Related to Specific Control Activities

As of September 30, 2011, Academy and MARAD officials had taken sufficient actions to address 32 of our 46 prior recommendations intended to address specific deficiencies in the Academy’s control activities. For example, officials took steps to fully close all of our previous recommendations related to controls over training vessel use, personal service acquisitions, accountability for Academy reserves, and NAFI camps and clinics using Academy facilities. For the 14 remaining recommendations, we identified varying levels of action in process as of September 30, 2011, but none sufficient for us to consider them effectively implemented. Our conclusions on the status of Academy and MARAD actions to address our 46 previous recommendations concerning specific deficiencies in control activities are summarized in table 2, discussed in summary in the following sections, and discussed in greater detail in appendix II. Standards for Internal Control in the Federal Government provides that agencies should take appropriate follow-up actions to address findings and recommendations of audits and other reviews. Also, GAO’s Internal Control Management and Evaluation Tool provides that in taking such actions, agencies are to ensure that the underlying causes giving rise to the findings or recommendations are investigated, that actions are decided upon to correct the identified weaknesses, and that weaknesses are corrected promptly.

Training vessel use. In 2009, we reported that the Academy lacked policies and procedures and adequate internal controls over the use of Academy training vessels by outside parties. For example, we found that the usage rates for Academy training vessels were not supported and were not based on consideration of current costs of operation. The Academy and MARAD took steps to address all five of our recommendations related to internal control deficiencies regarding outside party use of Academy training vessels. In September 2010, the Academy issued Superintendent’s Instruction 2010-08, which set out procedures for outside parties to use and pay for all costs associated with the use of Academy training vessels. The Academy’s Department of Waterfront Activities also issued a vessel usage rate schedule in September 2010 that provided current costs of operation for use of Academy training vessels. The guidance provides base hourly, daily, and weekly billing rates that outside parties are to be charged for using the Academy’s training vessels.

Personal service acquisitions. In our 2009 report,instances in which the Academy entered into illegal personal service agreements with its NAFIs, whereby NAFI employees performed exclusively Academy functions and reported to Academy supervisors. The Academy and MARAD took actions to address both of our recommendations related to improving internal controls over personal service acquisitions. To address our recommendations, MARAD performed an analysis to identify the nature and scope of personal service arrangements in order to determine whether amounts paid by the government were consistent with the services received by the Academy. Using the results of the analysis, MARAD took action to address all personal service arrangements by either converting affected NAFI employees to the civil service or transferring them to a contract. In addition, the MARAD Administrator finalized MAO 400-11 on September 30, 2011, which provided governing principles under which NAFIs must operate, including that a NAFI must have staff to conduct its daily operations, and it is not to receive any operating subsidy from the Academy other than minor incidental support. Notably, however, MAO 400-11 requires that generally, a NAFI may not provide goods or services to the Academy.

NAFI camps and clinics using academy facilities. In 2009, we reported that the Academy lacked policies and procedures and effective internal controls to help ensure proper accounting for the use of fees from conducting camps and clinics using Academy athletic facilities. The Academy and MARAD took corrective actions to address all three of our recommendations related to NAFI camps and clinics’ use of academy facilities. Specifically, MARAD engaged the services of an independent public accounting firm to perform an analysis to identify NAFI camps, clinics, or fund-raising activities that used Academy property from fiscal years 2006 through 2008 and determine the related sources and uses of funds. Based on this analysis, it was determined that most of the revenue resulting from the camp and clinic activity was paid to the individuals responsible for conducting the activities and the residual revenue, deemed nominal, was identified to have been used to support the general activities of the NAFI conducting the camp or clinic. Also, Superintendent’s Instruction 11100.1, dated May 17, 2011, established a written policy that Academy facilities will not be used for revenue-generating athletic camps and clinics.selected 2010 and 2011 transactions did not identify any camp or clinic activity using the Academy’s facilities.

Our review of supporting financial documents for

Midshipmen fee accountability. In 2009, we identified instances of improper and questionable sources and uses of midshipmen fees, as well as a lack of adequate procedures and controls to maintain effective accountability over the amounts charged to midshipmen and to ensure that midshipmen fees were used only for their intended purpose. The Academy and MARAD undertook a series of reviews and completed actions that addressed seven of our nine recommendations related to midshipmen fee accountability. To address our recommendations, MARAD established a baseline for items of a personal nature and related costs to be charged to midshipmen, beginning with fiscal year 2009. Following an analysis based on this baseline, MARAD determined that prior years’ midshipmen fees included the costs of items that should have been paid by the Academy. Consequently, the fees collected from midshipmen over their 4-year academic program dropped from $15,500 in fiscal year 2008 to approximately $5,500 in fiscal year 2009. As a result, MARAD proposed a refund of midshipmen fees to the midshipmen who it was determined had overpaid in academic years from academic year 2003-2004 through academic year 2008-2009. In February 2012, DOT informed us that MARAD began making refunds in November 2011 and, as of January 2012, had reimbursed 83 percent of eligible refund recipients and continued with its efforts to reach the remaining refund-eligible midshipmen.

One of the two recommendations that remain open relates to establishing written policies and procedures over (1) processing of midshipmen fee collections and payments and (2) monthly reporting for midshipmen fee activity and balances. On May 26, 2010, MARAD issued MAO 400-15, providing policy guidance governing the setting, managing, and reporting of midshipmen fees. However, this guidance did not provide detailed procedures to ensure that staff consistently and effectively process and account for midshipmen fee activities and balances. The second of these open recommendations calls for a determination of the extent to which appropriated funds and midshipmen fees collected should be used to pay for contracted medical services. On February 5, 2010, MARAD reported the results of a joint MARAD and Academy review that identified the types of medical services provided to the midshipmen, through both appropriated and nonappropriated funding, and stated that for the fiscal year 2012 budget development process, the Administrator may wish to consider guiding the Superintendent to seek alternatives to the current approach. However, as of September 30, 2011, the Academy had not yet determined the extent to which appropriated funds and midshipmen fees collected should be used to pay for contracted medical service as called for in our recommendation.

Accountability for academy reserves. Our 2009 report identified inappropriate conversion of “off-book” reserves accumulated from excess midshipmen fee collections, funds received from the Global Maritime and Transportation School (GMATS) NAFI for use of the Academy’s facilities, and expiring appropriated funds that were deposited to a commercial bank account to fund Academy operations the following fiscal year. For example, a “Superintendent’s Reserve” account was created “off book” and used to make discretionary Academy operations payments authorized by the Academy Superintendent. The Academy and MARAD have taken corrective actions sufficient to address all four recommendations related to accountability for Academy reserves. To address our recommendations, MARAD engaged the services of a public accounting firm to perform an analysis of the sources and uses of funds held in commercial bank accounts during fiscal years 2006 through 2008 to determine consistency with applicable law, regulation, or policy. A May 19, 2010, MARAD CFO memorandum on the results of the analysis stated that the review did not identify any evidence that funds were used inappropriately or for the personal benefit of any individual and that no inconsistency with law, regulation, or policy was identified. Accordingly, the MARAD CFO concluded that no further action was warranted. In addition, the Academy’s changed business practices discontinued conversion of appropriated and nonappropriated funds to “off-book” reserves. Further, as a result of the analysis performed in response to our recommendation, a balance of approximately $3 million in the commercial bank account maintained for excess prior-year midshipmen fee collections was transferred to the U.S. Treasury to assist with the midshipmen fee refunds.

Academy and NAFI governance structure. Our 2009 report found that 11 of the 14 NAFIs that provided programs and services for Academy midshipmen and employees did not have approved governing documents, such as charters and bylaws, and that the remaining 3 NAFIs performed some duties and functions that fell outside the scope of authority set forth in their governance documents. As a result, we issued eight recommendations related to improving controls over activities between the Academy and its affiliated organizations. The Academy and MARAD completed actions sufficient to address four of our eight recommendations related to Academy and NAFI governance structure. For example, on September 30, 2011, MARAD issued MAO 400-11, which provides policies and general guidelines for the establishment and governance of NAFIs and their affiliation with the Academy, including charters, bylaws, and a NAFI governing board. In addition, an independent public accounting firm’s analysis of activity between the Academy and its GMATS NAFI did not identify any activity that was inconsistent with applicable law, regulation, or policy. A May 19, 2010, MARAD CFO memorandum concluded that none of the NAFI funds were used inappropriately or for the benefit of any individual and that no further action was warranted.

Two of the four recommendations that we concluded were not yet addressed relate to performing an analysis to identify each activity involving the Academy and its NAFIs and establishing formal written policies and procedures documenting the (1) planned timing of performance of each internal control procedure for each NAFI activity, (2) responsibilities for oversight and monitoring of those internal control procedures, and (3) direct, compensating, and mitigating controls for each NAFI activity. Although MAO 400-11 provides general guidance on NAFI and Academy relationships, it does not provide the necessary detailed procedures to be followed to ensure that each NAFI has a robust, risk-based system of checks and balances with the Academy for each NAFI activity as called for in our 2009 recommendation. As of September 30, 2011, we found that neither the Academy nor MARAD had performed an analysis aimed at identifying all activities between the Academy and its ongoing affiliated organizations. Without identifying such activities and their associated risks to the Academy, the Academy faces the continued risk of improper transactions.

The other two open recommendations relate to the relationship between the Academy and its GMATS NAFI. The recommendations were intended to address the Academy improperly entering into sole- source agreements with GMATS to provide training to other federal agencies and improperly accepting and using nonappropriated GMATS funds. On September 30, 2011, the Maritime Administrator issued a memorandum rescinding the authority of GMATS to operate as a NAFI effective August 1, 2012. The memorandum also provided that GMATS may continue future operations if it is reestablished under a different operating model. However, because GMATS NAFI operations have not yet been terminated or reestablished, our two recommendations in this area remain open.

Financial reporting. In 2009, we found that the Academy did not routinely prepare financial reports presenting information on all of its financial activities, including sources and uses of its appropriated and nonappropriated funds. Instead, we found that the Academy’s financial reporting was sporadic, unreliable, and, consequently, of limited value for decision making. The Academy and MARAD completed actions sufficient to address two of our five recommendations aimed at improving controls over the Academy’s financial reporting. MARAD issued CFO Directive 2 in December 2009 and amended it twice in 2010. Directive 2 established procedures for monitoring Academy financial performance by requiring the Office of Academy Operations to prepare, review, and provide monthly financial reports to the MARAD CFO for review. Directive 2 also provided for following up on, and documenting, unusual items and balances.

The three recommendations that remain open relate to (1) the production of financial reports to facilitate oversight and monitoring of actual and budgeted amounts of revenues and expenses, reporting of amounts for activities and balances with affiliated organizations, and the identification of items of revenue and expenses; (2) identification and evaluation of potential misstatements of amounts in Academy financial records; and (3) compliance with required annual reporting to Congress on all expenditures and receipts for the Academy and its affiliated organizations. CFO Directive 2 provides instructions for the Office of Academy Operation’s preparation, review, and monitoring of monthly financial reports on funds allotted to the Academy. However, it does not require the monthly reports to include information on all sources and uses of other funds benefiting the Academy, such as obligation and expenditure activity of expired funds;

CIP and gift and bequest expenditure activity for years following activity for miscellaneous receipts, such as transfer of funds from closed commercial bank accounts, fees from foreign midshipmen and for outside use of training vessels, and payments from the Navy Exchange; sources and uses of funds maintained in commercial bank accounts; and sources and uses of midshipmen fees processed through two appropriation accounts and one nonappropriation account.

The MARAD CFO told us that the primary intent of Directive 2 is to report the status of funds allotted to the Academy, but acknowledged that any additional funds should be identified and reported as well. Accordingly, the MARAD CFO agreed that CFO Directive 2 reporting requirements should be updated to require all sources and uses of Academy funds to be identified and reported to provide visibility over all Academy accounts and activities necessary to facilitate comprehensive oversight and monitoring.

With respect to our recommendation to identify and evaluate potential misstatements of amounts in Academy financial records, MARAD engaged an independent public accounting firm to determine the extent of any such misstatements. The review identified approximately $1.3 million in Academy expenditures funded by midshipmen fees that should have been funded by appropriated funds. However, as of September 30, 2011, MARAD had not yet determined whether it should adjust financial records and reports to reflect the use of midshipmen fees to augment Academy appropriations. MARAD officials acknowledged the need to perform additional work to determine whether adjustments to the Academy’s financial records and reports are warranted.

In response to our recommendation to provide Congress a statement on the purpose and amount of all expenditures and receipts of nonappropriated funds benefiting the Academy and its affiliated organizations, MARAD issued CFO Directive 3 on December 29, 2009. Directive 3 established procedures for reporting on resources other than the Academy’s appropriated funds to be included in MARAD’s annual report to Congress. Specifically, the directive provides for reporting on the amount, source, intended use, and nature of such funds. However, based on our review of MARAD’s fiscal year 2009 annual report to Congress—the most recent report available as of September 30, 2011—the report did not contain expenditure information for any of the Academy’s affiliated organizations and did not provide a purpose for which the expenditures were made to comply with the reporting requirement as we recommended.

Funds accountability. In 2009, we found that the Academy did not have assurance that it complied with applicable funds control requirements, including those in the Antideficiency Act (ADA). The Academy and MARAD have taken sufficient actions to implement four of our seven prior recommendations related to funds accountability. Specifically, officials investigated and mitigated a potential ADA violation, completed a series of reviews aimed at resolving past deficiencies related to “parking” of Academy funds to keep them from expiring,expense at year-end. With respect to the potential ADA violation, MARAD’s Chief Counsel determined in 2011 that Academy officials had retained approximately $200,000 in excess funds from GMATS which they had no legal authority to retain and had thereby augmented Academy funds in excess of appropriations made by Congress during fiscal years 2006, 2007, and 2008. According to an April 11, 2011, memo signed by the Maritime Administrator, MARAD determined that sufficient prior-year funds existed to offset the GMATS-funded Academy expenditures. MARAD adjusted its accounts accordingly and since these sufficient prior-year funds existed, MARAD did not exceed its available appropriations in violation of the ADA. Also, the Academy and MARAD successfully implemented two recommendations related to “parking” of appropriated Academy funds by performing a series of reviews to identify excess Academy funds improperly held in commercial bank accounts. As a result of these reviews, the Fiscal Control Office NAFI returned over $214,000 of improperly held excess fiscal years 2006 and 2007 funds to the Academy. The Academy subsequently deobligated these funds and returned them to their respective appropriation. Further, the Academy and MARAD have discontinued use of the Academy’s in-house fund control system and have transitioned to DOT’s financial accounting system and have revised the Budget Program Accounting Codes. These actions should provide more transparent financial reporting and improved oversight. Additionally, in January 2010, MARAD issued CFO Directive 6 establishing policy and procedures for accounting and recording of Academy accrual of expenses at year-end. If fully and effectively implemented, Directive 6 should improve internal control over accounting and recording of Academy accrual of expenses. and established written policy on the accrual of items of The three recommendations that remain open in this area relate to making final notification to Congress of an ADA violation resulting from midshipmen fees that were used to cover Academy expenses without legal authority to do so, implementing corrective actions as a result of a MARAD review in which it identified weaknesses related to the Academy’s funds control process, and establishing targeted internal controls, such as management’s review and approval procedures, over accruals.

According to a March 23, 2011, memorandum to the Maritime Administrator from MARAD’s Chief Counsel, the Academy violated the ADA by charging midshipmen fees in excess of authorized levels, improperly augmenting agency appropriations, and making expenditures in excess of and in advance of appropriations. As of June 1, 2012, the required ADA report to Congress had not been filed. Additionally, the Academy and MARAD had yet to implement corrective actions as a result of a review of the Academy’s funds control process. Specifically, on February 1, 2010, the MARAD CFO completed a review of the Academy’s funds control process and made five recommendations for process improvements, including that the MARAD CFO issue a directive establishing policy and procedures requiring the periodic review and closeout of undelivered orders. The review also recommended that the MARAD CFO issue policy guidance to address an internal control weakness regarding contracting officer approval of Academy invoices. However, as of September 30, 2011, the MARAD CFO had not issued any guidance in this area. While MARAD officials told us they had practices in place for contracting officer approval of invoices, we found that as of September 30, 2011, MARAD had not documented and disseminated these practices to Academy acquisition staff in policy guidance, such as a CFO directive.

Capital asset repairs and improvements. Our 2009 report identified repair and maintenance (R&M) costs that were improperly charged against the Academy’s no-year capital asset improvement appropriation and found that the MARAD CFO did not conduct timely reviews of the Academy’s capital improvement-related expenses for fiscal years 2006 and 2007. The Academy and MARAD have taken corrective action to address one of the three recommendations we made to improve specific controls related to capital asset repairs and improvements. On May 25, 2010, the MARAD CFO issued Directive 7, requiring monthly review of recorded amounts of Academy repairs and maintenance expenses and capital improvement transactions to identify any anomalies, discrepancies, or questionable entries. Our work found that the Office of Academy Operations reviewed the accounting records on a monthly basis in accordance with Directive 7.

The two recommendations that remain open relate to (1) establishing policies and procedures for reporting financial information on R&M expenses and capital asset additions to help monitor these items and (2) performing an analysis to identify the causes of approximately $8 million of errors in recording R&M expenses identified in our 2009 report. While CFO Directive 7 required monthly reporting, we found that the reports were not distributed to users, such as Academy department managers, to facilitate monitoring of these items as called for in our recommendation. With respect to our recommendation to identify the causes of the errors in recording R&M expenses, we found that the Academy and MARAD had taken action to reclassify the transaction errors we identified but had not yet conducted the recommended root cause analysis needed to identify and address any systemic issues causing the errors and to prevent such errors in the future. Consequently, the Academy and MARAD are at risk of reoccurrences of errors in R&M expense accounting.

Further Enhancements to Capital Improvement Program Oversight Are Needed

Although the Academy and MARAD have taken steps to improve oversight of the Academy’s CIP, the Academy does not have a current comprehensive plan for capital improvements to provide the basis for oversight of CIP planning and implementation. In response to a May 2009 directive from the Secretary of Transportation, MARAD convened an independent “Blue Ribbon” advisory panel consisting of senior government executives to analyze the Academy’s CIP and its investment priorities. The panel concluded that the Academy’s facilities were seriously deteriorated and its support buildings were inadequately maintained. The panel’s March 2010 report, USMMA: Red Sky in the Morning, provided 11 recommendations, which included linking a comprehensive Academy strategic plan to its Facilities Master Plan with capital investments prioritized for a 10- to 15-year period to address the Academy’s extensive needs. According to DOT officials, MARAD prepared its USMMA Capital Improvements Implementation Plan in November 2010 to serve as a road map for implementing the panel’s recommendations and to identify the Academy’s immediate capital improvement needs through 2016.

The Academy also established and filled a new position for an Assistant Superintendent for Capital Improvements and Facilities Maintenance in 2010, designating the new position’s responsibilities to include oversight of the Academy’s Departments of Capital Improvements and Facilities Maintenance and the Office of Safety and Environmental Protection. This position is to provide oversight for the Academy’s CIP and leadership for strategic planning and accountability related to capital improvement activities. Further, according to Academy officials, the Academy realigned its facilities management organizational structure in December 2010 to reflect that of other academic organizations and service academies and to improve oversight.

Despite these recent improvements, the Academy has not yet developed reliable project cost estimates and current phased capital investment plans aligned with the organization’s strategic objectives, as recommended by the Blue Ribbon panel in 2010. Guidance issued by OMB as well as our prior work on leading practices in this area identifies the need for effective capital planning to provide CIP accountability and oversight. Our Executive Guide: Leading Practices in Capital Decision- Making summarizes the results of our research on leading capital planning practices used by state and local government and private-sector organizations. It includes practical steps for implementing capital planning effectively and presents examples that illustrate and complement many of the concepts and specific steps contained in OMB’s Capital Programming Guide. Our GAO Cost Estimating and Assessment Guide, which provides best practices for developing, managing, and evaluating capital program cost estimates, complements the Executive Guide. Fundamental success factors identified in our Executive Guide include developing long- term capital investment plans that integrate with long-range organizational strategic objectives, present reliable project cost estimates to inform decision making, and use a phased priority approach to guide and schedule capital spending.

The Academy’s Facilities Master Plan, which identified anticipated capital projects for a 10-year period in three priority phases, has not been comprehensively updated since 2002. Up-to-date CIP information that identifies and prioritizes long-range renovation and new construction projects and provides reliable project cost estimates and completion and funding timelines would facilitate oversight by helping to assess whether individual improvements were carried out in a timely and cost-effective manner and in priority order. We identified instances where improvements were not carried out in priority order and also identified lengthy delays in completing some planned capital investments. For example, the 2002 Facilities Master Plan showed that the midshipmen’s primary commissary, Delano Hall (which serves over 2,000 meals a day to the Academy’s residential midshipman population), was to have been refurbished during fiscal year 2002. As of September 30, 2011, the Delano Hall refurbishment project had not yet broken ground. According to information that DOT provided in February 2012, several tasks related to the Delano Hall refurbishment project have been completed, such as remodeling rest rooms in compliance with the Americans with Disabilities Act. DOT told us at that time that it expected construction on the commissary to begin in the summer of 2012 and to be completed by December 2013.

Preparing the 2010 Capital Improvements Implementation Plan was a positive step, although the implementation plan acknowledged the need for a more comprehensive, phased investment plan. For example, the implementation plan did not present a long-range phased investment plan and detailed cost estimates. Rather, projects presented were based on average replacement cost per square foot for federal government buildings, described in the plan as a “rough order of magnitude estimate.” Accordingly, the cost estimates presented in the implementation plan did not consider specific cost factors for capital improvements at the Academy, such as geographic location, local cost of construction and labor, and the technology, simulation, and infrastructure requirements of an institution of higher education. As stated previously and recommended by the 2010 Blue Ribbon panel, reliable cost estimates and phased investment priorities for Academy capital projects that are aligned with the organization’s long-range strategic objectives would help facilitate CIP oversight. According to DOT officials, the Academy had recently begun preparing its first strategic plan to define the organization’s goals and objectives and to help the Academy better prioritize investments. Specifically, they told us in February 2012 that the strategic planning process for the Academy is to be led by the Academy’s Acting Superintendent and is expected to be a multiphased effort beginning with identification of key internal stakeholders to assist with the development of critical issues that should be addressed in the strategic plan.

Conclusions

Clearly articulated top management vision and support will be critical for fully implementing the open recommendation related to establishing a comprehensive risk-based system of internal control and related monitoring. The Academy and MARAD have taken a number of positive steps, but until Academy and MARAD officials take additional actions to fully address our recommendation in this area, their ability to ensure that management’s objectives are carried out, including proactively identifying and correcting control deficiencies in a timely fashion, will continue to be impaired. We reiterate the need to continue efforts to complete full implementation of this recommendation. The Academy and MARAD have made significant progress in addressing our prior recommendations related to specific control activities, and their actions effectively addressed 32 of the 46 recommendations related to deficiencies in specific controls. We reiterate the need to address the remaining 14 recommendations related to midshipmen fee accountability, Academy and NAFI governance structure, financial reporting controls, fund accountability, and controls over capital asset repairs and improvements.

The Academy and MARAD have taken steps to improve CIP oversight and planning of capital improvement projects at the Academy. However, the Academy does not have comprehensive, updated information on capital improvement projects, including reliable cost data, long-range capital investment plans, and phased priorities. Further, the Academy has not yet aligned its capital improvement priorities with the organization’s strategic objectives, a critical factor in providing effective oversight.

Recommendation for Executive Action

To improve oversight of the Academy’s capital improvement program, we recommend that the Secretary of Transportation direct MARAD to work with Academy officials to develop and maintain a current and comprehensive plan in accordance with leading practices and guidance. At a minimum, such plan should include an inventory of long-range capital improvements that align with the a phased investment approach for prioritizing capital improvement Academy’s strategic objectives, reliable estimates of cost specific to each capital improvement, and needs.

Agency Comments and Our Evaluation

On June 19, 2012, DOT provided written comments on a draft of this report, signed by the Deputy Assistant Secretary for Administration. The comments are reprinted in appendix III. In its comments, DOT described steps that the department, MARAD, and Academy are taking to help prioritize and manage Academy capital improvement projects. DOT indicated that these actions are aligned with and fulfill the recommendation in our draft report. Specifically, DOT stated that since our draft report was issued, the department, MARAD, and the Academy established a comprehensive CIP that includes a Senior Advisory Council and working group; a management process that provides a clear and consistent understanding of project status; and controls for project selection, management, and completion, including tracking reports, process documentation, and Senior Advisory Council meetings to monitor progress.

We are encouraged by the increased oversight these measures would provide for the Academy’s capital investments. However, it is too soon to determine the extent to which the new CIP addresses the three specific elements that our recommendation provided as minimum attributes for a comprehensive capital improvement plan: an inventory of long-range capital improvements that align with the Academy’s strategic objectives, reliable cost estimates specific to each capital improvement, and a phased investment approach for prioritizing capital improvement needs. We believe these attributes are critical to facilitating oversight of the Academy’s capital improvements to ensure that they address the needs of the midshipmen in accordance with the strategic vision of the Academy, are undertaken in priority order, and are completed timely and cost effectively.

DOT also stated that it remains dedicated to the challenging task of building and operating a comprehensive system of internal controls at the Academy, including completing action on all recommendations in our prior report, and will keep us apprised of progress to close out our recommendations. DOT further stated that it has established a goal of completing action on all 46 of our specific control-related recommendations by December 31, 2012.

We are sending copies of this report to the Secretary of Transportation; Maritime Administrator; and Superintendent, U.S. Merchant Marine Academy. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please contact me at (202) 512-9500 or DavisBH@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV.

Appendix I: Scope and Methodology

To address our objective to assess the extent to which actions have been taken to address our prior recommendations as contained in our report, United States Merchant Marine Academy: Internal Control Weaknesses Resulted in Improper Sources and Uses of Funds; Some Corrective Actions Are Under Way (GAO-09-635), we interviewed agency officials and reviewed and analyzed

MARAD summaries of action steps taken in response to our activities and policies, procedures, and memorandums issued by the U.S. Merchant Marine Academy (Academy) and Maritime Administration (MARAD); and laws and regulations governing Academy operations.

In addition, as part of our assessment of recommendations related to accountability for Academy reserves, financial reporting controls, and fund accountability, we obtained a database of Academy obligations and expenditures at the transaction level for fiscal years 2010 and 2011 to make a nonstatistical selection of transactions to obtain an understanding of the Academy’s accounting process. We compared these data to amounts reported for the Academy in the Department of Transportation’s (DOT) annual performance and accountability reports. We performed system walk-throughs to gain an understanding of procedures in place. As part of this assessment, we reviewed and analyzed bank statements; and procurement documentation for selected transactions, including receipts and disbursements records; contracts, purchase orders, receiving documentation, invoices, and disbursement documents and other pertinent supporting documents.

We also reviewed and discussed with appropriate officials the objectives and scope of a report prepared by an independent public accountant engaged by MARAD on its analysis of certain prior-year sources and uses of funds that related to our recommendations.

Further, for some specific recommendations, we reviewed rate schedules, billings and underlying calculations, payroll records, and congressional notifications, as appropriate. We also reviewed analyses prepared by the Academy, MARAD, and certain nonappropriated fund instrumentalities (NAFI) regarding specific transaction types, such as a midshipmen fee refund schedule and a summary of payments made by the Global Maritime and Transportation School (GMATS) NAFI to the Academy.

To assess actions taken to address our recommendations regarding controls over financial reporting and capital asset repairs and improvements, we also reviewed monthly reports summarizing transaction activity and balances.

To address our second objective regarding our assessment of oversight of the Academy’s Capital Improvement Program (CIP), we interviewed Academy and MARAD officials and reviewed Academy and MARAD procedures, monthly reports to MARAD, and monthly analyses prepared to help ensure that transactions are accounted for properly. We also reviewed the Academy’s 2002 Facilities Master Plan, a report on the Academy’s CIP prepared by a Blue Ribbon panel, a follow-up implementation plan that responded to the Blue Ribbon panel report,GAO and Office of Management and Budget (OMB) guides related to capital improvements project planning. We also observed the Academy’s physical plant.

We evaluated corrective actions taken through September 30, 2011, that the Academy, MARAD, and DOT made us aware of by February 15, 2012. In addition, we reviewed DOT’s Office of Inspector General audit and investigation reports for the period from January 2010 through March 2012 to determine if any work related to the Academy had been performed. No audit reports that could have an impact on this engagement were noted.

We conducted this performance audit from February 2011 to June 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Status of Prior Recommendations and Description of Corrective Actions Taken

This appendix presents a list of the 47 recommendations that we previously issued in our August 2009 report along with our analysis of the implementation status of each recommendation (see table 3). We evaluated corrective actions taken through September 30, 2011.

Appendix III: Comments from the Department of Transportation

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Jack Warner, Assistant Director; Crystal Alfred; Francine DelVecchio; Geoff Frank; Pat Frey; Matthew Gardner; Jehan Abdel-Gawad; Jamie Haynes; Kate Lenane; and Scott McNulty made key contributions to this report.