U.S. Capitol Grounds Concerts: Improvements Needed in Management Approval Controls over Certain Payments
Released: 2016-10-28T00:00:00

Letter

Background

Producing the Memorial Day and Fourth of July concerts involves obtaining funding; determining each concert’s artistic program; arranging for performing artists, talent, and production staff; and arranging for the television broadcast of the concerts.

CCI received both federal and nonfederal funding to support the production of the 2012 through 2014 Memorial Day and Fourth of July concerts. CCI received federal funding from NPS through a cooperative agreement. As shown in figure 1, funding provided through the cooperative agreement included funding that NPS received through an interagency agreement with the Department of the Army (Army) and funding from NPS’s own budget through the National Capital Area Performing Arts Program. CCI obtained nonfederal funding through corporate sponsorship agreements, grant agreements with the Corporation for Public Broadcasting, and license agreements from the Public Broadcasting Service (PBS). CCI also received funding from other sources, such as interest revenue, but these sources represent a minor portion of total funding.

CCI Received and Disbursed from $8 Million to $9 Million Each Year for the 2012 through 2014 Concerts

CCI received from $8.5 million to $9.2 million and disbursed from $8.3 million to $8.9 million each year to produce the 2012 through 2014 Memorial Day and Fourth of July concerts.

CCI Received from $8.5 Million to $9.2 Million Each Year for the 2012 through 2014 Concerts

We found that CCI received funding for the 2012 through 2014 Memorial Day and Fourth of July concerts ranging from $8.5 million to $9.2 million each year. For purposes of our report, we classified funding into three categories: federal, nonfederal, and other funding sources. These three categories are presented in table 1.

As shown in figure 2, CCI’s receipts for the 2012 Memorial Day and Fourth of July concerts totaled $8.5 million, $8.7 million for the 2013 concerts and $9.2 million for the 2014 concerts. Over the 3-year period, the percentage of funding CCI received from federal sources slightly decreased, even though the dollar amount remained consistent. The amount of funding CCI received from nonfederal sources over the 3-year period increased slightly in both dollar value and percentage. The increases were mainly attributable to an increase in funding received through the license agreements with PBS. Other funding sources remained consistent over the 3-year period.

CCI Disbursed from $8.3 Million to $8.9 Million Each Year for the 2012 through 2014 Concerts

CCI disbursed from $8.3 million to $8.9 million each year to produce the 2012 through 2014 Memorial Day and Fourth of July concerts, approximately 1.1 to 3.7 percent less than the annual funding received. CCI retains the excess of receipts over disbursements to use toward future concerts in accordance with the cooperative agreements to produce the concerts. CCI records transactions in its accounting system under three main account series (i.e., Memorial Day concert, Capitol Fourth concert, and general and administrative) and uses detailed subaccounts to classify transaction types. We used the account descriptions from the subaccounts to classify disbursement transactions into six categories to present the types of disbursements made in producing the concerts. These six categories are presented and defined in table 2.

As shown in figure 3, CCI disbursed $8.4 million for the 2012 Memorial Day and Fourth of July concerts, $8.3 million for the 2013 concerts and $8.9 million for the 2014 concerts. Over the 3-year period, there were few changes among the proportion of disbursements made by CCI in the overall production of the Memorial Day and Fourth of July concerts. Production staff is CCI’s largest disbursement category, and it accounted for 31 percent of all disbursements across the 3-year period. The largest change in proportion occurred in 2013 when technical equipment rose 3 percent. According to CCI, this was due to upgrades made to the band shell.

Transactions Were Adequately Supported and Recorded, but Some Payment Approvals Were Missing in 2013

During our review, we found that the receipt transactions tested for all 3 years were supported by adequate documentation, approved by authorized management, and recorded in the appropriate year. Similarly, we found that the disbursement sample items tested for all 3 years were supported by adequate documentation and recorded in the appropriate year. However, we found that CCI did not effectively follow its existing policy for documenting the approval of payments made by check in 2013.

Testing Results for Receipt Transactions

We found that all receipt transactions tested (21 transactions for 2012, 27 transactions for 2013, and 25 transactions for 2014) were supported by adequate documentation, approved by authorized management, and recorded in the appropriate year. Specifically, we found that the receipt transactions tested were supported by signed cooperative agreements or contracts and deposit records. We traced all federal and nonfederal receipts tested to their respective cooperative agreements or contracts and verified the amounts agreed without exception. We also found that all receipt transactions tested were classified appropriately in the accounting system and recorded in the appropriate year.

Testing Results for Disbursement Transactions

During our review, we found that all disbursement sample items tested (66 transactions per year) were supported by adequate documentation and recorded in the appropriate year, but management approval controls over certain payments were not implemented effectively for one of the years tested. All disbursement transactions tested were supported by contracts or vendor invoices and payment records, and management approval controls over payments were implemented effectively for the populations tested in 2012 and 2014. However, in 2013, we found 3 transactions that were not approved in accordance with CCI’s policy.

CCI’s Procurement and Accounts Payable Policy, section D, provides that invoices less than $500 may be approved and paid for with just one signature on the related check. For all other payments made by check, the checks should be signed by two of the following authorized managers: President, Vice President, Chief Financial Officer, or Treasurer. There are, however, temporary exemptions to the two-signature rule. For each year under review, CCI provided us with the memos that establish these exemptions, titled “Accounts Payable Policy Temporary Exemptions.” These memos state that for certain periods, specifically, July through October, authorized managers may be out of the office and not available to satisfy the two-signature requirement on checks equal to or over $500. In such instances, a list of vendors with amounts due is to be e-mailed or faxed to one of the out of office managers for approval. CCI is to retain the e-mail or fax containing the approval as evidence of a secondary approval for checks equal to or over $500 issued with only one signature during the July through October time frame.

In 2013, we found 3 transactions totaling over $12,000 that were paid with checks over $500 that contained only one signature, and the dates on these 3 checks did not fall within the stated policy exemption period. For 1 of the 3 checks, CCI provided us with an e-mail approval. However, this was not consistent with CCI’s exemption policy as the check was approved and issued in December 2013, which fell outside of the exemption period. For the other 2 checks, no explanation or evidence of secondary approval on the check was provided. Furthermore, while the test of the 2012 population demonstrated effective implementation of management approval controls over payments, we identified one error that also related to a missing signature on a check outside the exemption period. Because of the large dollar value of the error ($43,550) and related risks of improper payments, fraud, and abuse, we believe the error warrants management’s attention.

These errors occurred, in part, because CCI’s Procurement and Accounts Payable Policy has not been updated since November 2008 and does not include all internal control activities to be performed when authorized management may be out of the office and regular check authorization procedures cannot be followed. CCI issued separate memos documenting exemption periods for each of the years under review. However, these memos were not incorporated into CCI’s policy. Furthermore, these memos only covered a certain time frame each year, but instances were occurring outside these stated time frames. CCI added that where checks had only one signature, the associated invoices had been approved. While we received copies of the invoices showing approval, the signatures on the invoices did not include a date. Therefore, we were not able to determine whether these transactions were approved prior to payment and, as a result, could not rely on the invoice approval as a compensating control. In addition, CCI’s Procurement and Accounts Payable Policy does not refer to replacing check signatures with invoice approvals.

Without incorporating all control activities over payment approvals into its policy and procedures, CCI increases its risk that the control activities will not be implemented consistently and that improper payments, fraud, and abuse may not be prevented or detected.

Conclusions

CCI, a private nonprofit organization, relies on federal and nonfederal funding to put together concerts that honor military services and celebrate America’s independence. Over the 3-year period of our review, the amount of funding CCI received increased slightly, mainly attributable to a nonfederal source, and disbursements were slightly less than funds received.

CCI’s 2012 through 2014 concert receipts were adequately documented, properly approved by authorized management, and recorded in the appropriate year. In addition, CCI’s 2012 through 2014 concert disbursements were adequately documented and recorded in the appropriate year. However, we identified certain disbursements in 2013 that were not properly authorized in accordance with CCI’s policy. Without incorporating all control activities over payment approvals into its policy and procedures, CCI increases its risk that improper payments, fraud, and abuse could not be prevented or detected.

Recommendation for Executive Action

We recommend that CCI’s Chief Financial Officer update its existing Procurement and Accounts Payable Policy to fully document CCI’s management approval controls over payments made by check, including exemptions to regular procedures. This should include approval procedures to be followed during periods when only one authorized manager is available to sign checks for payment.

Third-Party Comments and Our Evaluation

We provided a draft of this report to CCI for comment. In its written comments, reprinted in appendix II, CCI stated that it views our report as a favorable review of its finances. For the four disbursements we found in which there was only one signature on a check, CCI stated in its comments that it provided us with records that indicated that these disbursements were properly approved by management. However, as noted in this report, checks outside of the exemption period should have two signatures per CCI’s policy. While CCI provided invoices which it stated showed evidence of approval for these disbursements, as we noted in this report, the associated invoices did not have an approval date and CCI’s policy does not make reference to replacing check signatures with invoice approvals. Nonetheless, CCI stated that its Board of Directors will take appropriate action to address our recommendation.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 3 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, Capital Concerts, Inc., and other interested parties. 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 about this report, please contact me at (202) 512-3406 or malenichj@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 III.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) how much funding, federal and nonfederal, was received and used by Capital Concerts, Inc. (CCI) for the 2012 through 2014 Memorial Day and Fourth of July concerts and (2) to what extent CCI’s recorded receipts and disbursements related to these concerts were supported by adequate documentation, approved by authorized management, and recorded in the appropriate year.

The scope of our audit was limited to the receipts and disbursements of CCI as the majority of funding received and disbursed to produce the Memorial Day and Fourth of July concerts held on U.S. Capitol Grounds rests with this organization. Other minimal costs are incurred by the National Park Service and the National Symphony Orchestra.

Categorizing Receipts and Disbursements

To examine how much funding, federal and nonfederal, was received and used by CCI for the Memorial Day and Fourth of July concerts, we obtained the populations of receipt and disbursement transactions from CCI’s accounting system for 2012 through 2014. To verify the completeness and accuracy of these populations, we performed data reliability procedures by reconciling population totals to the trial balances and then comparing the trial balances to the audited financial statements. We then used the account descriptions in CCI’s accounting system to classify the transactions into categories for reporting purposes.

CCI classifies revenue on its financial statements as public support, license fee, earnings on deferred compensation/retirement plan, royalty fees and other income, and interest income. For the purposes of this report and to provide the requesters more useful information about the sources of funding received, we chose to categorize revenues as federal funding, nonfederal funding, and other funding sources. To classify transactions into these three categories, we used the revenue subaccount descriptions. We obtained CCI management’s concurrence with our classifications.

CCI classifies expenses on its financial statements into three categories: Memorial Day concert, Capitol Fourth concert, and general and administrative. These three categories do not capture the various types of disbursement activities CCI undertakes. CCI uses over 500 different subaccounts to classify its disbursements. To provide the requesters with more useful information, we categorized disbursements into six categories: production staff, technical crew and postproduction, technical equipment, talent, promotion, and other administrative and miscellaneous. To classify transactions into these six categories, we used the disbursement subaccount descriptions. We obtained CCI management’s concurrence with our classifications.

Testing of Receipts and Disbursements

To examine to what extent CCI’s recorded receipts and disbursements related to the Memorial Day and Fourth of July concerts were supported by adequate documentation, approved by authorized management, and recorded in the appropriate year, we met with officials from CCI to discuss the specific nature and characteristics of their organization’s receipts and use of concert-related funding. We also discussed the manner in which they record and track concert-related receipts and disbursements in their system of records, obtained their receipt and disbursement policies and procedures, and performed walk-throughs to gain an understanding of the flow of information throughout the organization. Based on the understanding we gained, we developed data collection instruments to test the receipts and disbursements.

To identify our populations for testing, we first obtained from CCI all transactions that made up total recorded revenue and those that made up total recorded expenses for each year. We then removed transactions that canceled each other (offset transactions), and for receipts we also removed transactions with abnormal balances (debit transactions) and reviewed these transactions separately to determine the nature of the transactions and why they occurred. After removing these, the remaining transactions for each year made up the populations used for the sampling methodology described below.

Receipts

For receipts, we selected the largest receipt transactions that collectively represented at least 95 percent of the total dollar value of each year’s population. We chose this methodology because the receipt transactions that made up at least 95 percent of the total receipts population consisted mainly of a few high-dollar value transactions, and the remaining approximately 5 percent consisted of several low-dollar value transactions that were primarily interest receipts, which were not relevant to the scope of our audit. For the 3-year period we reviewed, a total of 73 individual receipt transactions were tested. Table 3 describes the total transaction count and dollar value of each population and the total number of transactions tested.

To perform detailed testing on receipts, we verified that (1) the transaction amount agreed to supporting documentation, such as cooperative agreements, contracts, and deposit records; (2) the supporting documentation had evidence of approval; and (3) the transaction was accurately recorded in the appropriate year.

Disbursements

For disbursements, using an attribute sampling method, we selected a random sample of disbursement transactions for each year under review. We chose this methodology because of the large volume of transactions in our populations and the nature of the testing we were to perform. We planned our testing to be 95 percent confident with a tolerable error rate of 7 percent. Table 4 describes the total transaction count and dollar value of each population and the total number of sampled transactions selected for testing.

To perform detailed testing on disbursements, we verified that (1) the transaction amount agreed to supporting documentation, such as contracts, vendor invoices, and payment records; (2) the supporting documentation had evidence of approval; and (3) the transaction was accurately recorded in the appropriate year. For the 3 years under review, disbursements made by checks represented approximately 59 to 77 percent of our sample items, and disbursements made by electronic fund transfers represented approximately 23 to 41 percent of our sample items. Therefore, for evidence of approval, we reviewed different documentation for each payment type. For payments made by check, we obtained check images from the bank to assess whether signatures by managers authorized to sign checks were evident and in accordance with CCI’s policy. For payments made by electronic fund transfer, we verified other document sources, such as employment records for payroll transactions, and expense reports for petty cash reimbursements and credit card transactions to assess whether electronic fund transfers were approved by the appropriate manager prior to disbursement.

We conducted this performance audit from December 2015 to October 2016 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: Comments from Capital Concerts, Inc.

Appendix II: Comments from Capital Concerts, Inc.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Nina M. Rostro (Assistant Director), Sharon Byrd, Natasha Guerra, Brian Harechmak, Jason Kelly, and Joseph Willert made key contributions to this report.