According to Postal Service figures, of the 177 billion pieces of mail it processed in 1994, over 118 billion pieces, or 67 percent, were categorized as bulk business mail. In fiscal year 1994, the Service recorded revenue from bulk business mail of $23.1 billion—48.4 percent of its total mail revenue. The Postal Service began offering postage discounts to mailers who presorted their mail in 1976, and in 1988 it began offering discounts for barcoding. Presort and barcode discounts are to compensate mailers for performing work that otherwise would have to be done by the Postal Service. In fiscal year 1994, about 34 percent of all First-Class mail and 92 percent of all third-class mail was discounted. According to Postal Service studies, the value of these discounts, during that year, totaled about $8 billion. Most bulk business mail is entered at Business Mail Entry Units (BMEU) and Detached Mail Units (DMU), located throughout the Postal Service’s 85 districts. DMUs are postal acceptance units located at mailers’ mail preparation facilities. BMEUs are often located in or adjacent to mail processing plants, which are postal facilities that process mail for distribution to both local and national destinations. Bulk mail is also entered at many of the 40,000 post offices located throughout the country. The Postal Service’s mail acceptance clerks are the gatekeepers for accepting bulk business mail into the mailstream. Their job is to ensure, before mail enters the Postal Service’s processing and distribution facilities, that mailers have prepared their mail in accordance with postal requirements and that discounts given for presorting and barcoding have, in fact, been earned. This is a difficult task given the time constraints and the wide variation in the way bulk business mail can be prepared and still meet Postal Service standards. If mail barcoded by a mailer is accepted by clerks but later fails to run on postal barcode sorters, the Postal Service incurs additional costs. This is because the Postal Service must rework the mail at its own expense even though it gave the mailer the barcoded rate to perform that work. Bulk mail acceptance clerks are to perform cursory verifications on all mailings and in-depth verifications on randomly selected mailings. For every in-depth verification completed, mail acceptance clerks are required to prepare a written verification report (Form 2866). Postal facilities that receive 100 or more bulk mailings during a 4-week accounting period are to prepare a consolidated bulk mail acceptance report (Form 2867) documenting the results of their in-depth verifications. Summary reports of Forms 2867 are to be used by postal managers at various times to monitor, among other things, mail volume and revenue generated through the bulk mail acceptance system. Mail acceptance supervisors are to regularly verify the work of the clerks and report the results to postal management. At Postal Service headquarters, management responsibility for the bulk business mail program resides with the Vice President of Marketing Systems, who reports to the Chief Marketing Officer and Senior Vice President. Area Vice Presidents and district managers are responsible for ensuring that bulk mail acceptance activities conform to prescribed standards within their geographic spans of control. Appendix I contains additional background information on the Service’s bulk mail acceptance system. Our objective in this report was to determine whether the current system of controls for accepting bulk business mailings reasonably assures the Postal Service that mailer-claimed discounts are granted only when earned. The scope of our review was limited primarily to the Service’s BMEUs and DMUs, which account for the majority of the bulk mail accepted by the Service. We did not review controls at other acceptance units, such as post offices and branches. To evaluate bulk mail acceptance controls, we (1) obtained and analyzed policies and procedures affecting bulk business mail acceptance; (2) visited 7 district offices located in 6 of 10 Postal Service area offices, and interviewed postal staff assigned to 17 business mail acceptance units in those districts; (3) collected and analyzed bulk mail acceptance reports that were available from 77 of 85 district offices for fiscal year 1994; and (4) interviewed various Postal Service managers and operations personnel at Postal Service headquarters and selected field locations. We selected field locations judgmentally primarily on the basis of management reports submitted by acceptance units. We also interviewed officials from eight commercial bulk business mailers at the field locations visited. Additionally, we interviewed a Postal Service contractor who is studying the feasibility of utilizing risk assessment as a means of targeting high-risk mailings, and we interviewed and obtained written information from IRS and Customs Service officials about verification methods employed by their respective agencies. We interviewed the Executive Director of the National Association of Presort Mailers to obtain information on the presort industry’s views regarding the Service’s bulk mail acceptance system. We obtained and analyzed documentation on proposed and ongoing Postal Service initiatives to improve bulk mail acceptance practices—although we did not evaluate the effectiveness of those initiatives because they are not yet fully implemented. Finally, we reviewed recent Postal Inspection Service audits on bulk mail operations and discussed ongoing work with cognizant postal inspectors. The work done for this report was part of our broader revenue protection survey that began in November 1993. In May 1994, as part of our revenue protection work, we reported on postage meter fraud. For the most part, our review of the Service’s bulk mail acceptance controls was done at Postal Service headquarters and selected field locations between February 1995 and February 1996. We did all of our work in accordance with generally accepted government auditing standards. We obtained written comments on a draft of this report from the Postal Service. Its comments are discussed at the end of this letter and are reprinted as appendix III. The Postal Service also provided additional technical comments on the draft, which were incorporated where appropriate. It is inevitable that some revenue losses will occur in a program of this magnitude, and, as with any business enterprise, the risk of revenue losses must be weighed against the cost of establishing controls to prevent and detect such losses. The Postal Service, however, is hindered in its ability to make data-driven decisions about the adequacy of bulk mail acceptance controls. For example, the Service does not know the full extent of losses resulting from mailer preparation errors, and, furthermore, it has not sought to develop a means for identifying such losses. Rather, the Postal Service operates under the premise that since the Inspection Service and managers in charge of bulk mail acceptance have not reported large dollar losses, then such losses must not have occurred. We did not attempt to estimate the extent to which revenue losses have occurred. However, we believe that sufficient evidence exists for the Postal Service to be concerned that substantial revenue losses may have occurred and gone undetected in the bulk business mail program. In 1989 and 1990, to address what it acknowledged to be a “seat of the pants” approach to bulk mail acceptance, the Postal Service developed and implemented new management guidelines and verification requirements designed to give it reasonable assurance that significant amounts of bulk mail revenue were not being lost. Those guidelines contained specific procedures and approaches for bulk mail acceptance and provided guidance to supervisors and managers for more analytical and effective management of acceptance employees. Available documentation shows that during fiscal year 1994, the bulk business mail control system identified mailer preparation errors totaling $168 million. However, the control system fell short of providing the Postal Service with the assurance it needs that significant amounts of revenue are not being lost in the bulk business mail program, as discussed below. Available Service documentation and our interviews with Service officials indicated that a large amount of bulk mail was accepted without proper verification. This occurred because clerks often skipped required in-depth verifications of bulk mail. Additionally, supervisors frequently failed to do required follow-up verifications of acceptance clerks’ work. The Postal Service’s failure to ensure that required verifications were done, and done properly, left it vulnerable to revenue losses. Postal Service figures show that during fiscal year 1994, the Service accepted over 16.2 million bulk business mailings of various sizes, classes, and levels of preparation nationwide. Typically, over 50,000 mailings were accepted daily, and the mailings averaged about 6,900 mail pieces. According to Postal Service requirements, all of the mailings should have received a cursory review, and between 2.3 and 2.9 million should have received an in-depth verification. The Postal Service estimated that given the criteria for selecting mailings for in-depth verification, each acceptance location should have done in-depth verifications on 14 to 18 percent of the mailings received. However, available documentation shows that only about 1.7 million in-depth verifications were done—about 60 to 75 percent of the required verifications. The remaining verifications were either not done or not documented. Available documentation for fiscal year 1994 shows that about 30 percent (23 of 77) of the postal districts reporting the results of their in-depth verifications did less than the estimated minimum-required 14 percent. Among the 77 districts, the percentage of mailings verified in-depth ranged from less than 2 percent to more than 30 percent. Because acceptance procedures are not implemented uniformly throughout the United States, Postal Service managers and acceptance employees, as well as individuals in the business mail industry, said that some mailers “shop around” for the “best” acceptance unit. The Executive Director of the National Association of Presort Mailers cited inconsistencies among acceptance units as a concern of the mailing industry. At almost half of the locations we visited, officials said that heavy workloads and unscheduled leave were frequently the reasons that required in-depth verifications were not being performed. They also said that balancing the goals of doing required mail verifications and improving customer service further complicated the situation. Some acceptance unit managers we spoke with said that the verification function is secondary to the Postal Service’s goal of increasing the level of customer satisfaction.