Government Accountability Office report

7/31/2019 Government Accountability Office report

1/51

U.S. MERCHANTMARINE ACADEMY

Additional ActionsNeeded to EstablishEffective InternalControl

Report to Congressional Committees

July 2012

GAO-12-369

United States Government Accountability Office

GAO


2/51

United States Government Accountability Office

Highlights ofGAO-12-369, a report tocongressional committees

July 2012

U.S. MERCHANT MARINE ACADEMY

Additional Actions Needed to Establish EffectiveInternal Control

Why GAO Did This Study

The Academy, a component of theDepartment of Transportations (DOT)MARAD, was established in 1938 andbuilt during World War II to provideundergraduate education programs formidshipmen to become shipboardofficers and leaders in the maritimetransportation field. DOT allocated$80 million to the Academy for fiscal

year 2011 for its operations, CIP, andfacilities maintenance.

In August 2009, GAO issued a reportthat identified numerous internalcontrol deficiencies and made 47recommendations for corrective action.This report provides the results ofGAOs assessment of (1) the extent towhich the Academy has taken actionsto address the prior recommendationsand (2) the Academys CIP oversight.To address these objectives, GAOevaluated corrective actions andsupporting documentation; interviewed

Academy, MARAD, and DOT officials;and performed walk-throughs ofseveral processes revised in responseto GAOs prior recommendations.

What GAO Recommends

In addition to reiterating the need tofully implement the remaining openrecommendations, GAO is making onenew recommendation directed atupdating the Academys capitalimprovement plan to include reliablecost estimates and phased investment

priorities aligned with the Academysstrategic objectives in accordance withleading practices. In commenting on adraft of this report, DOT stated that ithad recently established acomprehensive plan to manage CIP,and plans to keep GAO apprised as itcompletes actions addressing otherGAO open recommendations.

What GAO Found

The U.S. Merchant Marine Academy (Academy) has made progress in improvingits internal control since GAOs August 2009 report, but has not yet fullyaddressed one key recommendation related to fundamental weaknesses in itsoverall internal control system. GAO found that while the Academy hadappointed an Internal Control Officer responsible for coordinating reviews ofinternal controls, it had not yet established a comprehensive risk-based internalcontrol system to ensure effective and efficient operations, reliable financialreporting, and compliance with laws and regulations, including a monitoringsystem to help ensure that control deficiencies are proactively identified and

promptly corrected. Maritime Administration (MARAD) officials stated that theirstrategy had been to focus on the deficiencies that could be readily resolved. Asof September 30, 2011, Academy and MARAD officials had addressed 32 of theother 46 prior recommendations regarding control activity deficiencies.

Summary of GAO Conclusion on Status of Actions Taken to Address 2009 RecommendationsRelated to the Academys Control ActivitiesAcademy controlactivity

Totalrecommendations

Recommendationsimplemented

Remaining openrecommendations

Training vessel use 5 5 0Personal serviceacquisitions 2 2 0NAFI camps and clinicsusing Academyfacilities 3 3 0

Midshipmen feeaccountability 9 7 2Accountability forAcademy reserves 4 4 0Academy and NAFIgovernance structure 8 4 4

Financial reporting 5 2 3

Fund accountability 7 4 3Capital asset repairsand improvements 3 1 2

Total 46 32 14

Source: GAO analysis of MARAD and Academy data as of September 30, 2011.

Importantly, for many of the specific control-related recommendations thatremained open, the Academy and MARAD had not yet identified the cause of the

related internal control deficiencies, a critical step for designing effective controls.GAO also found that the Academy and MARAD have taken steps to improveCapital Improvement Program (CIP) oversight. For example, the Academy filled anew Assistant Superintendent position responsible for oversight of the

Academys capital improvements and facilities maintenance. However, theAcademy did not yet have an up-to-date, comprehensive plan for capitalimprovements to provide a basis for oversight. Specifically, the Academy did nothave a capital improvement plan that identified long-term capital improvementneeds aligned with the Academys strategic objectives, reliable cost estimates forplanned improvements, and a phased implementation approach for prioritizingcapital improvement needs. Such plan elements are consistent with Office ofManagement and Budget guidance and GAO-identified leading practices.

ViewGAO-12-369. For more information,contact Beryl Davis at (202) 512-2600 [email protected].
http://www.gao.gov/products/GAO-12-369http://www.gao.gov/products/GAO-12-369http://www.gao.gov/products/GAO-12-369http://www.gao.gov/products/GAO-12-369http://www.gao.gov/products/GAO-12-369http://www.gao.gov/products/GAO-12-369mailto:[email protected]:[email protected]:[email protected]://www.gao.gov/products/GAO-12-369http://www.gao.gov/products/GAO-12-369


3/51

Page i GAO-12-369 Merchant Marine Academy

Letter 1

Background 3

Actions Taken to Address Prior Recommendations 8

Further Enhancements to Capital Improvement Program Oversight

Are Needed 21

Conclusions 24

Recommendation for Executive Action 24

Agency Comments and Our Evaluation 25

Appendix I Scope and Methodology 27

Appendix II Status of Prior Recommendations and Description of Corrective

Actions Taken 29

Appendix III Comments from the Department of Transportation 44

Appendix IV GAO Contact and Staff Acknowledgments 46

Tables

Table 1: NAFIs in Transition for Closure 4

Table 2: Summary of GAO Conclusion on Status of Actions Taken

to Address Our 2009 Recommendations Related to the

Academys Specific Control Activities 10

Table 3: Implementation Status of GAO Recommendations 29

Figure

Figure 1: Overview of Merchant Marine Academy Organizational

Structure 6

Contents


4/51

Page ii GAO-12-369 Merchant Marine Academy

Abbreviations

ADA Antideficiency ActCFO Chief Financial OfficerCIP Capital Improvement ProgramDOT Department of Transportation

FAR Federal Acquisition RegulationFCO Fiscal Control OfficeFMFIA Federal Managers Financial Integrity ActFOB Fiscal Oversight BoardGMATS Global Maritime and Transportation SchoolICO Internal Control OfficerMAO Maritime Administrative OrderMARAD Maritime AdministrationNAFI Nonappropriated Fund InstrumentalityR&M Repair and Maintenance

This is a work of the U.S. government and is not subject to copyright protection in theUnited States. The published product may be reproduced and distributed in its entiretywithout further permission from GAO. However, because this work may containcopyrighted images or other material, permission from the copyright holder may benecessary if you wish to reproduce this material separately.


5/51

Page 1 GAO-12-369 Merchant Marine Academy

United States Government Accountability OfficeWashington, DC 20548

July 6, 2012

The Honorable Patty MurrayChairmanThe Honorable Susan M. CollinsRanking MemberSubcommittee on Transportation, Housing and Urban Development,

and Related AgenciesCommittee on AppropriationsUnited States Senate

The Honorable Tom LathamChairmanThe Honorable John W. OlverRanking MemberSubcommittee on Transportation, Housing and Urban Development,

and Related AgenciesCommittee on AppropriationsHouse of Representatives

The U.S. Merchant Marine Academy (Academy), one of five UnitedStates service academies, was established in 1938 to provide 4-yearundergraduate educational programs for men and women (midshipmen)to become shipboard officers and leaders in the maritime transportationfield. A graduate from the Academy receives a Bachelor of Sciencedegree and a U.S. Coast Guard license as deck or engineering officerand a commission in the U.S. Naval Reserve or another uniformedservice. The Academy is a component of, and receives federal fundingand overall policy direction through, the Department of Transportations(DOT) Maritime Administration (MARAD). For fiscal year 2011, DOTallocated $80 million to the Academy for its operations, capitalimprovements, and facilities maintenance. Most of the Academys 44principal facilities were constructed during or shortly after World War II.

In August 2009, we issued a report1

1GAO, United States Merchant Marine Academy: Internal Control Weaknesses Resultedin Improper Sources and Uses of Funds; Some Corrective Actions Are Under Way,

that identified numerous deficiencies

in the Academys internal control activities and weaknesses in the

GAO-09-635 (Washington, D.C.: Aug. 10, 2009).
http://www.gao.gov/products/GAO-09-635http://www.gao.gov/products/GAO-09-635http://www.gao.gov/products/GAO-09-635


6/51


Academys overall internal control environment2 that resulted in numerous

instances of improper and questionable sources and uses of funds by theAcademy and its affiliated organizations. Our 2009 report included 47recommendations to address the deficiencies we identified. Yourequested that we update the status of the Academys efforts to addressour recommendations from our 2009 report and that we review the

Academys oversight of its Capital Improvement Program (CIP).3

To assess the extent to which actions have been taken to address ourprior recommendations, we (1) evaluated the Academys and MARADscorrective actions for each recommendation and supportingdocumentation as of September 30, 2011, andwhere relevantreviewed documentation supporting selected transactions to assess the

Academys implementation of revised internal control procedures;(2) interviewed Academy, MARAD, and DOT officials responsible for thedevelopment and implementation of the corrective actions; and(3) performed walk-throughs of the Academys processes as revised inresponse to our recommendations.

This

report provides the results of our assessment of (1) the extent to whichthe Academy has taken actions to address our prior recommendationsand (2) the Academys CIP oversight.

To assess the Academys oversight of its CIP, we (1) interviewedcognizant agency officials responsible for oversight of the Academysimplementation of the program, (2) obtained and reviewed related policiesand procedures and strategic planning documents, and (3) toured the

Academy grounds to observe the current physical condition of buildingsand infrastructure. In addition, we interviewed MARAD human resources

2GAO, Standards for Internal Control in the Federal Government,GAO/AIMD-00-21.3.1(Washington, D.C.: November 1999). Standards for Internal Control in the FederalGovernmentprovides that the control environment sets the tone of the organization,influencing the control consciousness of its people and their attitude toward internal

control. It is the foundation for all other components of internal control, providing disciplineand structure. Control environment factors include the integrity, ethical values, andcompetence of the entitys people; managements philosophy and operating style; and theway management assigns authority and responsibility and organizes and develops itspeople.

3The Academys CIP encompasses the construction or maintenance of capital assets atthe Academy, including construction of new academic or support facilities, majorrenovation or refurbishment of existing facilities, or acquisition or replacement of capitalequipment or training resource needs.
http://www.gao.gov/products/GAO/aimd-00-21.3.1http://www.gao.gov/products/GAO/aimd-00-21.3.1http://www.gao.gov/products/GAO/aimd-00-21.3.1http://www.gao.gov/products/GAO/aimd-00-21.3.1


7/51


personnel regarding Academy staff resources used to oversee andmanage CIP projects.

During our review, the Academy and MARAD continued to addressinternal control weaknesses that were the focus of our priorrecommendations. For this report, we evaluated corrective actions takenthrough September 30, 2011, that the Academy, MARAD, and DOT madeus aware of as of February 15, 2012. We will evaluate information that wereceive about additional actions taken as part of our standard, ongoingrecommendation follow-up procedures.

We conducted this performance audit from February 2011 to June 2012in accordance with generally accepted government auditing standards.Those standards require that we plan and perform the audit to obtainsufficient, appropriate evidence to provide a reasonable basis for ourfindings and conclusions based on our audit objectives. We believe thatthe evidence obtained provides a reasonable basis for our findings andconclusions based on our audit objectives. Additional details on our scopeand methodology are in appendix I.

MARAD is responsible for overall policy direction of the Academy. TheMaritime Administrator issues Maritime Administrative Orders (MAO) andbulletins establishing policies and providing guidelines for Academyoperations. Additionally, the MARAD Chief Financial Officer (CFO) issuesdirectives to provide guidance for conducting Academy financialoperations. Since 2010, there have been two MARAD CFOs with anacting CFO between their appointments. From 2009 through 2011,MARAD relied on a Fiscal Oversight Board to assist MARAD in theoversight of the Academys operations.

The Academy Superintendent is responsible for day-to-day managementof the Academy and reports directly to the head of MARAD, the MaritimeAdministrator. Since September 2008, there have been three AcademySuperintendents, with the Academic Dean serving as Interim

Background

Organizational Structureand Oversight
http://www.usmma.edu/admin/leadership/superintendent.shtmlhttp://www.usmma.edu/admin/leadership/superintendent.shtml


8/51


Superintendent between Superintendent appointments.4 Various

assistant superintendents report to the Superintendent, and variousdirectors of departments and offices report to the assistantsuperintendents. The Office of Academy Operations is led by the

Academys CFO, who reports directly to the MARAD CFO. Additionally,since our 2009 report, four Academy support functions5

As of September 30, 2011, the Academy was also affiliated with twononappropriated fund instrumentalities (NAFI) intended to assist the

Academy in providing programs and services primarily for Academymidshipmen and employees. One of these NAFIs, the Employee

Association, is intended to promote and support the interests of Academypersonnel. The other is the Regimental Morale Fund Association,authorized to support morale, welfare, and recreation activities for the

Academys midshipmen. In addition, as of September 30, 2011, four otherNAFIs were in transition for closure (see table 1).

now report

directly to MARAD headquarters offices.

Table 1: NAFIs in Transition for Closure

NAFI Purpose Status

Global Maritime andTransportation School

Provide education and training toother federal agencies and to themaritime industry.

MARAD rescinded this NAFIs authorization but authorizedtransitional operations through its planned closure on July 31,2012.

Melville Hall Provide dining, lodging, andmeeting facilities.

MARAD rescinded this NAFIs authorization but authorizedtransitional operations through its planned closure on October31, 2012, to complete conversion to a contract agreement.

Athletics Association Enhance midshipmenseducational experience throughparticipation in athletic activities.

MARAD rescinded this NAFIs authorization but authorizedtransitional operations through its planned closure onDecember 31, 2011, to complete transition to an appropriatedfederal program.

Fiscal Control Office (FCO) Provide bookkeeping, payroll, andother administrative supportservices for NAFIs.

MARAD rescinded this NAFIs authorization on March 16,2010. The Academy CFO assumed the FCO NAFIsresponsibilities for the administrative and financial functions ofthe NAFIs in transition for closure until they cease operationscompletely.

Source: GAO presentation of MARAD data as of September 30, 2011.

4In addition, on June 25, 2012, the Secretary of Transportation announced that a new

Superintendent had been appointed and would begin work at the Academy in July 2012.5The four Academy support offices that report directly to MARAD are the Offices ofAcademy Operations, Procurement, Human Resources, and Academy Legal Counsel.


9/51


Additionally, the Academy also received financial support from two privatefoundations, the U.S. Merchant Marine Academy Alumni Association andFoundation and the Sailing Foundation. These foundations use fundsprovided by Academy alumni to provide financial support for the

Academys charitable, scientific, and educational activities. See figure 1for an overview of DOT, MARAD, and Academy organizationalrelationships.


10/51


Figure 1: Overview of Merchant Marine Academy Organizational Structure

a

The Fiscal Oversight Board, comprising senior management officials from the Academy andMARAD, met on a regular basis to increase the flow of information between the Academy andMARAD. A DOT official informed us that after September 30, 2011, the Fiscal Oversight Board

meetings had been replaced by weekly meetings to be chaired by the DOT Secretary and attendedby departmental executives, the Maritime Administrator, and the Interim Superintendent to addressAcademy management issues. Additionally, the official stated that departmental executives conductbiweekly meetings with MARAD and Academy management to discuss facilities management andcapital improvement issues.


11/51


Our 2009 report6

Of the 47 recommendations, we made 1 overarching recommendationconcerning actions needed for the Academy to establish effective overallinternal control. Specifically, we recommended that the Secretary ofTransportation direct the Administrator of MARAD, in coordination withthe Superintendent of the Academy, to establish a comprehensive, risk-based internal control system to address the core causes of the controldeficiencies identified in our 2009 report, including delineating the rolesand responsibilities of management and employees to establish andmaintain a positive and supporting attitude toward internal control and

conscientious management, and the responsibility of managers to monitorcontrol activities.

on the Academy identified numerous internal control

deficiencies as well as weaknesses in the Academys controlenvironment. Specifically, we found that flawed design andimplementation of internal controls were the root causes of the

Academys inability to prevent or detect numerous instances of improperand questionable sources and uses of funds that we identified.

Additionally, we found that the Academy lacked an accountabilitystructure that clearly defined organizational roles and responsibilities;policies and procedures for carrying out its financial stewardshipresponsibilities; 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.

The remaining 46 recommendations related to control deficienciesassociated 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.

6GAO-09-635.

GAOs 2009 ReportRecommendations
http://www.gao.gov/products/GAO-09-635http://www.gao.gov/products/GAO-09-635http://www.gao.gov/products/GAO-09-635http://www.gao.gov/products/GAO-09-635


12/51


Our review of the Academys and MARADs efforts to address the issuesreported in our 2009 report found that the Academy and MARAD had notyet established a comprehensive, risk-based system of internal control atthe Academy. The Academy and MARAD both focused their initial effortson the more readily correctible deficiencies in the Academys controlsover specific activities. As a result, the Academy and MARAD had madesubstantial progress in addressing weaknesses related to specific controlactivities by successfully implementing 32 of the 46 control deficiency-related recommendations identified in our 2009 report. For example, thecorrective actions taken to improve controls were sufficient for us toconclude that all recommendations related to training vessel use,

personal service acquisitions, accountability for Academy reserves, andNAFI camps and clinics using Academy facilities were successfullyimplemented.

Our review found that actions taken by the Academy and MARAD throughSeptember 30, 2011, were not sufficient to fully address our overarchingrecommendation related to the establishment of a comprehensive, risk-based internal control system at the Academy, a positive and supportiveattitude toward internal control, and an associated system of monitoringinternal control effectiveness. Standards for Internal Control in theFederal Government7

7

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 toensure that findings of audits or other reviews are promptly resolved andto assess the ongoing effectiveness of controls. However, our reviewfound that the Academy had not yet taken actions sufficient to addressthe core cause of many of the control deficiencies identified in our 2009report. Understanding the causes of internal control deficiencies is criticalto designing effective, risk-based controls that can help preventquestionable transactions in the future. For example, as discussed later inthis report, the Academy took action to correct errors we identified in its

accounting for certain capital asset repairs and improvements, but hadnot yet taken action to conduct an analysis, as we recommended, toidentify and address the underlying causes of these errors.

GAO/AIMD-00-21.3.1.

Actions Taken toAddress PriorRecommendations

Additional Action Neededto Establish Overall, Risk-Based Internal ControlSystem
http://www.gao.gov/products/GAO/aimd-00-21.3.1http://www.gao.gov/products/GAO/aimd-00-21.3.1http://www.gao.gov/products/GAO/aimd-00-21.3.1http://www.gao.gov/products/GAO/aimd-00-21.3.1


13/51


Nonetheless, the Academy and MARAD have taken a number of actionsthat represent an important first step toward focusing the top-levelattention and accountability needed to establish an effective overallsystem of internal control for the Academy. For example, in January2011, MARAD established and filled an Internal Control Officer (ICO)position for the Academy. The Academy ICO, who is also the AcademysChief Information Officer, reports to MARADs Internal Controls ProgramManager and is responsible for coordinating and leading the Academysreviews of internal controls in accordance with Office of Management andBudget (OMB) Circular A-123 and the Federal Managers FinancialIntegrity Act of 1982 (FMFIA).8

Despite these completed actions, until Academy and MARAD officialstake additional actions to fully address our recommendation in this area,their ability to ensure that Academy and MARAD managementsobjectives are carried out, including proactively identifying and correctingcontrol deficiencies in a timely fashion, will continue to be impaired. Boththe Academy and MARAD focused their initial efforts on the more readilycorrectible deficiencies in the Academys specific controls, as discussedlater in this report. However, while these efforts are necessary and have a

significant impact on internal control, it is important that the Academy andMARAD address the long-standing, deeply rooted causes of the specificcontrol deficiencies we identified and establish processes to ensure thateffective internal control is fully established, maintained, and monitoredover time. In this regard, it is also important that the Academy andMARAD provide priority attention and focus not only on addressingquestionable transactions we identified in our prior report, but also on theunderlying causes of the specific errors we identified.

Also, in September 2011, MARAD issued

guidance in MAO 400-11 intended to help clarify the Academys oversightrole and responsibilities with respect to the Academys affiliated NAFIs.

831 U.S.C. 3512 et seq., commonly known as FMFIA, requires ongoing evaluations andreports of the adequacy of internal accounting and administrative control of eachexecutive agency. The act requires the head of each agency to annually prepare astatement on the adequacy of the agencys systems of internal accounting andadministrative control. OMB Circular A-123, Managements Responsibility for InternalControl, contains guidance for implementing FMFIA. OMB A-123 requires agencymanagement to annually report on internal control in its performance and accountabilityreport, including a report on identified material weaknesses and corrective actions.


14/51


As of September 30, 2011, Academy and MARAD officials had takensufficient actions to address 32 of our 46 prior recommendations intendedto address specific deficiencies in the Academys control activities. Forexample, officials took steps to fully close all of our previousrecommendations related to controls over training vessel use, personalservice acquisitions, accountability for Academy reserves, and NAFIcamps and clinics using Academy facilities. For the 14 remainingrecommendations, we identified varying levels of action in process as ofSeptember 30, 2011, but none sufficient for us to consider themeffectively implemented. Our conclusions on the status of Academy andMARAD 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 greaterdetail in appendix II. Standards for Internal Control in the FederalGovernment9 provides that agencies should take appropriate follow-up

actions to address findings and recommendations of audits and otherreviews. Also, GAOs Internal Control Management and Evaluation Toolprovides that in taking such actions, agencies are to ensure that theunderlying causes giving rise to the findings or recommendations areinvestigated, that actions are decided upon to correct the identifiedweaknesses, and that weaknesses are corrected promptly.10

Table 2: Summary of GAO Conclusion on Status of Actions Taken to Address Our2009 Recommendations Related to the Academys Specific Control Activities

Academy controlactivity




Training vessel use 5 5 0

Personal serviceacquisitions

2 2 0

NAFI camps and clinicsusing Academy facilities

3 3 0

Midshipmen feeaccountability

9 7 2

Accountability for

Academy reserves

4 4 0

9GAO/AIMD-00-21.3.1.

10GAO, Internal Control Management and Evaluation Tool,GAO-01-1008G (Washington,D.C.: August 2001).

Actions Taken to AddressMany of Our PriorRecommendations Relatedto Specific Control

Activities
http://www.gao.gov/products/GAO/aimd-00-21.3.1http://www.gao.gov/products/GAO/aimd-00-21.3.1http://www.gao.gov/products/GAO/aimd-00-21.3.1http://www.gao.gov/products/GAO-01-1008Ghttp://www.gao.gov/products/GAO-01-1008Ghttp://www.gao.gov/products/GAO-01-1008Ghttp://www.gao.gov/products/GAO-01-1008Ghttp://www.gao.gov/products/GAO/aimd-00-21.3.1


15/51


Academy controlactivity




Academy and NAFIgovernance structure

8 4 4

Financial reporting 5 2 3

Fund accountability 7 4 3

Capital asset repairsand improvements

3 1 2

Total 46 32 14

Source: GAO analysis of MARAD and Academy data.

Training vessel use. In 2009, we reported that the Academy lackedpolicies and procedures and adequate internal controls over the useof Academy training vessels by outside parties. For example, wefound that the usage rates for Academy training vessels were notsupported and were not based on consideration of current costs ofoperation. The Academy and MARAD took steps to address all five ofour recommendations related to internal control deficiencies regardingoutside party use of Academy training vessels. In September 2010,the Academy issued Superintendents Instruction 2010-08, which setout procedures for outside parties to use and pay for all costsassociated with the use of Academy training vessels. The AcademysDepartment of Waterfront Activities also issued a vessel usage rate

schedule in September 2010 that provided current costs of operationfor use of Academy training vessels. The guidance provides basehourly, daily, and weekly billing rates that outside parties are to becharged for using the Academys training vessels.

Personal service acquisitions. In our 2009 report,11

11

we identifiedinstances in which the Academy entered into illegal personal serviceagreements with its NAFIs, whereby NAFI employees performedexclusively Academy functions and reported to Academy supervisors.The Academy and MARAD took actions to address both of ourrecommendations related to improving internal controls over personalservice acquisitions. To address our recommendations, MARADperformed an analysis to identify the nature and scope of personal

service arrangements in order to determine whether amounts paid bythe government were consistent with the services received by the

Academy. Using the results of the analysis, MARAD took action toaddress all personal service arrangements by either converting

GAO-09-635.


16/51


affected NAFI employees to the civil service or transferring them to acontract. In addition, the MARAD Administrator finalized MAO 400-11on September 30, 2011, which provided governing principles underwhich NAFIs must operate, including that a NAFI must have staff toconduct its daily operations, and it is not to receive any operatingsubsidy from the Academy other than minor incidental support.Notably, however, MAO 400-11 requires that generally, a NAFI maynot provide goods or services to the Academy.12

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 useof fees from conducting camps and clinics using Academy athleticfacilities. The Academy and MARAD took corrective actions toaddress all three of our recommendations related to NAFI camps andclinics use of academy facilities. Specifically, MARAD engaged theservices of an independent public accounting firm to perform ananalysis to identify NAFI camps, clinics, or fund-raising activities thatused Academy property from fiscal years 2006 through 2008 anddetermine the related sources and uses of funds. Based on thisanalysis, it was determined that most of the revenue resulting from thecamp and clinic activity was paid to the individuals responsible forconducting the activities and the residual revenue, deemed nominal,

was identified to have been used to support the general activities ofthe NAFI conducting the camp or clinic. Also, SuperintendentsInstruction 11100.1, dated May 17, 2011, established a written policythat Academy facilities will not be used for revenue-generating athletic

12MAO 400-11 provides that the Superintendent may authorize a solicitation from a NAFIfor a particular purchase on an exigent or emergency basis, but the transaction mustfully comply with the Federal Acquisition Regulation (FAR). CFO Directive 4, which alsorequires that transactions must fully comply with the FAR, was issued on December 30,2009. It provides that the standard under which a NAFI can offer goods or services to theAcademy is that such instances should be exception rather than routine. Upon beingnotified of these differing standards, MARAD stated that CFO Directive 4 was in theprocess of being rescinded.


17/51


camps and clinics.13

Our review of supporting financial documents forselected 2010 and 2011 transactions did not identify any camp orclinic activity using the Academys facilities.

Midshipmen fee accountability. In 2009, we identified instances ofimproper and questionable sources and uses of midshipmen fees, aswell as a lack of adequate procedures and controls to maintaineffective accountability over the amounts charged to midshipmen andto ensure that midshipmen fees were used only for their intendedpurpose. The Academy and MARAD undertook a series of reviewsand completed actions that addressed seven of our nine

recommendations related to midshipmen fee accountability. Toaddress our recommendations, MARAD established a baseline foritems of a personal nature and related costs to be charged tomidshipmen, beginning with fiscal year 2009. Following an analysisbased on this baseline, MARAD determined that prior yearsmidshipmen fees included the costs of items that should have beenpaid by the Academy. Consequently, the fees collected frommidshipmen over their 4-year academic program dropped from$15,500 in fiscal year 2008 to approximately $5,500 in fiscal year2009. As a result, MARAD proposed a refund of midshipmen fees tothe midshipmen who it was determined had overpaid in academicyears from academic year 2003-2004 through academic year

2008-2009. In February 2012, DOT informed us that MARAD beganmaking refunds in November 2011 and, as of January 2012, hadreimbursed 83 percent of eligible refund recipients and continued withits efforts to reach the remaining refund-eligible midshipmen.

One of the two recommendations that remain open relates toestablishing written policies and procedures over (1) processing ofmidshipmen fee collections and payments and (2) monthly reportingfor midshipmen fee activity and balances. On May 26, 2010, MARADissued MAO 400-15, providing policy guidance governing the setting,

13Superintendents Instruction 11100.1 states that unless superseded by the AcademySuperintendent, all Academy components and personnel are prohibited from usingAcademy facilities or resources to conduct any revenue-generating camps or clinics. Theinstruction further states that any superseding direction shall incorporate the elements ofour recommendation, including establishing targeted internal controls, such as therequired approvals; costs to be recovered by the Academy; requirements for participationby Academy employees in the activities; and other matters of importance, such asinsurance requirements, security, and required accounting records on the source anduses of funds from each event.


18/51


managing, and reporting of midshipmen fees. However, this guidancedid not provide detailed procedures to ensure that staff consistentlyand effectively process and account for midshipmen fee activities andbalances. The second of these open recommendations calls for adetermination of the extent to which appropriated funds andmidshipmen fees collected should be used to pay for contractedmedical services. On February 5, 2010, MARAD reported the resultsof a joint MARAD and Academy review that identified the types ofmedical services provided to the midshipmen, through bothappropriated and nonappropriated funding, and stated that for thefiscal year 2012 budget development process, the Administrator may

wish to consider guiding the Superintendent to seek alternatives to thecurrent approach. However, as of September 30, 2011, the Academyhad not yet determined the extent to which appropriated funds andmidshipmen fees collected should be used to pay for contractedmedical service as called for in our recommendation.

Accountability for academy reserves. Our 2009 report identifiedinappropriate conversion of off-book reserves14

14After the end of an academic year, the Fiscal Control Office (FCO) typically t ransferredthe excess of midshipmen fees collected over payments made to a commercial bankaccount that was not reflected in the books and records of the Academy (off book). FCOtracked the transaction activity in the account using off-line (cuff) records.

accumulated fromexcess midshipmen fee collections, funds received from the GlobalMaritime and Transportation School (GMATS) NAFI for use of the

Academys facilities, and expiring appropriated funds that weredeposited to a commercial bank account to fund Academy operationsthe following fiscal year. For example, a Superintendents Reserveaccount was created off book and used to make discretionary

Academy operations payments authorized by the AcademySuperintendent. The Academy and MARAD have taken correctiveactions sufficient to address all four recommendations related toaccountability for Academy reserves. To address ourrecommendations, MARAD engaged the services of a publicaccounting firm to perform an analysis of the sources and uses offunds held in commercial bank accounts during fiscal years 2006through 2008 to determine consistency with applicable law, regulationor policy. A May 19, 2010, MARAD CFO memorandum on the resultsof the analysis stated that the review did not identify any evidence thatfunds were used inappropriately or for the personal benefit of any


19/51


individual and that no inconsistency with law, regulation, or policy wasidentified. Accordingly, the MARAD CFO concluded that no furtheraction was warranted. In addition, the Academys changed businesspractices discontinued conversion of appropriated andnonappropriated funds to off-book reserves. Further, as a result ofthe analysis performed in response to our recommendation, a balanceof approximately $3 million in the commercial bank accountmaintained for excess prior-year midshipmen fee collections wastransferred to the U.S. Treasury to assist with the midshipmen feerefunds.

Academy and NAFI governance structure. Our 2009 report foundthat 11 of the 14 NAFIs that provided programs and services for

Academy midshipmen and employees did not have approvedgoverning documents, such as charters and bylaws, and that theremaining 3 NAFIs performed some duties and functions that felloutside the scope of authority set forth in their governancedocuments. As a result, we issued eight recommendations related toimproving controls over activities between the Academy and itsaffiliated organizations. The Academy and MARAD completed actionssufficient to address four of our eight recommendations related to

Academy and NAFI governance structure. For example, onSeptember 30, 2011, MARAD issued MAO 400-11, which provides

policies and general guidelines for the establishment and governanceof NAFIs and their affiliation with the Academy, including charters,bylaws, and a NAFI governing board. In addition, an independentpublic accounting firms analysis of activity between the Academy andits GMATS NAFI did not identify any activity that was inconsistent withapplicable law, regulation, or policy. A May 19, 2010, MARAD CFOmemorandum concluded that none of the NAFI funds were usedinappropriately or for the benefit of any individual and that no furtheraction was warranted.

Two of the four recommendations that we concluded were not yetaddressed relate to performing an analysis to identify each activityinvolving the Academy and its NAFIs and establishing formal writtenpolicies and procedures documenting the (1) planned timing ofperformance of each internal control procedure for each NAFI activity,(2) responsibilities for oversight and monitoring of those internalcontrol procedures, and (3) direct, compensating, and mitigatingcontrols for each NAFI activity. Although MAO 400-11 providesgeneral guidance on NAFI and Academy relationships, it does notprovide the necessary detailed procedures to be followed to ensurethat each NAFI has a robust, risk-based system of checks and


20/51


balances with the Academy for each NAFI activity as called for in our2009 recommendation. As of September 30, 2011, we found thatneither the Academy nor MARAD had performed an analysis aimed atidentifying all activities between the Academy and its ongoingaffiliated organizations. Without identifying such activities and theirassociated risks to the Academy, the Academy faces the continuedrisk of improper transactions.

The other two open recommendations relate to the relationshipbetween the Academy and its GMATS NAFI. The recommendationswere intended to address the Academy improperly entering into sole-

source agreements with GMATS to provide training to other federalagencies and improperly accepting and using nonappropriatedGMATS funds. On September 30, 2011, the Maritime Administratorissued a memorandum rescinding the authority of GMATS to operateas a NAFI effective August 1, 2012. The memorandum also providedthat GMATS may continue future operations if it is reestablishedunder a different operating model. However, because GMATS NAFIoperations have not yet been terminated or reestablished, our tworecommendations in this area remain open.

Financial reporting. In 2009, we found that the Academy did notroutinely prepare financial reports presenting information on all of itsfinancial activities, including sources and uses of its appropriated andnonappropriated funds. Instead, we found that the Academysfinancial reporting was sporadic, unreliable, and, consequently, oflimited value for decision making. The Academy and MARADcompleted actions sufficient to address two of our fiverecommendations aimed at improving controls over the Academysfinancial reporting. MARAD issued CFO Directive 2 in December 2009and amended it twice in 2010. Directive 2 established procedures formonitoring Academy financial performance by requiring the Office of

Academy Operations to prepare, review, and provide monthlyfinancial reports to the MARAD CFO for review. Directive 2 alsoprovided for following up on, and documenting, unusual items andbalances.

The three recommendations that remain open relate to (1) theproduction of financial reports to facilitate oversight and monitoring ofactual and budgeted amounts of revenues and expenses, reporting ofamounts for activities and balances with affiliated organizations, andthe identification of items of revenue and expenses; (2) identificationand evaluation of potential misstatements of amounts in Academyfinancial records; and (3) compliance with required annual reporting to


21/51


Congress on all expenditures and receipts for the Academy and itsaffiliated organizations. CFO Directive 2 provides instructions for theOffice of Academy Operations preparation, review, and monitoring ofmonthly financial reports on funds allotted15

obligation and expenditure activity of expired funds;

to the Academy.

However, it does not require the monthly reports to includeinformation on all sources and uses of other funds benefiting the

Academy, such as

CIP and gift and bequest expenditure activity for years followingobligation;

activity for miscellaneous receipts, such as transfer of funds fromclosed commercial bank accounts, fees from foreign midshipmenand for outside use of training vessels, and payments from theNavy Exchange;

sources and uses of funds maintained in commercial bankaccounts; and

sources and uses of midshipmen fees processed through twoappropriation accounts and one nonappropriation account.

The MARAD CFO told us that the primary intent of Directive 2 is toreport the status of funds allotted to the Academy, but acknowledgedthat any additional funds should be identified and reported as well.

Accordingly, the MARAD CFO agreed that CFO Directive 2 reportingrequirements should be updated to require all sources and uses ofAcademy funds to be identified and reported to provide visibility overall Academy accounts and activities necessary to facilitatecomprehensive oversight and monitoring.

15An allotment is an authorization by either the agency head or another authorizedemployee to his/her subordinates to incur obligations within a specified amount within therequirements in OMB Circular No. A-11. The amount allotted by an agency cannot exceed

the amount of appropriations that are apportioned. Apportionment is a plan, approved byOMB, to spend resources provided by one of the annual appropriations acts, asupplemental appropriations act, a continuing resolution, or a permanent law (mandatoryappropriations). The apportionment identifies amounts available for obligation andexpenditure. It specifies and limits the obligations that may be incurred and expendituresmade (or makes other limitations, as appropriate) for specified time periods, programs,activities, projects, objects, or any combination thereof. An apportioned amount may befurther subdivided by an agency into allotments, suballotments, and allocations. Anallotment is part of an agency system of administrative control of funds whose purpose isto keep obligations and expenditures from exceeding apportionments and allotments.


22/51


With respect to our recommendation to identify and evaluate potentialmisstatements of amounts in Academy financial records, MARADengaged an independent public accounting firm to determine theextent of any such misstatements. The review identified approximately$1.3 million in Academy expenditures funded by midshipmen fees thatshould have been funded by appropriated funds. However, as ofSeptember 30, 2011, MARAD had not yet determined whether itshould adjust financial records and reports to reflect the use ofmidshipmen fees to augment Academy appropriations. MARADofficials acknowledged the need to perform additional work todetermine whether adjustments to the Academys financial records

and reports are warranted.

In response to our recommendation to provide Congress a statementon the purpose and amount of all expenditures and receipts ofnonappropriated funds benefiting the Academy and its affiliatedorganizations, MARAD issued CFO Directive 3 on December 29,2009. Directive 3 established procedures for reporting on resourcesother than the Academys appropriated funds to be included inMARADs annual report to Congress. Specifically, the directiveprovides for reporting on the amount, source, intended use, andnature of such funds. However, based on our review of MARADsfiscal year 2009 annual report to Congressthe most recent reportavailable as of September 30, 2011the report did not containexpenditure information for any of the Academys affiliatedorganizations and did not provide a purpose for which theexpenditures were made to comply with the reporting requirement aswe recommended.

Funds accountability. In 2009, we found that the Academy did nothave assurance that it complied with applicable funds controlrequirements, including those in the Antideficiency Act (ADA). The

Academy and MARAD have taken sufficient actions to implement fourof our seven prior recommendations related to funds accountability.

Specifically, officials investigated and mitigated a potential ADAviolation, completed a series of reviews aimed at resolving pastdeficiencies related to parking of Academy funds to keep them from


23/51


expiring,16

The three recommendations that remain open in this area relate to

and established written policy on the accrual of items ofexpense at year-end. With respect to the potential ADA violation,MARADs Chief Counsel determined in 2011 that Academy officialshad retained approximately $200,000 in excess funds from GMATSwhich they had no legal authority to retain and had therebyaugmented Academy funds in excess of appropriations made byCongress during fiscal years 2006, 2007, and 2008. According to an

April 11, 2011, memo signed by the Maritime Administrator, MARADdetermined that sufficient prior-year funds existed to offset theGMATS-funded Academy expenditures. MARAD adjusted itsaccounts accordingly and since these sufficient prior-year funds

existed, MARAD did not exceed its available appropriations inviolation of the ADA. Also, the Academy and MARAD successfullyimplemented two recommendations related to parking ofappropriated Academy funds by performing a series of reviews toidentify excess Academy funds improperly held in commercial bankaccounts. As a result of these reviews, the Fiscal Control Office NAFIreturned over $214,000 of improperly held excess fiscal years 2006and 2007 funds to the Academy. The Academy subsequentlydeobligated these funds and returned them to their respectiveappropriation. Further, the Academy and MARAD have discontinueduse of the Academys in-house fund control system and havetransitioned to DOTs financial accounting system and have revised

the Budget Program Accounting Codes. These actions should providemore transparent financial reporting and improved oversight.

Additionally, in January 2010, MARAD issued CFO Directive 6establishing policy and procedures for accounting and recording of

Academy accrual of expenses at year-end. If fully and effectivelyimplemented, Directive 6 should improve internal control overaccounting and recording of Academy accrual of expenses.

making final notification to Congress of an ADA violation resultingfrom midshipmen fees that were used to cover Academyexpenses without legal authority to do so,

16Parking of funds describes a federal entitys transfer of funds to a revolving fund or, inthe Academys case, a NAFI bank account, in an effort to keep the funds available aftertheir period of availability expires. However, such transfers do not extend the period ofavailability for the transferred funds.


24/51


implementing corrective actions as a result of a MARAD review inwhich it identified weaknesses related to the Academys fundscontrol process, and

establishing targeted internal controls, such as managementsreview and approval procedures, over accruals.

According to a March 23, 2011, memorandum to the MaritimeAdministrator from MARADs Chief Counsel, the Academy violatedthe ADA by charging midshipmen fees in excess of authorized levels,improperly augmenting agency appropriations, and makingexpenditures in excess of and in advance of appropriations. As of

June 1, 2012, the required ADA report to Congress had not been filedAdditionally, the Academy and MARAD had yet to implementcorrective actions as a result of a review of the Academys fundscontrol process. Specifically, on February 1, 2010, the MARAD CFOcompleted a review of the Academys funds control process and madefive recommendations for process improvements, including that theMARAD CFO issue a directive establishing policy and proceduresrequiring the periodic review and closeout of undelivered orders. Thereview also recommended that the MARAD CFO issue policyguidance to address an internal control weakness regardingcontracting officer approval of Academy invoices. However, as ofSeptember 30, 2011, the MARAD CFO had not issued any guidance

in this area. While MARAD officials told us they had practices in placefor contracting officer approval of invoices, we found that as ofSeptember 30, 2011, MARAD had not documented and disseminatedthese practices to Academy acquisition staff in policy guidance, suchas a CFO directive.

Capital asset repairs and improvements. Our 2009 report identifiedrepair and maintenance (R&M) costs that were improperly chargedagainst the Academys no-year17

17Capital improvement funds are provided under appropriations that remain available foran indefinite period.

capital asset improvementappropriation and found that the MARAD CFO did not conduct timelyreviews of the Academys capital improvement-related expenses forfiscal years 2006 and 2007. The Academy and MARAD have taken

corrective action to address one of the three recommendations wemade to improve specific controls related to capital asset repairs andimprovements. On May 25, 2010, the MARAD CFO issued Directive


25/51


7, requiring monthly review of recorded amounts of Academy repairsand maintenance expenses and capital improvement transactions toidentify any anomalies, discrepancies, or questionable entries. Ourwork found that the Office of Academy Operations reviewed theaccounting records on a monthly basis in accordance with Directive 7.

The two recommendations that remain open relate to (1) establishingpolicies and procedures for reporting financial information on R&Mexpenses and capital asset additions to help monitor these items and(2) performing an analysis to identify the causes of approximately $8million of errors in recording R&M expenses identified in our 2009

report. While CFO Directive 7 required monthly reporting, we foundthat the reports were not distributed to users, such as Academydepartment managers, to facilitate monitoring of these items as calledfor in our recommendation. With respect to our recommendation toidentify the causes of the errors in recording R&M expenses, wefound that the Academy and MARAD had taken action to reclassifythe transaction errors we identified but had not yet conducted therecommended root cause analysis needed to identify and address anysystemic issues causing the errors and to prevent such errors in thefuture. Consequently, the Academy and MARAD are at risk ofreoccurrences of errors in R&M expense accounting.

Although the Academy and MARAD have taken steps to improveoversight of the Academys CIP, the Academy does not have a currentcomprehensive plan for capital improvements to provide the basis foroversight of CIP planning and implementation. In response to a May 2009directive from the Secretary of Transportation, MARAD convened anindependent Blue Ribbon advisory panel consisting of seniorgovernment executives to analyze the Academys CIP and its investmentpriorities. The panel concluded that the Academys facilities wereseriously deteriorated and its support buildings were inadequatelymaintained. The panels March 2010 report, USMMA: Red Sky in theMorning,18

18U.S. Merchant Marine Academy Capital Improvements Advisory Panel, USMMA:RedSky in the Morning, March 2010.

provided 11 recommendations, which included linking a

comprehensive Academy strategic plan to its Facilities Master Plan withcapital investments prioritized for a 10- to 15-year period to address the

Academys extensive needs. According to DOT officials, MARAD

FurtherEnhancements toCapital ImprovementProgram OversightAre Needed


26/51


prepared its USMMA Capital Improvements Implementation Plan19

The Academy also established and filled a new position for an AssistantSuperintendent for Capital Improvements and Facilities Maintenance in2010, designating the new positions responsibilities to include oversightof the Academys Departments of Capital Improvements and FacilitiesMaintenance and the Office of Safety and Environmental Protection. Thisposition is to provide oversight for the Academys CIP and leadership for

strategic planning and accountability related to capital improvementactivities. Further, according to Academy officials, the Academy realignedits facilities management organizational structure in December 2010 toreflect that of other academic organizations and service academies and toimprove oversight.

in

November 2010 to serve as a road map for implementing the panelsrecommendations and to identify the Academys immediate capitalimprovement needs through 2016.

Despite these recent improvements, the Academy has not yet developedreliable project cost estimates and current phased capital investmentplans aligned with the organizations strategic objectives, asrecommended by the Blue Ribbon panel in 2010. Guidance issued byOMB as well as our prior work on leading practices in this area identifies

the need for effective capital planning to provide CIP accountability andoversight. OurExecutive Guide: Leading Practices in Capital Decision-Making20 summarizes the results of our research on leading capital

planning practices used by state and local government and private-sectororganizations. It includes practical steps for implementing capital planningeffectively and presents examples that illustrate and complement many ofthe concepts and specific steps contained in OMBs Capital ProgrammingGuide.21 OurGAO Cost Estimating and Assessment Guide,22

19Maritime Administration, USMMA Capital Improvements Implementation Plan,November 2010.

which

20GAO, Executive Guide: Leading Practices in Capital Decision-Making,GAO/AIMD-99-32(Washington, D.C.: December 1998).

21OMB, Capital Programming Guide: Supplement to Circular A-11, Part 7, Preparation,Submission, and Execution of the Budget(Washington, D.C.: Executive Office of thePresident, August 2011).

22GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing andManaging Capital Program Costs,GAO-09-3SP (Washington, D.C.: March 2009).
http://www.gao.gov/products/GAO/AIMD-99-32http://www.gao.gov/products/GAO/AIMD-99-32http://www.gao.gov/products/GAO-09-3SPhttp://www.gao.gov/products/GAO-09-3SPhttp://www.gao.gov/products/GAO-09-3SPhttp://www.gao.gov/products/GAO-09-3SPhttp://www.gao.gov/products/GAO/AIMD-99-32


27/51


provides best practices for developing, managing, and evaluating capitalprogram cost estimates, complements the Executive Guide. Fundamentalsuccess factors identified in ourExecutive Guide include developing long-term capital investment plans that integrate with long-range organizationastrategic objectives, present reliable project cost estimates to informdecision making, and use a phased priority approach to guide andschedule capital spending.

The Academys Facilities Master Plan, which identified anticipated capitalprojects for a 10-year period in three priority phases, has not beencomprehensively updated since 2002. Up-to-date CIP information that

identifies and prioritizes long-range renovation and new constructionprojects and provides reliable project cost estimates and completion andfunding timelines would facilitate oversight by helping to assess whetherindividual improvements were carried out in a timely and cost-effectivemanner and in priority order. We identified instances where improvementswere not carried out in priority order and also identified lengthy delays incompleting some planned capital investments. For example, the 2002Facilities Master Plan showed that the midshipmens primarycommissary, Delano Hall (which serves over 2,000 meals a day to the

Academys residential midshipman population), was to have beenrefurbished during fiscal year 2002. As of September 30, 2011, theDelano Hall refurbishment project had not yet broken ground. Accordingto information that DOT provided in February 2012, several tasks relatedto the Delano Hall refurbishment project have been completed, such asremodeling rest rooms in compliance with the Americans with Disabilities

Act. DOT told us at that time that it expected construction on thecommissary to begin in the summer of 2012 and to be completed byDecember 2013.

Preparing the 2010 Capital Improvements Implementation Plan was apositive step, although the implementation plan acknowledged the needfor a more comprehensive, phased investment plan. For example, theimplementation plan did not present a long-range phased investment plan

and detailed cost estimates. Rather, projects presented were based onaverage replacement cost per square foot for federal governmentbuildings, described in the plan as a rough order of magnitude estimate.

Accordingly, the cost estimates presented in the implementation plan didnot consider specific cost factors for capital improvements at the

Academy, such as geographic location, local cost of construction andlabor, and the technology, simulation, and infrastructure requirements ofan institution of higher education. As stated previously and recommendedby the 2010 Blue Ribbon panel, reliable cost estimates and phased


28/51


investment priorities for Academy capital projects that are aligned with theorganizations long-range strategic objectives would help facilitate CIPoversight. According to DOT officials, the Academy had recently begunpreparing its first strategic plan to define the organizations goals andobjectives and to help the Academy better prioritize investments.Specifically, they told us in February 2012 that the strategic planningprocess for the Academy is to be led by the Academys ActingSuperintendent and is expected to be a multiphased effort beginning withidentification of key internal stakeholders to assist with the developmentof critical issues that should be addressed in the strategic plan.

Clearly articulated top management vision and support will be critical forfully implementing the open recommendation related to establishing acomprehensive risk-based system of internal control and relatedmonitoring. The Academy and MARAD have taken a number of positivesteps, but until Academy and MARAD officials take additional actions tofully address our recommendation in this area, their ability to ensure thatmanagements objectives are carried out, including proactively identifyingand correcting control deficiencies in a timely fashion, will continue to beimpaired. We reiterate the need to continue efforts to complete fullimplementation of this recommendation. The Academy and MARAD havemade significant progress in addressing our prior recommendationsrelated to specific control activities, and their actions effectivelyaddressed 32 of the 46 recommendations related to deficiencies inspecific controls. We reiterate the need to address the remaining 14recommendations related to midshipmen fee accountability, Academyand NAFI governance structure, financial reporting controls, fundaccountability, and controls over capital asset repairs and improvements.

The Academy and MARAD have taken steps to improve CIP oversightand planning of capital improvement projects at the Academy. However,the Academy does not have comprehensive, updated information oncapital improvement projects, including reliable cost data, long-range

capital investment plans, and phased priorities. Further, the Academy hasnot yet aligned its capital improvement priorities with the organizationsstrategic objectives, a critical factor in providing effective oversight.

To improve oversight of the Academys capital improvement program, werecommend that the Secretary of Transportation direct MARAD to workwith Academy officials to develop and maintain a current and

Conclusions

Recommendation forExecutive Action


29/51


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 theAcademys strategic objectives,

reliable estimates of cost specific to each capital improvement, and a phased investment approach for prioritizing capital improvement

needs.

On June 19, 2012, DOT provided written comments on a draft of this

report, signed by the Deputy Assistant Secretary for Administration. Thecomments are reprinted in appendix III. In its comments, DOT describedsteps that the department, MARAD, and Academy are taking to helpprioritize and manage Academy capital improvement projects. DOTindicated that these actions are aligned with and fulfill therecommendation in our draft report. Specifically, DOT stated that sinceour draft report was issued, the department, MARAD, and the Academyestablished a comprehensive CIP that includes a Senior Advisory Counciland working group; a management process that provides a clear andconsistent understanding of project status; and controls for projectselection, 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 wouldprovide for the Academys capital investments. However, it is too soon todetermine the extent to which the new CIP addresses the three specificelements that our recommendation provided as minimum attributes for acomprehensive capital improvement plan: an inventory of long-rangecapital improvements that align with the Academys strategic objectives,reliable cost estimates specific to each capital improvement, and aphased investment approach for prioritizing capital improvement needs.We believe these attributes are critical to facilitating oversight of the

Academys capital improvements to ensure that they address the needs

of the midshipmen in accordance with the strategic vision of theAcademy, are undertaken in priority order, and are completed timely andcost effectively.

DOT also stated that it remains dedicated to the challenging task ofbuilding and operating a comprehensive system of internal controls at the

Academy, including completing action on all recommendations in our prioreport, and will keep us apprised of progress to close out our

Agency Comments

and Our Evaluation


30/51


recommendations. DOT further stated that it has established a goal ofcompleting action on all 46 of our specific control-relatedrecommendations 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 theGAO website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please

contact me at (202) 512-9500 [email protected]. Contact points forour Offices of Congressional Relations and Public Affairs may be foundon the last page of this report. GAO staff who made key contributions tothis report are listed in appendix IV.

Beryl H. DavisDirectorFinancial Management and Assurance
http://www.gao.gov/mailto:[email protected]:[email protected]://www.gao.gov/


31/51

Appendix I: Scope and Methodology


To address our objective to assess the extent to which actions have beentaken 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 officialsand reviewed and analyzed

MARAD summaries of action steps taken in response to ourrecommendations;

activities and policies, procedures, and memorandums issued by theU.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 toaccountability for Academy reserves, financial reporting controls, andfund accountability, we obtained a database of Academy obligations andexpenditures at the transaction level for fiscal years 2010 and 2011 tomake a nonstatistical selection of transactions to obtain an understandingof the Academys accounting process. We compared these data toamounts reported for the Academy in the Department of Transportations(DOT) annual performance and accountability reports. We performedsystem walk-throughs to gain an understanding of procedures in place.

As part of this assessment, we reviewed and analyzed

receipts and disbursements records; bank statements; and procurement documentation for selected transactions, including

contracts, purchase orders, receiving documentation, invoices, anddisbursement documents and other pertinent supporting documents.

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

Further, for some specific recommendations, we reviewed rate schedules,billings and underlying calculations, payroll records, and congressionalnotifications, 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 feerefund schedule and a summary of payments made by the GlobalMaritime and Transportation School (GMATS) NAFI to the Academy.



32/51



To assess actions taken to address our recommendations regardingcontrols over financial reporting and capital asset repairs andimprovements, we also reviewed monthly reports summarizingtransaction activity and balances.

To address our second objective regarding our assessment of oversightof the Academys Capital Improvement Program (CIP), we interviewed

Academy and MARAD officials and reviewed Academy and MARADprocedures, monthly reports to MARAD, and monthly analyses preparedto help ensure that transactions are accounted for properly. We alsoreviewed the Academys 2002 Facilities Master Plan, a report on the

Academys CIP prepared by a Blue Ribbon panel,1 a follow-upimplementation plan that responded to the Blue Ribbon panel report,2

We evaluated corrective actions taken through September 30, 2011, thatthe Academy, MARAD, and DOT made us aware of by February 15,2012. In addition, we reviewed DOTs Office of Inspector General auditand investigation reports for the period from January 2010 through March2012 to determine if any work related to the Academy had been

performed. No audit reports that could have an impact on thisengagement were noted.

and

GAO and Office of Management and Budget (OMB) guides related tocapital improvements project planning. We also observed the Academysphysical plant.

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

1U.S. Merchant Marine Academy Capital Improvements Advisory Panel, Red Sky in theMorning, March 2010.

2Maritime Administration, USMMA Capital Improvements Implementation Plan, November2010.


33/51

Appendix II: Status of Prior Recommendationsand Description of Corrective Actions Taken


This appendix presents a list of the 47 recommendations that wepreviously issued in our August 2009 report1

Table 3: Implementation Status of GAO Recommendations

along with our analysis of

the implementation status of each recommendation (see table 3). Weevaluated corrective actions taken through September 30, 2011.

Recommendation Status per GAO

Overall internal control and monitoring To improve the design and operation of the internal control system at the Academy, werecommend that the following actions be taken.

1. Establish a comprehensive risk-based internal control system

that addresses the core causes and the challenges to properadministration that we identify in this report, including the risksand challenges that flow from the close organizational andtransactional relationships between the Academy and its affiliatedorganizations and implement internal controls that address theelements of ourStandards for Internal Control in the FederalGovernment, including the role and responsibilities ofmanagement and employees to establish and maintain a positiveand supportive attitude toward internal control and conscientiousmanagement, and the responsibility for managers and otherofficials to monitor control activities.

Open.

As of September 30, 2011, the Academy had not yet establisheda comprehensive risk-based internal control system to includemonitoring to ensure ongoing effectiveness and efficiency ofoperations, reliability of financial reporting, and compliance withlaws and regulations. In contrast to the substantial actions takento address many of the deficiencies concerning specific Academycontrol activities, few corrective actions have yet been taken toaddress the fundamental weaknesses we previously identifiedconcerning the Academy establishing a comprehensive risk-basedinternal control system and monitoring. In particular, the Academyhad not addressed the underlying causes of many of thedeficiencies we identified in the Academys specific controlactivities. MARAD officials told us that these overridingdeficiencies were not yet addressed because their strategy hasbeen to focus on the deficiencies that could be more readily

resolvedthose relating to deficiencies in controls over specificAcademy activities.

Training vessel use To improve internal controls over activities from usage of training vessels and other Academy-owned boats byothers, the Academy should take the following actions:

2. Perform an analysis to identify all activity involving the use ofthe Kings Pointerand Academy-owned boats by others, includingall sources and uses of funds for fiscal years 2006 and 2007.

Identify and recover the cost of any unreimbursednongovernmental uses, to the extent authorized by law.

For each payment, including payments to affiliatedorganizations, that is determined to be for other than a propergovernmental purpose and that is not consistent with law,regulation, and policy, consider pursuing recovery from theorganization or individual that benefited from the payment.

Closed.

MARAD engaged an independent public accountant to identifyactivities related to the use of Academy-owned training vessels byoutside parties and identify the sources and uses of funds,including the bank accounts used in these transactions for fiscalyears 2006, 2007, and 2008. On April 30, 2010, the independentpublic accountant completed its analysis and concluded that it didnot identify any payments that could be characterized as being forother than the continuing operations of the Academy or for thebenefit of the midshipmen. On September 21, 2010, the Acting

MARAD Chief Financial Officer (CFO) also concluded that fundsfrom the usage of training vessels were used only for the benefitof the Academy or its midshipmen. Based on the independent

1GAO, United States Merchant Marine Academy: Internal Control Weaknesses Resultedin Improper Sources and Uses of Funds; Some Corrective Actions Are Under Way,GAO-09-635 (Washington, D.C.: Aug. 10, 2009).

Appendix II: Status of PriorRecommendations and Description ofCorrective Actions Taken
http://www.gao.gov/products/GAO-09-635http://www.gao.gov/products/GAO-09-635http://www.gao.gov/products/GAO-09-635


34/51




public accountants work, MARAD management determined thatno further actions were warranted. We are closing thisrecommendation because the independent public accountantsanalysis performed did not identify any misuse of governmentfunds during fiscal years 2006 through 2007. We also noted thatthe Academys changed business practices include new writtenpolicies and procedures that govern the use of Academy trainingvessels.

3. Establish written policies and procedures to govern the use ofthe Academy-owned training vessel, the Kings Pointer, and otherboats, including addressing issues for ships crews, insurance,security, billing procedures, and other responsibilities.

Closed.

On September 29, 2010, the Academy issued SuperintendentsInstruction 2010-08, which established policies and proceduresgoverning the use of Academy-owned training vessels by outside

parties. The instruction contained the process by which Academy-owned training vessels would be made available to outside partiesand stated that all costs associated with their use shall be borneby the outside userincluding the cost of personnel, fuel,provisions, dockages, and maintenance and repair.

4. Perform or contract out a comprehensive usage rate study toestablish usage rates. Such a study should include(1) consideration of the full cost to the Academy of the trainingvessels and other boats, including salaries and benefits ofAcademy personnel, major repairs, routine maintenance,nonroutine maintenance and long-term repairs, fuel, and dockage,and (2) identification of indirect expenses and imputed costs asappropriate (e.g., depreciation).

Closed.

On September 29, 2010, the Academys Department of WaterfrontActivities completed a usage rate study and issued a vesselusage rate schedule, entitled Usage Rates for T/VKings Pointerand Other USMMA Vessels, establishing a base hourly, daily, andweekly billing rate for use of Academy-owned training vessels byoutside parties. The base rate includes direct and indirect costsrelated to the ships crew, administrative personnel, major repairs,routine maintenance, and operational expenses. Fuel charges are

to be billed on a direct reimbursable basis.5. Establish policy for the timing and extent of the analysisrequired for periodic updates to the usage rate study.

Closed.

On September 29, 2010, the Academy issued SuperintendentsInstruction 2010-08, which required the Director of WaterfrontActivities to maintain a comprehensive schedule of usage rates forall Academy vessels made available for use by outside parties.Additionally, the instruction states that the schedule may beadjusted for cost-of-living, inflation, or payroll increases on anannual basis, and shall be reviewed for other factors at least every3 years. Prior to completion of our review, and as a result of ourtransaction testing results, the Academy updated the usage ratepolicy and reissued it on July 20, 2011.

6. Determinein coordination with the department or MARADlegal counsel, as appropriateif the Academy had the legalauthority to retain and use any collections from the use of theAcademy-owned training vessel the Kings Pointerand otherboats; otherwise, deposit them in the general fund of the U.S.Treasury.

Closed.

In fiscal years 2006 and 2007, MARADs appropriations acts

permitted MARAD to collect moneys for utilities, services, andnecessary repairs in connection with any lease, contract, oroccupancy and credit these funds back to the appropriationcharged. However, any portions of rental receipts for items otherthan utilities, services, or repairs were to be deposited into theTreasury as miscellaneous receipts. Although there was authorityto take up certain collections from the use of Academy-ownedtraining vessels and other boats and credit these funds back tothe appropriation charged, it was not possible to definitelydetermine whether MARADs treatment of its collections was inaccordance with its authority because available records do not


35/51




detail the sources of all funds and financial records do not detailtheir complete application. MARAD stated that it would developrecommendations for further improvement of the record-keepingprocess, and that it was proceeding with the development of awritten lease to be employed in all instances of vessel use byoutside parties.

Personal service acquisitions To improve accountability and internal controls over the acquisition of personal services fromNAFIs, and to resolve potential issues surrounding past personal services activities and payments, the Academy should take thefollowing actions:

7. Perform an analysis to identify the nature and full scope ofpersonal services activities and the associated sources and usesof funds to include a review of all questionable payments,

including those that we identify in this report for personal servicestotaling more than $8 million for fiscal years 2006 and 2007. Foreach such personal services arrangement, (1) determine if theamounts paid were consistent with the services received by theAcademy; (2) quantify the amounts, if any, paid by the Academyfor personal services that were not received by the Academy; and(3) document the decisions made with respect to any payments bythe Academy for personal services that were not received,including decisions to seek recovery from other organizations forsuch amounts.

Closed.

On February 25, 2010, the MARAD CFO issued a memo to the

Fiscal Oversight Board (FOB) summarizing a follow-up review thathad identified 15 NAFI positions that were paid all or in part withthe Academys appropriations but had not been identified in anearlier review, which resulted in the conversion of NAFI staff tocivil service or contract positions. The memo described thedisposition of those positions and identified 3 positions fundedwith appropriations that performed functions exclusively for theNAFIs. The follow-up review also determined that the amountsrendered were consistent with the services received by theAcademy; however, the MARAD CFO concluded that there wasno possibility of recovering the amounts paid for these positionsfrom the organizations that benefited. We are closing thisrecommendation based on (1) the results of the analysis MARADperformed and (2) the Academys changed business practiceswith the implementation of Maritime Administrative Order (MAO)400-11 and the discontinued use of illegal personal service

arrangements.

8. Develop written policy guidance on acquiring services fromNAFIs that complies with the requirements of law, regulation, andpolicy on the proper use of funds by the Academy.

Closed.

On September 30, 2011, MARAD issued MAO 400-11, whichprovided governing principles under which NAFIs must operate. Itincluded principles stating that a NAFI, generally, may not providegoods or services to the Academy; must have staff to conduct itsdaily operations; and will receive no operating subsidy from theAcademy, in kind or otherwise, other than minor incidentalsupport. In addition, Section 6.03 of the MAO states the chartersand bylaws of authorized NAFIs will provide for oversight by athree-person Governing Board made up of members approved bythe Maritime Administrator and Academy Superintendent. TheNAFI Governing Board is to be accountable for ensuring that theAcademys NAFIs are operated consistently with the governing

principles set forth by MAO 400-11.NAFI camps and clinics using academy facilities To improve internal controls over camps and clinics operated by the AthleticsAssociation NAFI or others on Academy property, the Academy should take the following actions:

9. Perform an analysis to identify practices at the Academyinvolving camps and clinics operated by the Athletics Associationor others using Academy property and other assets. Documentthe nature and scope of such activities, including all sources anduses of funds for fiscal years 2006 and 2007, and take correctiveaction on any improper transactions.

Closed.

MARAD engaged an independent public accountant to identifycamps, clinics, or similar fund-raising activities operated by theAthletics Association using Academy property; document thescope and nature of these activities, including the sources anduses of funds; and document payments to coaches constitutingtheir compensation for fiscal years 2006, 2007, and 2008. Based


36/51




on this analysis, MARAD management issued a memo onMay 13, 2010, stating that the majority of the camps and clinicsrevenue had been provided to the individuals conducting thecamps and clinics and that the residual revenue had been minorand was used to support the general activities of the AthleticsAssociation. We are closing this recommendation because theanalysis performed did not identify any misuse of governmentfunds during fiscal years 2006 through 2008. Also, we noted thatthe Academys business practices have changed with theestablishment of Superintendent Instr

Government Accountability Office report

Documents

Transcript of Government Accountability Office report