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         Unrt«0St«m       ..... ,.  . .„
         Environmental Protection    "" " Xiji> """ "::
         Report of Audit
         E1B67-11-0029-80779
         flCCOUNTS  RECEIUfiBLE
             §HEADQUARTFRS LIBRARY
	            ENVtRfiMMFMTJi "ROTfCTION AGEMCY
             wi--.-.i>ii '.•!, IJ.L 20460
CVJ

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                        TART.F, OF CONTENTS

                                                      PAGE

 SCOPE  AND OBJECTIVES  	    !

 SUMMARY  OF FINDINGS  	    2

 ACTION REQUIRED 	    6

 BACKGROUND 	    6

 FINDINGS  AND  RECOMMENDATIONS

     1.   ALMOST FORTY  PERCENT OF THE  DEBTS  IN  THE
          ACCOUNTING RECORDS  WERE UNDERSTATED OR
          OVERSTATED  	    9

     2.   AGGRESSIVE COLLECTION ACTION IS  NEEDED TO
          ENSURE THAT DEBTORS PAY THE  AGENCY IN A
          TIMELY MANNER 	   19

     3.   ALL  DEBTS OWED TO THE AGENCY SHOULD BE
          RECORDED AS ACCOUNTS RECEIVABLE  	   26

 EXHIBIT  1:  MANY RECEIVABLES IN THE SAMPLE  WERE
            UNDERSTATED OR OVERSTATED DUE TO A
            VARIETY OF REASONS 	   31

 EXHIBIT 2:  RECEIVABLES WITHOUT DOCUMENTATION  	   39

 EXHIBIT 3:  DELINQUENT RECEIVABLES FOR WHICH NO
            DEMAND LETTERS WERE SENT  	   40

 EXHIBIT 4:  FIRST DEMAND LETTER FOR DELINQUENT DEBT
            WAS  SENT MORE THAN 60 DAYS AFTER
            THE  BILL 	   41

EXHIBIT 5:  RECEIVABLES OVER 120 DAYS OLD FOR  WHICH
            THE  FMO HAD TAKEN NO RECENT FOLLOW-UP
            ACTION 	   42

EXHIBIT 6:  INDEPENDENTLY DEVELOPED SUPPLEMENTAL
            COMPUTER SYSTEMS OPERATING DURING  THE
            FIRST HALF OF FISCAL 1987 	   43

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                       TABT.E OF CONTENTS
                             CONT'D
                                                      PAGE
EXHIBIT 7:  RECEIVABLES NOT RECORDED AS  SUCH
            AND THE COLLECTION STATUS  	    44

EXHIBIT 8:  FMOS WITH OUTSTANDING RECEIVABLES  FOR
            FINES AND PENALTIES ON  12-31-86 AND
            6-30-87 	    45

APPENDIX 1: SAMPLING AND ESTIMATION PROCEDURES FOR
            THE ACCOUNTS RECEIVABLE AUDIT  	    46

APPENDIX 2: FEBRUARY 1, 1988 RESPONSE  TO THE  DRAFT
            AUDIT REPORT  	    52

APPENDIX 3: DISTRIBUTION OF THE AUDIT  REPORT  	    64

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        UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                    WASHINGTON. D.C. 20460

                           ! 7 fCQQ
MEMORANDUM

SUBJECT:  Audit Report E1A67-11-0029-30779
          Accounts Receivable
FROM:
TO:
                                                     OF*
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                                                                    1
 Audit work similar  to this phase was previously performed.  The
 most recent report  resulting  from such work was audit report
 E1A86-11-0048-70619, dated January 28, 1987.  It covered delin-
 quent debts (i.e.,  accounts receivable that were not collected
 within 30  days  after the debtor was billed) as of September 30,
 1986,  for  one FMO.  Because of corrective action proposed^ or
 underway,  the audit report did not contain any recommendations.
 However, the corrective action had not been completed as of
 July 1987.

 During phase two, we wanted to determine whether Agency program
 offices were promptly providing the FMO with documents needed
 to  establish an account receivable.  This is important to deter-
 mine if all debts owed the Agency are recorded in the FMS.  If
 the FMO was not notified, we  checked whether the program offices
 tracked such billings to be sure that the debts were collected
 promptly.

 For this part of the audit, we interviewed program officials
 in  Headquarters and in Regions 1, 4, 5, 6 and 7 about activities
 that may generate receivables and how the receivables were tracked.
 If  there should have been receivables, we traced some of the trans-
 actions to  the  FMS.  We tested 149 transactions that originated
 in  the program  office during  fiscal 1986 or 1987.  We performed
 this work  from  March through  June 1987.

 The controls we reviewed and  our conclusions and observations
 about them  are  detailed later in this report.  We reviewed only
 those  internal  controls needed to satisfy the objectives of the
 audit.  Tested  items complied with applicable requirements to
 the extent  depicted in the report.  Because we used a statisti-
 cal sample  for  phase one, items not specifically tested which
 were part of the audit universe are projected to have characteris-
 tics as described in the report.  Nothing further came to our
 attention as a  result of the  specified procedures that caused
 us  to  believe untested items  did not follow applicable laws
 and regulations.

 SUMMARY OF  FINDINGS

 Improvements related to accounts receivable are needed to ensure
 that:  the dollar value in the FMS for each receivable is  recorded
 and  adjusted according to Agency policy; the FMO is as aggressive
 in  collecting debts as they should be; and all receivables are
 recorded.   Except for the collection of civil penalties,  the
Agency guidance  related to accounts receivable was generally
 adequate.   Most  of  the problems were in implementing the  guidance.
The  operating problems facing the financial management officers
could be partially  relieved by automating more of the activities,
as was successfully and independently done at three locations.

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Also,  the program offices need prompting to fulfill their respon-
sibility to:   (1) place the correct payment terms on the bills;
and  (2) send  a  copy of all bills to the FMO.

      I.  MANY DEBTS IN THE ACCOUNTING RECORDS WERE
         UNDERSTATED OR OVERSTATED

W«. project thac as of March 31, 1987, the recorded balances in
the  FMS for about 40 percent of the accounts receivable were
not  accurate.   The extent of errors has serious implications
on the Agency's ability to collect money owed and support the
validity of the recorded balances.  Several factors contributed
to the recorded value of an account receivable varying from
what it should  have been.  The primary factor causing the
differences was that the^EMe- was not accurately computing and
recording additional charges such as interest, handling charges
and  penalties on delinquent/debts.  Other factors included having
no documentation to support1* the validity of the transactions and
matching transactions to the\ wrong accounts,

Based  on Agency policies and available intormation, the recorded
value  for 119 of the 287 receivables in the sample were under-
stated by $4,213,453, and 50 were overstated by $1,226,187.
(Exhibit 1 provides details on this information.)  Using pro-
jections of the receivables in the sample, Si£* estimate:; that 25
percent of the  accounts in the universe were understated by
$5,361,710 and  14 percent were overstated by $2,994,774.
Instead of the  $94,851,680 recorded in the Agency reports on
March  31, 1987, we believe with 95 percent confidence that the
recorded value  of the accounts receivable should have been
between $95,273,292 and $99,163,936.

The  law allows  the Agency to collect additional charges from
most debtors.   cJ^rDevaluation of the sample showed that addi-
tional charges  were not accurately recorded for 113 receivables.
Either nothing  was recorded for additional charges or the FMO
was  recording an incorrect amount.  As a result, these receiv-
ables  were understated by $3.5 million.  When projected to the
universe, the understatement may total $4.2 million.  Respon-
sibility for  assessing additional charges rests with both the
FMO and the office preparing the bill.  Many times the bill did
not  include the payment terms required by the Agency.  The
regulations limit additional charges to those identified on the
bill to the debtor.

Uncorrected errors when entering transactions iii\FMS)7insuffi-
cient  documentation, and other problems also contributed to the
understatements or overstatements for 82 receivables in the
sample.  Most of these differences should be identified during
the required  reconciliation between the FMS and account receiv-
able file.  A report listing all transactions about individual

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                                                                    1
 receivables would also be helpful  for the reconciliation.  The
 reconciliations were generally  not performed because of resource
 limitations.   As a result,  some of the errors remained in the
 FMS  a long time.

 In his response to the draft  report, the Comptroller stated that
 proposed Agency guidance  on receivables, planned  for issuance
 in April 1988,  will require the FMO to:  (l) maintain documentation
 showing who completed the required reconciliation and when it was
 completed; and (2)  take appropriate action  in cases where bills
 lack correct payment terms.   Also, Financial Management Division
 (FMD)  will:   (1)  make available to FMOs a copy of software and
 documentation for an automated  method that  computes additional
 charges; and (2)  evaluate and test compliance to  accounts receiv-
 able policy when participating  in  various reviews.  In addition,
 we are recommending one immediate  reconciliation  of all files
 and  the FMS.

      2.   MORE AGGRESSIVE  CQT/LECTfQN l^s NEEDED
                                                           *r
 A large part of the receivables outstanding on March 31 were
 substantially past due, increasing the^ likelihood that they
 would not be collected in full.  The^FMOs^were generally not
 collecting receivables as aggressively as the Agency directives
 required.   They were not  periodically contacting  debtors or
 regularly evaluating the  debts  to  determine collection action
 needed.   For example,  the sample included 102 bills  "or which
 the  FMO was responsible for sending a demand letter to delinquent
 debtors.   For 95  of these bills, either demand letters were not
 sent or were sent late.   Additionally, the  aging  reports provided
 through the FMS contained j.r,r->rrect information.  Methods used
 effectively by some FMOs,  particularly supplemental computer
 systems,  could be adapted for use  by others to improve the
 timeliness P^ collections.
In ^responding to  tuv draft  audit  report,  the  Comptroller said
the \ FMD will:   (1) make  available to  FMOs a copy of the soft-
ware and documentation for  an automated method  that effectively
generates demand  letters; and  (2)  evaluate and  test compliance
with Agency policy to aggressively collect receivables when
participating in  various reviews.   In addition,  we are recom-
mending one immediate review of outstanding receivables to
ensure proper followup action was taken.

     I .  ALL DEBTS OWED  SHOULD BE RECORDED AS ACCOUNTS
He' Identified over $376,000  in debts  that  were owed the Agency
during fiscal 1986 and  1987  but were  not recorded in the FMS as
accounts receivable.  Of these debts,  $375,000 were civil
penalties assessed against parties who violated environmental
laws.  Although such debts were generally  paid, failing to
record them could delay collection and create a climate for
fraud.  The FMOs; knew that program offices did not always

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 provide the bill but generally had  not  taken  effective action
 to correct the situation.   Improved communication with the
 program offices, as well  as better  coordination  among the program
 offices,  is needed.

 The Office of Enforcement and  Compliance Monitoring  is preparing
 program guidance on this  subject.   Also, actions were taken in
 several regions to improve coordination between  the  programs and
 the FMO.   Finally,  the proposed Agency  guidance  on receivables
 will require the FMOs to  take  appropriate action when program
 offices do not provide required documents to  the FMO.

      AGENCY COMMENTS

 We discussed problems identified during the audit with representa-
 tives of the FMOs,  regions and FMD.  Where appropriate, we have
 included their comments.   We sent a draft of  this audit report
 to the Comptroller and the Director, Office of Enforcement
 Policy,  Office of Enforcement  and Compliance  Monitoring  (OECM)
 on December 23,  1987,  and received  joint comments signed by the
 Comptroller on February 1,  1988.  Our discussions of these
 comments  are included in  the relevant sections of the report
 and a copy of the comments are included as appendix  2.  Exit
 conferences were held with representatives of OECM on February 24,
 and with  FMD on March 2,  1988.

 Ifce Agency generally .aareed with our-recommendations and stated
 that the  results of  Our-audit  were  similar to other  reviews con-
 ducted internally.   The Comptroller listed many  of the accounts
 receivable initiatives the Agency has already implemented.  These
 included  continually stressing to Agency management  officials the
 critical  importance  of complying with EPA procedures for reporting,
 billing,  and collecting debts,  performing reviews either internally
 or  by contract of accounts receivable,  revising  accounts receivable
 policy and procedures,  and working  with* )EC>  to  strengthen controls
 relating  to the  tracking  of fines and .penalties  under administrative
 orders and consent decrees.  The Comptroll^V*-also stated that they
will  continue working with program  offices 'whose support and coopera-
tion  is essential to the  accounts receivablry process to ensure that
all  amounts due  the  Agency are accurately ^reflected  in the Agency's
 financial  records.                          '           '
                            '                —  - - .             (
Whiie—corrective-act ion is underway, -^fche—eomptrol-ler' disagreed
with  the draft report's overall conclusion that  the  errors found
would materially  impact reporting on accounts receivable.  He
stated in  the  Agency's  response to  the  draft  report:

      Your  projected  range  of total  accounts receivable in
      comparison to the  actual  recorded  accounts  receivable
     balance  in the  FMS,  shows  a discrepancy  rate of between
      .5 -  4.5%—a variance that is  "insignificant11 and
      "immaterial" by professional standards.  Therefore,

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     we believe-that the  accounts  receivable, as a whole, are
      fairly staced and  that  the Agency  is providing reliable
      financial  information.

      Old-EVALUATION OF  AGENCY  COMMENTS

 We' *re  pleased  with the various actions the Agency has taken or
 plans to take to  improve  the accounts receivable process and to
 strengthen.the.  internal controls over accounts receivable.
 However,  w»-a£e concerned about the extent of errors in the
 balances for individual accounts receivable.  The average
 difference between the  recorded balance and what the balance
 should  have been  was $32,187 for the 169 receivables in our
 sample.   This indicates a major problem which needs correction.
 If the  individual balances are incorrect, Agency officials do
 not have available to them accurate information to properly
 manage  and control the  receivables.

 AJTION  REQUIRED

 In accordance ~ith EPA  Directive 2750,  the action official is
 required to provide this  office a  written response to the audit
 report  within 90  days of  the audit report date.

 BACKGROUND

 Current and former employees,  vendors, grantees and others owe the
 Agency  money for  a variety of  reasons.  When these accounts receiv-
 able are  collected,  the money  generally either increases Government
 funds or offsets  Agency expenses.  Therefore, many organizations,
 in addition to  the Agency, are interested in how many debts the
 Agency  can bill and collect.   The  Office of Management and Budget
 and the Treasury  Department  receive reports about accounts receiv-
 able from  the Agency.   Congress receives related information for
 each fiscal year  through  the Office of Management and Budget
 ("Management Of The United States  Government") and for each six-
 month period through the  Inspector General's semiannual report.
 The General Accounting  Office  has, through several reports to
 Congress,  stressed the  need  for efficient and effective debt
 collection activity.

 The interest of these organizations made recording, maintaining
 and collecting  receivables a highly visible function throughout
 the Federal Government.   For example, the Office of Management
 and Budget's "Management  of  the United  States Government" for
 fiscal  1987 and 1988:   (1) identified debt collection as one of
 this administration's highest  management improvement priorities;
 and (2)  described initiatives  and  progress related to credit
management  and  debt collection.  They also contained a status
report on debt  collection.

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Goverrunentwide guidance related to these debts is in the Debt
Collection Act of 1982  (Public Law 97-365).  The act was implemented
through the Federal Claims Collection Standards (parts 101 through
105, Title 4 of the Code of Federal Regulations).  The Agency
policies and procedures related to recording and collecting debts
are covered, primarily, by chapter 7 of the Financial Management.
Manual and chapter 17 of the EPA Accounting Manual.  These
directives define the roles of the program offices, the FMOs,
the Director of FMD, and the EPA Claims Officer.

The program office has responsibility for establishing the
debt and the Agency's right to collect additional charges if
the debt is not paid promptly.  Generally, the program office
either sends the bill or provides the information needed for
the FMO to send the bill.  Whoever prepares the bill must be
sure that it contains the proper payment terms.  If the program
office prepares the bill, a copy must also be sent to the FMO
so the debt can be recorded in the FMS.  Often the program
office becomes involved in disputes with debtors about the
validity of debts.  Of the $94.8 million recorded as outstanding
accounts receivable on March 31, 1987, $33.9 million (or 35
percent) was identified in the FMS as being under appeal.

There are 14 FMOs controlling the activities of 15 accounting
points in the Agency.   (The FMO at Headquarters controls two
accounting points, one of which is Agencywide payroll activity.)
FMOs are located at Headquarters, at each of the Agency's 10
Regional Offices, and at three major laboratory facilities
(Research Triangle Park near Durham, North Carolina; Cincinnati,
Ohio; and Las Vegas, Nevada).  They provide accounting support
for assigned facilities, organizations or functions.

The FMO has many responsibilities related to money owed the
Agency.  As well as sending the bill when the program office
does not, these responsibilities include: recording the debt
initially as an account receivable in the FMS, and later recording
any adjustments, such as additional charges and funds collected;
establishing and maintaining a file of documents about the debt;
comparing the file with financial reports each month; regularly
contacting the debtor if the debt is not paid promptly; and,
when the collection actions are unsuccessful, either turning the
debt over to others to collect or writing it off in the FMS  as  a
bad debt.

The EPA Claims Officer  (located in the Office of General Counsel)
and the Director, FMO, determine the final disposition of the debt
when the FMO is unsuccessful in collecting it.  Of the $94.8
million recorded as outstanding accounts receivable on March 31,
1987, $2.1 million was identified in the FMS as referred to
these officials.

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During the first half of fiscal 1987, according to data provided
by the Director of FMD, the Agency collected $45.8 million and
wrote-off debts totaling $44,218.  On March 31, 1987, the FMS
showed the following outstanding receivables at each accounting
point, part of which were not controlled by the FMO  (as discussed
above and in Finding 2):

                            TABLE 1
                    OUTSTANDING RECEIVABLES
                       ON MARCH 31, 1987
                               DOLLARS (IN THOUSANDS)
 ACCOUNTING
   POINT
     01
     02
     O3
     04
     05
     06
     07
     08
     09
     10
     15
     22
     27
     33
     99
  LOCATION
BOSTON
NEW YORK
PHILADELPHIA
ATLANTA
CHICAGO
DALLAS
KANSAS CITY
DENVER
SAN FRANCISCO
SEATTLE
WASHINGTON
DURHAM
CINCINNATI
LAS VEGAS
WASHINGTON
RECE]
$














TOTAL
CVABLES
826
3,040
38,251
5,889
8,442
641
637
1,392
10,059
3,778
154
619
13,580
126
7,418
CONTROLLED
BY THE FMO
$ 577
1,323
32,735
1,303
368
74
169
86
551
84
99
105
183
14
2,258
           TOTAL
                    $ 94,852
$  39,929
                              8

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FINDINGS AND RECOMMENDATIONS

      1.  ALMOST FORTY PERCENT OF THE  DEBTS  IN  THE  ACCOUNTING
          RECORDS WERE UNDERSTATED OR  OVERSTATED

 With 95 percent confidence we estimate  that as of  March  31,
 1987,  25 percent of all recorded receivables were  understated
 by $5,374,188 {plus or minus $1,291,616)  and 14  percent  were
 overstated by $2,969,843 (plus or minus $1,372,359).   The  extent
 of errors in the accounts has serious implications on  the  ability
 of the Agency to collect money which  it is  owed  and to accurately
 report on the balance of accounts receivable.  When amounts due
 the Agency are not correctly recorded,  collecting  the  proper
 amount becomes unlikely.  Agency reports on accounts receivable
 that are based on information in the  FMS, such as  those  provided
 to Congress and to the Office of Management and  Budget,  reflect
 the errors in individual receivables.  Several factors contributed
 to the recorded value of an account receivable varying from what
 it should have been.   The most common correction needed  was to
 accurately compute and record additional charges (such as  interest)
 on delinquent debts.   Other factors that caused  differences,
 including some receivables that had no  documentation available to
 support the validity of the transactions and mismatching accounting
 entries,  should have been identified  during the  required monthly
 reconciliation of the file to the accounting records.

 Agency directives require that accounts receivable be  promptly
 recorded in the FMS,  adequately documented, and  regularly  reconciled.
 Paragraph 5 of chapter 7 of the Financial Management Manual  identi-
 fies the FMOs responsibilities to include:   processing bills  from
 the program office within one day of  receipt;  establishing and
 maintaining an account receivable file  for  all documents pertaining
 to a particular bill; preparing a "Subsidiary  Record For A Delin-
 quent  Account Receivable;" maintaining  the  general ledger  accounts
 for accounts receivable and interest; reconciling  the  file and
 the ledger each month; writing off a  receivable  under  $150 when
 it cannot be collected; and continuing  to accrue additional charges
 each month after the receivable is referred to the EPA Claims
 Officer.

 Similiar requirements appear in Chapter 17  of  the  EPA  Accounting
 Manual.   For example, based on the bill, section 17.3  requires
 that the receivable be recorded in the  general ledger  by debiting
 (or increasing)  one of two accounts.  Section  17.6 further requires
 that additional charges be debited (added)  to  the  appropriate
 general  ledger account.  Payments, on the other  hand,  should be
 credited to (or reduce) these accounts  according to section 17.8.
 Continuing to accrue additional charges after  referring  the receiv-
 able to  the EPA Claims Officer is mentioned in section 17.9.
 Sections 17.4 and 17.5 refer to the accounts receivable  file.
 Writing  off receivables by crediting  the appropriate  account is
 addressed in section 17.9.

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We selected a statistical sample of 287 receivables to test for
the accuracy of the recorded balance and that the Agency guidance
was followed.  The sample was taken from FMS transactions related
to accounts receivable outstanding at some time during the first
six months of fiscal 1987.  The data included over 22,000 trans-
actions related to 4,887 receivable numbers.  Appendix 1 describes
the selection of the sample in more detail.

Of the 287 receivables in the sample, 118 had the correct value
recorded in the FMS on March 31, 1987.  That is, the balance
reflected compliance with Agency guidance, according to available
information.  However, as shown on exhibit 1, a different balance
should have been recorded for 169 receivables.  For 119 of these
receivables, the actual recorded value should have been increased
by a total of $4,213,453.  The actual recorded value should have
been decreased by a total of $1,226,187 for the remaining :'
receivables.  The net effect of the differences was to unde  tate
the recorded value of the sample by $2,987,266.

Understated receivables generally would be expected to result
in losses to the Agency.  It is important to note, however, that
some receivables which we, out of necessity, labeled as overstated,
may also be losses to the Agency.  For example, documents related
to receivable 86034 in accounting point 3 could not be located.
Since the recorded amount was not documented, we considered it
an overstatement for purposes of our sample.  Should debtors
challenge recorded receivables that are undocumented, there is a
high probability that the Agency will be unable to collect.
However, these may be valid receivables if properly documented.

Several factors contributed to the recorded value of an account
receivable varying from what it should have been.  More than one
factor could also affect a single receivable.  The various factors
and the number of receivables affected are summarized on the
following page in table 2.
                               10

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                             TABLE 2


                       REASONS RECEIVABLES
                  WERE UNDERSTATED OR OVERSTATED


                                                        NUMBER OF
            REASON                                     RECEIVABLES
            Nothing was recorded for certain
            added charges although the debt
            was delinquent.                                72

            Added charges were not recorded
            in the correct amount for the
            delinquent debt.                               51

            Funds collected  or other
            transactions were not matched
            to a debt or were not matched
            to the correct receivable.                     30

            There were multiple entries  of
            the same transaction.                           8

            Adequate documentation was not
            available to support the
            validity of the  receivable.                    10
           Differences were due to other
           reasons.
                                                          42
For the 169 receivables, the average difference between  the
recorded balance and what the balance should be was  $32,187.
Of these receivables, the absolute value of the difference was
sore than $100 for 65 percent.  The chart on the  following page
shows the number of receivables by size of the dollar difference
in the balance.
                               11

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                             CHART 1
         v • • • u'
          • • 'VI'

                                          CE
                         = .29.OX
   $10 on LESS

   $11 TO $100

   $101 TO $1.000

   si.ooi TO $100.000

I   I QVEB $!QQ. 000
                         51 - 30.3
We projected the results of the sample with 95 percent assurance
as follows.   (The projections do not include unrecorded accounts
receivable,  as  discussed in Finding 3.)  For 14 percent of the
receivables,  the recorded value should have been decreased a
total of  between $1,623,676 to $4,365,872.  The recorded value
should have  been increased by a total of between $4,069,741 to
$6,653,679 for  25 percent of the receivables.  Although we con-
sidered the  extent of error in either direction as the signifi-
cant concern, we also projected the overall balance.  We project
that the  value  of accounts receivable, Agencywide, on March 31,
1987, should have been between $95,273,292 and $99,163,936.
This is from $421,614 to $4,312,258 more than the actual recorded
value.

Agency officials rely on the FMS for financial information about
EPA's operations.   The information must be correct to:  (1) reflect
the Agency's  actual financial position;  and (2) help manage and
control receivables.   The FMS also serves as the basis for reports
sent to parties  outside the Agency, such as Congress, the Treasury
Department,  and  the Office of Management and Budget.
                                12

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      A.  NOT CORRECTLY COMPUTING AND RECORDING ADDITIONAL CHARGES
          WAS THE MOST COMMON PROBLEM WITH A RECEIVABLE
 The FMOs did not always compute and record additional  charges
 correctly for receivables that were delinquent.   The Debt  Collec-
 tion Act of 1982 or the Federal Claims Collection Standards
 generally allow the Agency to collect interest and (except for
 units of State and local government)  handling charges  and  penal-
 ties where the debtor does not promptly pay its  bills.   These
 additional charges were not accurately recorded  for 113  of the
 287 receivables in the sample.   The net effect was to  understate
 the receivables in the sample by $3.5 million.   When projected
 to the universe, the understatement may to'.. ^1 $4.1 million (plus
 or minus $489,365 at the 95 percent confidence level).   Reasons
 usually cited by the FMOs for the problem were resource  limita-
 tions or not having the required payment terms on the  bill.  A
 computer system could assist in computing and recording  the
 additional charges.

 Governmentwide as well as Agency guidance permits additional
 charges to be collected under certain circumstances.   The  Debt
 Collection Act allows agencies to assess interest, a penalty
 charge of not more than 6 percent if the debt is not paid
 within 90 days,  and administrative charges to cover the  cost
 of processing and handling delinquent claims.  Regulations
 implementing this act became effective in April  1984.  Among
 these regulations,  4 CFR 102.13 provides for assessing interest,
 penalties and administrative costs on debts.   However, the
 Agency must give the debtor a written notice that explains the
 charges.

 The Financial Management Manual (chapter 7,  paragraph  5) and
 the EPA Accounting Manual (chapter 17,  sections  17.4,  17.6 and
 17.7)  also permit collecting interest and handling charges
 after 30  days,  and a 6 percent penalty after 90  days.  These
 Agency requirements  became effective in November 1984.   Before
 then,  interest was sometimes included in the payment terms
 based on  common  lav  practices.

 The  FMOs  identified  two primary reasons for under-recording
 the  additional  charges:  additional charges were  not included  in
 the  payment terms on the bill sent to the debtor; and  resource
 limitations prevented them from following the requirements.
 Also,  in  a few instances,  the staff forgot or did not  know they
 should record the charges,  or the computation used was slightly
 different.

Agency  guidance  requires that the bill to the debtor include
payment terms.   The  exact wording is specified in the  Financial
Management Manual, chapter 7,  paragraph 4a(2) and in the EPA
Accounting Manual, chapter 17,  section 17. 2. IE.   Further,
4 CFR  1O2.13  only allows the Agency to demand payment  of the
additional  charges included on  the bill (or a revised  bill) .

                                13

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 Thus,  unless the debtor was informed  of the charges, the Agency
 may not collect them.   Whenever  possible the Agency should bill
 and collect these charges to recover:   (1) the  administrative
 costs  of collection actions; and (2)  the cost of being deprived
 of the current use of  funds.

 Program offices,  not the FMO,  prepared many of  the bills sent
 to debtors.  In these  cases, according to chapter 7, paragraph
 4,  of  the Financial Management Manual, the program office is
 responsible for ensuring that the bill contains the proper
 payment terms.  The FMO,  however, is  responsible for assessing
 and collecting the additional charges.  Exhibit 1 (in notes
 2,  5 or 8)  identifies  34 receivables  for which  additional charges
 were neither included  in the payment  terms nor  recorded by the
 FMO.  (For 12 of the 34 receivables,  we were told that the
 terms  should have been included  on  a  separate page accompanying
 the bill,  but the FMO  was not given a copy of this page to
 confirm it was sent.)

 If the correct payment terms had been on the 34 bills, the
 Agency could have assessed additional charges totaling $205,487.
 Based  on a projection,  10.1 percent of the receivables in the
 universe (at the 95 percent confidence level) had terms that
 did not include interest.   This  is  the most frequent additional
 charge assessed.   In the memorandum of February 1, 1988, the
 Comptroller agreed to  include in the  new Agency guidance on
 receivables a requirement that the  FMO take appropriate action
 when a bill lacks correct payment terms.  The new guidance  (HMDS
 chapter 2540)  is  planned for issuance in April  1988.

 Even when  the payment  terms provided  for additional charges,
 the charges were  not always recorded  correctly.  For 39 receiv-
 ables,  no  additional charges were recorded even though the
 payment terms included such charges.  (See exhibit 1, notes
 1,  4 and 7).   The added charges  not assessed totaled $754,799.
 For 51 receivables,  the amount recorded for additional charges
 was not correct,  and was usually understated.   (See exhibit  1,
 notes  3, 6  and 9).

 Resource limitations was one reason cited by FMOs for not
 regularly recording additional charges.  The computations needed,
 as  well  as  the related accounting entries, were many and time
 consuming to perform.   To reduce the  activity,  the FMO for
 accounting  point  99  had the computations performed but delayed
 recording the results  until the  payment was received.  Two  FMOs
 reduced  the resources  needed by  using supplemental computer
 systems  to  calculate certain additional charges.

The FMO  for accounting point 22  operates a system that generates
the bill to the debtor and,  if appropriate, computes interest
and the  handling  charge.   This system operates  on an IBM personal
computer.   The FMO  for accounting point 5 independently developed
a system that  computes  interest, the  handling charge and the

                               14

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 penalty for certain  types  of receivables.  In addition, the
 charges computed  by  the  Region 5 system can be automatically
 sent to the FMS.   This system operates on the PRIME computer.
 Both supplemental systems,  to a limited extent, duplicate data
 in the  FMS.   Records were  not readily available documenting the
 Agency's cost to  develop these two similar systems.

 Providing these or similar computer systems to the other FMOs
 could reduce the  work-years of effort needed to compute and
 record  additional charges.  In a memorandum dated August 14,
 1987, the Deputy  Director  of FMD directed the Financial Systems
 Branch  to modify  the Region 5 system for use by the FMO at
 Headquarters.   (The  system was modified and became operational
 in September 1988.)  Four  other FMOs (accounting points 1, 8, 9,
 and 10)  are adopting these or similar systems.  In his February l
 memorandum,  the Comptroller agreed to make available to the FMOs
 a  copy  of the software and documentation for an automated method
 to compute additional charges.  However, according to the Deputy
 Director of FMD,  the systems will be replaced in two years when
 the Agency implements its  new accounting system.  The new system
 should  have an automated subsystem to handle accounts receivable.
 Considering the potential  loss from understated billings, we
 believe FMD should encourage all of the FMOs to adopt a supple-
 mental  system.

      B-   MONTHLY  RECONCILIATIONS SHOULD REDUCE DIFFERENCES
          CAUSED BY OTHER FACTORS

 A  variety of factors not related to additional charges also
 contributed to the recorded value of 82 accounts receivable
 varying from what it should have been.  These included not
 having  documentation available to support the validity of the
 transactions,  not matching transactions to a debt, or matching
 then to the  wrong debt.  Some of the errors remained in the  FMS
 without correction for a long time.  Most, however, would have
 been identified by an adequate monthly reconciliation of the  file
 and  the FMS,  as required by the Financial Management Manual.
 The  net effect of the factors was to overstate the receivables
 in  the  sample by  $506,800.  The overstatements totaled $1,142,300
 and  the understatements  $635,500.

 The  FMOs could not locate  documentation supporting 10  of the
 receivables  in our sample.  As noted above. Agency guidance
 requires the FMOs to maintain a document file on each  receivable.
 The  EPA Accounting Manual  states in section 17.4.0 that  "The
 accounts receivable  file is the basis for determining  when  there
 is an outstanding debt."  Without documentation, it is not  possible
 to determine if the  receivables are valid.  The receivables  for
which no file  was readily  available are identified in  exhibit 2.
The  recorded value of the  10 receivables included a zero balance
 for  1 receivable,  balances due for 6 totaling $78,686, and
credit  balances for  the  remaining 3 totaling  $100.  We concluded
that  (for  the  purposes of  exhibit 1) the balance of the  10

                               15

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 receivables should have been  zero  on March 31,  1987.  However,
 we encourage the FMOs  to determine if valid receivables, in
 fact,  exist.

 Eight  of the 10  receivables were in Headquarters, where the FMO
 had already taken action to remove some of the  undocumented
 receivables from the FMS.  Because of an earlier audit report
 (E1A86-11-OO48-70619,  dated January 28, 1987),  the FMO at Head-
 quarters was aware that documentation was not always available
 in accounting point 99.   The  previous audit report noted that
 accounting point 99 had prematurely retired account receivable
 files.   Files related  to older  receivables were stored while tne
 FMS still showed the receivable was outstanding.  In response
 to that  report the FMO had agreed  to retrieve such files.  They
 were retrieving  the files while we were performing the field
 work for this audit.   One of  the receivables on exhibit 3 was
 among  those being retrieved because of the prior audit.  For
 accounting point 15, the same FMO  had taker action in January
 and February 1987,  to  write-off 26 receivab-.es  that lacked
 documentation, including five in the sample.  Four of the five
 were outstanding in FMS on March 31 because the EPA claims
 Officer  was processing the actions.

 Another  factor that contributed to differences  in the recorded
 balance  of 30 receivables was matching transactions to the
 proper receivable.  The most  common mismatch was recording the
 collection against the wrong  receivable or no receivable.  The
 former was usually due to incorrectly entering  data into the
 FMS.  For example,  accounting point 5 entered the collection
 for receivable 87138 under th*  number 81138.  Incorrect matches
 may be timing errors;  that is,  there was a delay in the FMO
 getting  the bill.   As  « result, the payment was entered in the
 FMS  before the receivable was recorded.  In accounting point
 99,  for  example,  receivable H5103  was collected March 9, 1987,
 and the  receipt  recorded before the information was entered
 from the bill, which was dated  February 26, 1987.

 A  review of receivables with  an obvious mistake, those with a
 credit balance,  shoved that errors were not promptly corrected.
 On  March 31,  1987,  there were,  Agencywide, 174  receivables with
 credit balances  totaling $336,125.  These receivables appear  on
 the  Agency reports with a negative dollar value so they are
 easily identified.  Therefore,  they should be corrected within
 60  days.   The sample included 35 receivables with credit balances,
 On March 31,  1987,  based on the posting dates,  the 35 receivables
 had  credit balances from 8 to 987  days, with an average of 228
 days.  Eleven of  the 35  appeared with negative  balances on the
Agency reports as  of June 30, 1987.
                                16

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 The Financial Management Manual  requires  a  reconciliation  each
 month between the account receivable file and the accounting
 records.   The staff for four of  the  FMOs  said that they  regularly
 reconcile the two.   The four accounting points were 3, 5,  8 and
 9.   As a group,  these four accounting points  had about the same
 proportion of sampled receivables  with differences in the  balance.
 However,  the part of the receivables with differences due  to
 reasons other than additional charges was lower.   With better
 reviews of transactions by these and other  FMC3,  and more  regular
 and careful comparisons to the files,  most  factors causing differ-
 ences could be quickly identified  and corrected.

 We  recommended,  in the draft audit report,  that the Director,
 FMD,  initiate and oversee an effort  by the  FMOs to perform a
 special reconciliation between the files  and  FMS.   In the
 February 1 response,  the Comptroller agreed that FMOs should
 reconcile the two,  but believes  quarterly (rather than monthly)
 reconciliations  would be more appropriate.  Therefore, the new
 Agency guidance,  which should be issued in  April 1988, will
 require quarterly reconciliations  by the  FMOs.   In addition,
 the new Agency guidance will require that the FMO maintain
 documentation showing who completed  the work  and when it was
 completed.   We agree that quarterly  reconciliations should be
 adequate  after a special,  one-time reconciliation between  the
 accounts  receivable file and the accounting system is performed.
 We  continue to believe that this special  reconciliation  should
 be  performed immediately so the  accounting  records can be
 corrected.

 We  believe  a report that lists the transactions in the FMS for
 the current receivables might be useful to  the FMO when  reconcil-
 ing the  file to  the accounting records.   The  FMOs received feed-
 back on what was  in the FMS in several ways.   One form was as
 edits  and transaction histories, that is, printouts listing
 transactions entered  and processed.   These  printouts give  very
 detailed information.   Operating procedures of the FMOs  generally
 required that someone review the edits (printouts)  of the  data
 entered into the  FMS.   More summarized information comes as
 standard monthly  reports identifying receivables outstanding on
 a certain date for  the FMO.   These are identified as FM022
 reports.  The Financial Reports  and  Analysis  Branch of FMD also
 reviews the FMO22 reports  on a routine basis.   Finally,  some
 FMOs obtain special reports on accounts receivable in the  system.
These  reports generally combine  some of the transactions for
each receivable,  but  do not provide  details on all transactions.
A report with all the transactions would  be helpful in pinpointing
differences  between the FMS and  the  file, and their cause.
                               17

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In the draft audit report, we recommended that the Director,
FMD, make available to the FMOs an automated method that will
chronologically list the transactions for all (or selected)
accounts receivable, and require the FMOs to use this or
alternate information to identify and correct data entry
problems timely.  The Comptroller, in his memorandum dated
February 1, 1988, agreed that data entry problems should be
identified and corrected in a timely manner.  He believed
that processes in place, along with the routine reconciliations,
will help locate errors so corrections can be made.  Therefore,
we are not recommending development of a report listing the
transactions.

RECOMMENDATIONS

S* recommendjthat the Comptroller:


     1-;  Direct the Director, Financial Management Division to
         initiate and oversee an effort by the FMOs to, by a
         certain date:  (a) perform a special reconciliation
         between the account receivable file and the accounting
         system for receivables outstanding on either February 28
         or March 31, 1988; and (b) correct the accounting records
         for the proper additional charges and any other balance
         differences identified during the reconciliation.

     3L  |?nsure that the Director, Financial Management Division
         issues the guidance requiring the.
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2-  AGGRESSIVE COLLEOTTOM ACTION
                   "           '
                     GENCY
Collection action is needed to ensure that debtors pay the
Agency in a timely manner.  The older a receivable becomes  the
less likely it is that it will be collected.  FMOs were not
generally following Agency guidance to be aggressive in collect-
ing receivables.  For example, the first demand letter was sent
within 31 days in only 7 of the 102 required instances   When
demand letters had been sent, files sometimes show collection
activity later stalled.  For 26 receivables with a total princi-
pal outstanding on March 31 of $4.2 million, the document file
identified little or no recent followup action even though
the receivable was quite old.  Although Agency guidance identified
the collection action needed, the exact procedures differed amona
the FMOs.  Procedures of the FMOs included using such aids as
logs, filing practices, and supplemental computer systems.  A
standard aging report was available to the FMOs.  However  the
data on the report about the age and type of receivable was
often incorrect so the report was not as useful as it should be
The Agency directives require periodic contact with the debtor
and regular evaluations of the collectability of the debt.  The
EPA Accounting Manual, chapter 17, section 17.4.0 requires that
debtors  (other than Federal agencies and common carriers) be
sent three demand letters if the debt is not paid within 31
days.  The letters should be sent to the debtor 31, 61, and 91
days after the initial bill.  Unless the debtor acknowledges the
debt, the debtor should be contacted by telephone before mailing
the second and third letters.  The second and third letters should
be sent by registered mail, return receipt requested.  Similar
requirements are found in the Financial Management Manual, chapter
7, paragraphs 5d and 5k.  In addition, paragraph 5g requires the
FMO to notify certain debtors that if payment is not received
within 60 days of the due date, information regarding the debt
will be referred to credit bureaus.

Fifteen days after the third demand letter is sent, both direc-
tives require the FMO to evaluate the situation.  At this point,
either:  (1) more collection action should be taken;  (2) the
debt should be written off by the FMO if the principal is less
than $150 (less than $2,000 effective October 1987) and  further
collection action would be useless; or  (3) the debt should be
transferred to another office for action.  Generally, the debts
are transferred to the EPA Claims Officer.  Another alternative
may soon be available.  In a memorandum dated August  14, 1987,
the Deputy Director of FMD required his staff to establish
procedures for referring delinquent debts to a collection agency.
These procedures will be finalized when the Agency receives  final
Treasury guidance.
                                19

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 Collection a;tivity for most FMOs is very labor-intensive.
 Files must De reviewed, the receivables requiring action identi-
 fied, and the action taken.  The primary actions involve making
 telephone calls or sending letters,   staff members for four
 accounting points told us resource limitations prevent them
 from performing these activities as often or as thoroughly  as
 perhaps they should.  It was difficult to set aside a block of
 time for collection activity so receivables remained uncollected

 In a few cases, the FMO had the program office take the collec-
 tion action.  For example, until recently the FMO cf accounting
 point 3 did not followup on delinquent debts related to requests
 under the Freedom of Information Act.  Another example where
 the program office takes the collection action is receivables
 recorded in accounting point 99 for the Superfund program.
 When these became delinquent,  the appropriate Regional Counsel
 was informed so the Agency lawyers could take collection action.
 The Deputy Director of FMD emphasized, in a memorandum dated
August 14,  1987, that followup is the FMOs responsibility.

Demand letters were not always sent 31, 61, and 91 days after
the initial bill.   In the sample, 102 bills became delinquent
and needed at least one demand letter by March 31, 1987.  The
action taken regarding the first demand letter for these 102
bills is summarized below.

                            CHART 2
       WHEN  AT LEAST ONE DEMAND LETTER
          WAS REQUIRED,  THE  FIRST WAS
          RARELY SENT  BY THE 31st  DAY
     LETTER WAS SENT LATE
                                       LETTER WAS SENT ON TIME
                              "iO LETTER WAS SENT
                               20

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 As the chart shows,  a demand letter was not sent  for 42  of  the
 102 bills.  As shown in exhibit 3,  39  of the 42 bills remained
 outstanding on March 31 with a combined balance of  $4.3  million.
 Demand letters were sent for 60 bills,  but for 53 of these  the
 first letter was sent after the 31st day.   For these 53  receiv-
 ables, the first letter was sent,  on average,  126 days late.
 As examples, exhibit 4 lists the 22 bills for which the  first
 demand letter was sent more than 6O days after the  bill.  As the
 exhibit shows, the accounts were outstanding for  lengthy periods
 of time.

 When projected to the universe,  at  least one demand letter  was
 needed for 36 percent of the receivables (at the  95 percent
 confidence level).  Of these,  no letter was sent  for 30  percent
 (at the 95 percent confidence level),  and a letter  was sent on
 time for only 17 percent of the bills  where one was required.

 Part of the receivables on exhibits 3  and 4 are several  years
 old and, according to some FMOs,  do not reflect their current
 practices on sending demand letters.   Further analysis,  however,
 indicated the problem existed for bills sent in fiscal 1987.
 At least one demand  letter was required for 40 bills sent during
 the first half of fiscal 1987.   Of  the 40  bills,  no demand  letter
 had been sent for 16 (or 40 percent).   A demand letter was  sent
 in compliance with Agency policy for five bills.  For the remain-
 ing 19 bills the demand letter was  sent after the 31st day. For
 these bills,  the demand letter was  sent,  on average,  32  days
 late.   Thus,  the problem seems less severe for the  fiscal 1987
 bills than for the sample as a whole,  but the problem remains.

 Based on the account receivable file,  followup action had
 stopped for some receivables.   Although the debt  had been out-
 standing more than 105 days,  it was not transferred to another
 office,  as required,  and there was  no  recent collection  action
 by the FMO.   Exhibit 5 identifies 26 such debts that were over
 120 days old on March 31,  1987.  As the exhibit shows, the
 balance for these  receivables  on that  date was $4.2 million.
 When projected to  the universe,  6 percent  of the  receivables
 (at the 95 percent confidence  level) had no recent  follow-up
 action.   We believe  it unlikely that the debtor would volunteer
 to pay these old receivables unless the Agency takes action.

 If the Agency shows  it is  serious about collecting  a debt,  we
 believe the debtor will  pay more promptly.   The Agency demon-
 strates its seriousness  by contacting  the  debtor  through demand
 letters  and telephone calls.   The debtor will  know  the Agency
 is  serious when  the  contact is  quickly  and frequently made.
The  older a debt becomes,  the  less  likely  the  entire debt will
be  collected.  Although  government  collection  efforts may be
more or  less  successful  than private sector efforts,  the follow-
 ing  information  will  help  put  the age  of receivables in  some
                               21

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 perspective.   Information  from the private sector* shows that
 when a  receivable  is  4-months past-due, the likely recovery
 averages  80 cents  on  the dollar.  After one year, the likely
 recovery  averages  45  cents on the dollar.

 A large proportion of the  Agency's outstanding receivables were
 substantially past-due.  Some of these receivables, however,
 were not  controlled by the FMO.  Of the $94.8 million for receiv-
 ables outstanding  on  March 31, 1987, the FMS identified $54.9
 million as reimbursable interagency agreements, as receivables
 being appealed,  or as receivables being paid in installments.
 Excluding these  items, outstanding receivables totaled $39.9
 million.  Of  this  amount,  based on FMS information, $19.2
 million (or 48 percent) was  for receivables over one year old
 while $8.2 million (or 21  percent) was for receivables under 90
 days old.  As further discussed below, the aging information in
 the  FMS was not  completely reliable.

      B.   ACCURACY  OF  INFORMATION ABOUT DEBTS
          SHOULD  BE IMPROVED

 The  Agency provided the FMOs with standard, monthly reports—
 FMO22 reports—that show the age  (in days) of all the outstanding
 receivables.   They come in several versions and are based on
 data in the FMS.   The most commonly used version is the FMO22C
 report, "SCHEDULE  OF  ACCOUNTS RECEIVABLE - BY GENERAL LEDGER
 ACCOUNT."  However, the data related to the billing date and to
 the  type  of receivable was not always accurate.  The reports,
 therefore, were  not as useful as they should be.

 The  age shown on the  report  is based on a date that should be
 the  date  of the  bill.  For 150 receivables in our sample, the
 date was  not  the date of the bill.  Usually the receivable was
 older than tne FM022  report  showed.  When projected to the
 universe, omy 40  percent  of the receivables  (at the 95 percent
 confidence level)  had the  correct bill date in the FMS.  without
 the  correct date,  the aging  report was misleading.  As a result,
 the  report could not  be relied upon to identify when the demand
 letters should be  sent.  Also, the dollar value identified with
 delinquent debts in various  age categories was incorrect.  This
 information was  used  to calculate the allowance for doubtful
 accounts  and  to  prepare reports by the age of outstanding receiv-
 ables.

 The  age of the receivables has two uses other than for collec-
 tion  action.   One  use is to  estimate the allowance for doubtful
 accounts.  This  account offsets the accounts receivable to
 present a more realistic picture of the accounts receivable
 that  will be  collected.  The other use is in reporting, such as
 the  Inspector General's semiannual report to Congress.  In  a

 *Source:  Alexander Grant  &  Co., CPA's, New York, NY and others;
August  1980

                               22

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 section on delinquent  debts, the Inspector General's semiannual
 report provides  accounts  receivable information by age category.
 Thus,  erroneous  dates  in  the FMS impact the information provided
 in the semiannual  report.   For example, our sample included 73
 receivables with both  a FMS date and a bill date, one of which
 was between January  1  and March 31, 1987.  These would be receiv-
 ables  under 9O days  old on March 31.  Using FMS data, there
 were 62 such receivables  with balances totaling $14 million.
 Using  the bill dates,  there were 70 receivables with balances
 totaling $18.6 million.   The difference in the balances was
 $4.6 million.

 There  were two common  reasons for another date being in the FMS:
 an error when entering the date, or using the date the data was
 entered instead  of the date of the bill.  For example, accounting
 point  27 had developed a  supplemental computer system that gener-
 ated the bill and  automatically sent the billing information
 into the FMS at  the  end of the month.  Instead of the bill
 date,  the system entered  the input date, so the debt could be
 up to  3O days older  than  shown on the FM022 report.  The FMO
 corrected this problem, which was less severe than other cases.

 The bill dates cannot  always be corrected.  According to a staff
 member for accounting  point 22, erroneous dates cannot be correc-
 ted unless the date  of the bill is before the date entered in
 the system.   The system allows them to make the debt older but
 not more current.  For example, the bill for receivable 5C074
 in accounting point  22 was dated October 7, 1985.  Because of
 an entry error,  the  FMS shows the bill date as October 7, 1982.
 Since  October 1982 is  before October 1985, the date  in the FMS
 cannot be brought  closer  to the date of the bill.  Thus, some
 data entry errors  cannot  be corrected because of system limita-
 tions.   We recommended in the draft audit report that the FMS
 be  modified so the date could be corrected.

 In  his response  to the draft audit report, the Comptroller stated
 that users can modify  the bill date by reversing the erroneous
 record and replacing it with the correct record.  This requires
 rekeying the entire  entry.  Using this method, the staff in
 accounting point 22  is trying to correct the age for receivable
 5C074.    Assuming they  will be successful, we changed the recommen-
 dation to have FMD tell the FMOs how to change the date.

 The  FMO22  report uses  a set of codes to identify the type  (or
 source)  of receivable  or,  in certain circumstances,  its status.
 This information could be useful to the FMO in determining
 whether collection action is needed.  For example, demand letters
 need not be  sent for receivables that:  involve refunds of
 common carrier costs;  the debtor is disputing or appealing; or
were transferred to  another office for collection.   Since the
 codes  would  be useful, the FMO should make sure they are correct.
 In a memorandum  dated  August 14, 1987, the Deputy Director of FMD
directed the Financial Reports and Analysis Branch to evaluate
use  of  the  source  codes.
                               23

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 The source codes shown on the  FMO22  report  did not  always
 correctly reflect the source or status  of ±h& receivable.  For
 42  of the 287 receivables,  a different  source code  should have
 been shown on the FMO22C report as of March 31,  1987.  Twenty-
 six of the differences involved receivables being appealed or
 those referred to the Claims Office.  For example,  in June 1986
 the debtor filed an appeal  related to receivable 60249 in
 accounting point 3,  but the FMO22 report did not show this.  On
 the other hand,  the FM022 report indicated  that  part of receiv-
 able 20961 in accounting point 4 was in appeal and  part was
 not.   The receivable file,  however,  contained documents showing
 the Agency ruled on the appeal in 1985  and  the debt had been
 referred to the Claims Officer.

 For the remaining 16 of the 42 receivables  with  differences,
 two reasons were generally  cited by  the FMOs' staff for the
 differences.   One reason was that they  were not  using a current
 list of source codes (although the list can be accessed through
 the FMS).   The other reason was that the codes were not changed
 when circumstances changed  to  avoid  entry errors.

 The accuracy of the bill dates and source codes  could be improved
 in  two ways.   First,  data entry problems should  be  identified
 during the required monthly reconciliation  of the account receiv-
 able file and the accounting system.  As discussed  in Finding 1,
 the FMOs  did not always perform the  reconciliation.  Concerning
 knowledge of the source codes,  they  are listed in the FMS and
 therefore available to the  FMOs.  In addition, the  Deputy Director
 of  FMD,  in a memorandum dated  August 14, 1987, required Financial
 Reports and Analysis Branch to review the source codes.

 We  recommended in the draft audit report that the Director, FMD
 require the FMOs (as part of the reconciliation  recommended
 earlier)  to initiate needed followup action and  correct the
 accounting records.   In the memorandum  of February  1, 1988, the
 Comptroller agreed that FMOs should  reconcile the receivable
 file  to the accounting records (quarterly)  and take appropriate
 action to correct the records.   Further, aging reports will be
 used  to monitor the  status  of  receivables outstanding more than
 120 days.   In addition,  the Comptroller indicated that when
 participating in various reviews, FMD will  evaluate and tervt
 compliance to accounts receivable policy.   Concerning followup
 based on  the  reconciliation, we believe one should  be performed
 before the new Agency cfjidance is issued.

      C.  VARIOUS PROCEDURES WERE USffD TO TDENTXFY PE£EIvft&LE-?
         THAT NEED COLLECTION  ACTION

 FMOs  usually  relied  on their own systems, rather than the Agency
aging  report,  to begin collection action.   These systems may
have  included logs,  certain filing practices, or a  supplemental
computer system.   The staff in accounting points 4, 5,  6,  8,


                                24

-------
 22,  27,  and  99 kept a receivables log although one was not
 required by  the Agency directives.  The log was generally
 maintained by hand rather than on a computer, and its content
 varied  from  office to office.

 Different filing practices were used by some of the FMOs to
 draw attention to older receivables.  The staff in four
 accounting points (accounting points 4, 8, 27, and 99) filed
 open receivables in a different location or manner than they
 filed receivables that were collected.  Documents related to
 open receivables might be in a different drawer of the filing
 cabinet  or in a different type of folder.  This created a sort
 of "tickler" system for receivables needing collection action.
 The  staff for the FMO of accounting point 27 used different
 colored  labels each month for files established during the
 month.   That way, older files could be easily identified.

 The  supplemental computer systems developed in accounting points
 5 and 22 also assisted with collection actions.  The systems
 aged the receivables, identified those that required demand
 letters, and generated the appropriate letters.  As in computing
 the  additional charges, the FMOs' staffs believed the computers
 allowed more efficient use of resources.  The system used in
 accounting point 5 is being adapted and implemented by four other
 FMOs.  Exhibit 6 summarizes information about supplemental
 computer systems related to accounts receivable.  The Comptroller
 also agreed to make available to the FMOs a copy of the soft-
 ware and documentation for an automated method that generates
 demand letters.  However, he stated this was an interim step
 to be replaced by the new accounting system.

RECOMMENDATIONS

We recommend that the Comptroller:

     1.   Provide a copy of the letter making available to the
         FMOs an automated method that effectively generates
         demand letters, and, in the interim, require the FMOs
         to devote the necessary resources to properly complete
         collection activity.

     2*-  Direct the Director, Financial Management Division, as
         part of the special reconciliation of the accounts
         receivable file and the accounting system (per recommen-
         dation for Finding 1):  to (a) initiate proper followup
         action,  if needed, for collecting the receivable, and
         (b)  correct the accounting records for any differences
         in the source codes or bill date.

     3   Direct the Director, Financial Management Division, to
         instruct the FMOs how to modify the bill date identified
         in the accounting records so it reflects the date on
         the bill to the debtor.

                               25

-------
 3-  ALL DEBTS OWED TO THE AGENCY SHOULD BE RECORDED
    AS ACCOUNTS  RECEIVABLE

 Debts totaling over  $376,000 that were owed the Agency during
 fiscal 1986 and  1987 were not recorded in the FMS as accounts
 receivable.  The accounts receivable, therefore, were under-
 stated to  the extent that these  (and similar transactions) were
 not recorded,  of these debts, $375,000 originated from legal
 actions taken in three Regions and Headquarters.  Since we
 reviewed only a  sample of the legal actions at these locations,
 we believe the total debts not recorded greatly exceed the
 $375,000 that we identified.  Money owed the Agency should be
 recorded in the  accounting system to properly reflect the Agency's
 financial  position and to help ensure that the funds are collected
 and properly controlled.  The FMOs became aware of the debts,
 which were generally paid by the debtor in a prompt manner,
 when the funds were collected.

 According  to the Financial Management Manual, chapter 7, para-
 graph 2a,  it is  the Agency's policy to promptly establish an
 account receivable in the accounting records for all amounts
 owed to the Agency.  To achieve this, paragraph 4a requires
 that program offices must forward a copy of all action documents
 establishing a debt to the appropriate FMO.  Further, the FMO
 must process bills within one workday after receipt from the
 program office,  according to paragraph 5a.  Similar requirements
 appear in  the EPA Accounting Manual, chapter 17, sections 17.1.1,
 17.2 and 17.3.

 When comparing different types of receivables recorded by the
 FMOs, we identified some inconsistencies.  That is, the FMO22
 reports for some FMOs did not include types of receivables that
 were being recorded by other FMOs.  As a result, we interviewed
 personnel  about  certain activities at Headquarters and at Regions
 1, 4, 5, 6 and 7 to see if the activities generated money owed
 to the Agency.   Except for Region 4, we also tested some trans-
 actions that may have generated an account receivable.  From
 documents  in the program office, we traced 149 transactions to
 the accounting system.  Four types of transactions were tested:
 civil penalties  assessed by the Agency against violators of
 environmental lavs; bills related to requests for information
 from the Agency  for which the requestor had to pay at least
 $25; grants under which the grantee was overpaid, usually based
 on an audit report; and intergovernmental personnel actions under
which an Agency  employee works for someone else and the other
 organization reimburses the Agency for the employee's salary.
The number of each type of transaction tested is summarized
 on the following page on chart 3.
                               26

-------
                            CHART 3


                "OUR TYPES OF TRANSACTIONS
                         WERE TESTED
                     rOR RECORDATICN  AS
                    ACCOUNTS  RECEIVABLE


                                 CIVIL PENALTIES
                                    ^^^  INTERGOVERNMENTAL PERSONNEL


         INFORMATION REQUESTS

                                     GRANT OVERPAYMENTS
We  found that all debts owed to the Agency were not being
recorded as accounts receivable in the FMS.  It is important
to  note that the projections in finding 1 were based only on
recorded receivables.  Consequently, these unrecorded receiv-
ables show the overall Agency balance is understated even
further.  Although they involved money owed the Agency, 43
transactions valued at about $376,000 were not recorded as
accounts receivable.  Exhibit 7 identifies these transactions.
The list consists primarily of civil penalties assessed in
Headquarters and Regions 1, 5, and 6.  Such debts were consist-
ently not recorded in Headquarters and Regions l and 6.  (They
were also usually not recorded in Region 4, where we performed
survey work but not audit work.)  Region 5 inconsistently
recorded such receivables; some but not all were recorded.

Except for Region 6, the unrecorded debts had not been outstand-
ing for a lengthy period.  When we visited Region 6, three of
the penalties assessed there had been outstanding for 141, 155
and 279 days.  The total value of these three debts was $27,000.
Two were collected before July 1987.  The remaining debt totals
$21,6OO.
                               27

-------
 The transactions identified in exhibit  7  concerning  legal actions
 were not the only such transactions that  should  have been recorded
 as accounts receivable.   We reviewed only a  sample of the legal
 actions at the locations we visited.  For example, we reviewed
 two of 27 legal actions  taken during the  early part  of fiscal 1987
 in Region 5 related to the Resource Conservation and Recovery Act.
 We were provided information showing that the 27 actions totaled
 about $383,600.  The two we reviewed totaled $39,746,  of which
 one for $10,500 is on exhibit 7.   In Region  6 there  were 21  legal
 actions during fiscal 1986 and early 1987 that related to poly-
 chlorinated biphenyls.  The actions totaled  about $108,200.  We
 reviewed nine, totaling  $65,100,  of which seven  totaling $53,200
 are on exhibit 7.   This  further shows that the understatement
 of accounts receivable may be greater than what  we identified
 in our limited testing.

 On June 30, 1987,  the FM022C reports showed  outstanding civil
 penalties for nine of the regions.   Exhibit  8 compares the
 FMOs with outstanding receivables for penalties  on that date
 with those on December 31,  1986.   At that time three FMOs had
 no outstanding receivables for civil penalties.   Although more
 FMOs are recording civil penalties,  all of them  may  not be
 recorded.   As discussed  above,  Region 5 was  recording as accounts
 receivable only part of  the penalties.  Recent audit reports
 showed similar situations in Region 9 and in one Agency program.
 In the December 19,  1986,  audit report  E1A56-09-012670434  (Review
 Of EPA Region 9 Internal Controls Over  Penalty Collections),
 unrecorded penalties totalling $30,000  were  identified.  In  the
 October 7,  1987,  audit report P5EH7-11-0022-80028 (Obligations
 And Disbursements  Under  The Comprehensive Environmental Response,
 Compensation,  and  Liability Act Of 1980,  fiscal  year ended
 September 30,  1986),  amounts due the Agency  under one program
 were not promptly  recorded as accounts  receivable.   Part of
 these unrecorded receivables resulted from cost  recovery actions
 involving the Agency's legal or enforcement  personnel.

 The receivables were not recorded because the program office
 had not provided action  documents to the  FMO.  Officials in  the
 program offices gave the following reasons for this.  Officials
 in  Headquarters and  in Regions 1 and 6  said  they were not aware
 of  the requirements  in the Financial Management  Manual and  the
 EPA Accounting Manual.   Therefore,  action documents  were not
 sent to the FMO.   Officials in Regions  4  and 5,  however, said
 they thought someone was sending the documents to the FMO but
 no  one was  doing so.   Thus,  the problem is in either communica-
 tion (i.e.,  being  unaware  of the requirements) or coordination
 (i.e.,  knowing the requirements but believing someone else was
 fulfilling  them).

Communication  could  be improved by emphasizing the existing
requirements  in program-related guidance. We recommended  in the
draft  audit report that  the Director, Office of  Enforcement


                                28

-------
 Policy,  Office  of  Enforcement and Compliance Monitoring  (OECM),
 emphasize in  program  guidance related to civil penalties that
 Agency guidance requires the program office  (or legal counsel)
 to give  the FMO a  copy  of  administrative orders and other
 documents that  establish a debt.  The Assistant Administrator
 for Enforcement and Compliance Monitoring  is the national
 program  manager for the Agency's enforcement and compliance
 effort.   Therefore, his office develops national policies and
 procedures in connection with legal and other general compliance
 and enforcement issues.  The Agency's February 1 response
 stated that future OECM guidance will address this issue.  In
 addition,  OECM  will encourage the Regional Counsels to follow
 this guidance in regard to their own enforcement activities.
 However,  the  staff from OECM pointed out at the exit conference
 that the guidance  applies  only to civil penalties assessed by
 a  Federal  court.   Generally, guidance about administrative civil
 penalties  assessed by the  Agency must be issued by the assistant
 administrators  for the  various program offices.

 The OECM staff  prepared a  draft handbook,  "Handbook For  Ensuring
 Compliance With Judicial And Administrative Orders."  It empha-
 sizes  that a  copy  of  the order (whether issued by the Agency or
 a  court) must be sent to the FMO so a receivable can be  estab-
 lished.  The  handbook was  developed with help from the FMD.
 OECM staff plans to present the handbook to program enforcement
 officials  at  a  joint  meeting scheduled for the middle of March
 1988.  If  adopted, it will provide consistent treatment  by all
 programs  for  recording  civil penalties.  Meanwhile, the  FMD has
 prepared a memorandum from the Deputy Administrator that requests
 the OECM,  the Office  of Solid Waste and Emergency Response, and
 the Regional  Administrators to send documents related to civil
 penalties  to  the FMOs so that debts owed the Agency can  be
 properly recorded.  Therefore, we are not  recommending any
 other  action  by OECM  or the program offices.

 The FMOs were aware that civil penalties were not always
 recorded as accounts  receivable in the FMS.  When the funds
 arrive, they  have  to  research where they belong.  Thus,  the FMO
 is  in  the  best  position to identify a problem with coordination.
The  FMOs should not have to remind the program officials each
day  to submit the  required documents.  However, we believe FMD
and  the FMOs  have  responsibility to ensure the accounting
records are accurate  and complete.  Thus,  FMD and the FMOs
should take whatever  action is necessary,  including repetitive
 followups  or  elevating  issues, to be sure  the accounts are
accurate and  complete.  Otherwise, the accounts receivable will
be understated  for items that were never sent to the FMO.
                               29

-------
 When not recorded in the accounting system,  there  is  less assur-
 ance that debts owed to the Agency will  be promptly and properly
 collected.  In addition, the possibility that  someone other than
 the Agency receives the funds is increased.  Good  internal controls
 require separating responsibility for authorizing  and recording
 transactions,  and controlling the related assets.  Agency proce-
 dures required that if the program office assessed (authorized)
 the civil penalty,  the FMO would record  it as  a  receivable in
 the FMS.   The  money would be sent to the lock  box  by  the debtor.
 Thus,  responsibility is correctly separated.

 As an example, assume the program office assessed  a civil penalty
 but did not inform the FMO.  Consequently, a receivable was not
 recorded in the FMS.   Since only the program office had a record
 of the civil penalty,  responsibility was not correctly separate'.
 In our example,  the debtor sends a check to  an Agency office
 instead of the lock box.  (Officials in  Regions  5, 6  and 7 said
 money for civil  penalties was not always sent  to the  lock box.)
 Further,  assume  that someone at  the Agency lost  the check.  Sinea
 a  receivable was not recorded in the FMS, it could be quite a
 while  before anyone realized the problem.  Therefore,  we believe
 the FMO should actively followup situations  in which  program
 offices are not  providing the action documents needed to record
 accounts  receivable.   In addition,  the followup  should be pursued
 at progressively higher levels until the situation is corrected.

 In Regions 1 and 4,  the coordination problem had been brought
 to the attention of the program  offices  through  memoranda dated
 December  1986  and May 1985, respectively.  Thus, the  procedures
 were not  operating  at the time we visited Region 4 and had just
 been established in Region 1.  Officials in  Region 5  were also
 revising  their procedures to clarify who should  provide the
 action documents.   In the memorandum of  February 1, 1988, the
 Comptroller agreed  to require, in the new Agency guidance on
 receivables, a requirement that  FMOs take appropriate action
 wnen program offices  do not send the FMO the documents needed
 so  that accounts receivable can  be properly  recorded.

 RECOMMENDATION

 We  recommends that the  Comptroller ensure that  the  Director,
 Financial  Management  Division, issues guidance that requires
 tSesXFMO» to:   (1) notify (in writing)  the head of  the program
 office  when action  documents were not provided;  and  (2) send
 copies  of  the  notification to the addressee's  supervisor and
 the Director,  Financial Management Division, when  a program
 office  continually  fails to provide documents  from which an
account receivable  should be recorded.
                               30

-------
     No.
03/04/86
                                                       OHIBIT  ]
                                                 RECEIVABLES  IN THE SAMPLE
                                            MERE UNDERSTATED  OR OVERSTATED
                                              DUE TO A VARIETY OF REASONS

ACCT.
ACCOUNT
RECEIV.
POINT NLf££R
Oi
02
01
01
01
01
01
01
02
08
02
0£
0£
0£
0£
OS
(A
CC
02
0£
0£
03
03
03
03
03
03
03
03
03
03
03
03
03
03
03
03
03
03
03
03
03
03
03
40665
43785
53986
59966
TWOS
7R007
7RO£0
7R028
OASS8
31912
50709
64045
85065
8622
S6£3£
87014
87056
870*:
87142
jvei!
K0£34
00007
00031
OOKl
OPOC'l
11360
11556
£0473
31089
3110*
3117£
3187£
40017
40370
40371
40464
40624
40906
41181
41379
50621
51234
51396
51539
BALANCE
OKPUTED
BY flUDITOR
189336.00
0.00
0.00
0.00
133561.85
157.04
5.56
6967.94
0.00
50509.00
738663.00
1054££.00
45.00
119.93
12947.72
45371.98
!£S500. 00
965471.00
3500.00
963.00
0.00
0.00
37.53
4407495. 00
25557.00
110351. 00
14634938. 52
3545649.71
583173.00
99519.00
0.00
108093.00
1367.00
60621.02
51485C..OO
409244.00
38636.00
19249.00
103565.00
165145.00
54335.00
1059910.00
119106.00
177679.46
BALANCE
RECORDED
IK FW
189338.00
356.40
0.00
0.00
123833.50
6043.86
953.00
6967.94
•0.00
50509.00
738669.00
1054£2.00
45.00
0.00
12449.73
45371.96
100000.00
956715. CO
3500.00
963.00
-2S. 00
1 3*439. £3
3740.51
4407*95. 00
22667.00
110351.00
13764671.34
3334807. 74
563173.00
99519.00
34344.00
108093.00
1367.00
48594.00
514650.00
409244.00
38636.00
19249.00
103565.00
165145.00
54335.00
1059910.00
219106.00
164528.00
DiFTOBCE
BETHEEN
BALANCES
0.00
-356.40
0.00
0.00
9748.35
-5666.84
-947.44
0.00
0.00
0.00
0.00
0.00
0.00
119.93
497.99
0.00
29500,00
12756.00
0.00
0.00
£6.00
-134439. £3
-3712. 98
0.00
2890.00
0.00
870267.18
210641.97
0.00
0.00
-34344.00
0.00
0.00
120£7.02
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
13161.46


M




3
3
1






£
2

1
1




3

1

3
3





1









1
                                                        NOTES
OTHER
COffCNTS
                                                                    UNDER APPEA. PRIOR TO £-£1-36.
                                                                    FKS DID NOT SrCU
                                                                    FWS ALSO DID WT  SKW 3-30-67 PfiYVEN~ :? 15.
                                                                    WS ALSO DID NOT  SHOW 3-3: -87
                                                                    RECEIVABLE DATED  3-31-87.
                                                                    REVERSING INTEREST.
                                                                    IN APPEAL PRIOR TO 2-21-66.
                                                                    IN APPEAL PRIOR TO £-21-86.
                                                                    IN APPEAL PRIOR TO 2-21-66.
                                                                    INTEREST ON FINE, REVERSES BOY.
                                                                    INSTALLMENT PQYrOTS LATE FOS V^.'Y] N-.fBE5 :•
                                                                    !«PRE5T FUND WT, UNDE3
                                                                    REVERSING £*T«.
                                                                    OX*T REDUCED ft/R TD 150.000 JK
                                                                   UNDER fiPPEflt PRIOR TO a-21-86.
                                                                   IK)£R AOPEAL AFTER £-£!-&

                                                                   UNDER APPEAL PRIOR TD ,;-£:-&.
                                                                   UNDER flPPEHL PfilOff TO £-£1-66.
                                                                   ADJL'TED TH.RCLBH APPEfi^.
                                                                   UNDER APPEPL PRIOR TQ 2-21-66.
                                                                   UNDER APPEAL PRIOR TO £-21 -tt.
                                                                   UNDER ttPEAL PRIOR
                                                                   UNDER APPEAL PRICR
                                                                   UNDER APPEAL PRIOR
                                                                   IN APPEAL PRIOR TO
                                                                   UNDER APPEAL PRIOR
                                                                   UNDER APPEAL PRIOR
                                                                   UNDER APPEAL PRIOR
                                                                   UNDER APPEAL PRIOR
                                                                   UNDER APPEAL PRIOR
                                                                   UNDER APPEAL AFTER
                  TO £-£i-86.
                  TO £-£1-66.
                  TO 2-21-K.
                  £-£1-66.
                  TD £-£:-66.
                  TO £-£1-66.
                  TO 2-ai-«6.
                  TO 2-81-tf.
                  TO £-£!-66.

-------
Pigt No.      3
03/04/88
                                                      EXHIBIT 1
                                           WNY RECEIVABLES IN THE S*Pt£
                                           MERE (JKRSTATH) OR OVE*STftT£D
                                             DUE TO A VARIETY OF REASONS
                                                                   OT>€R
                                                                   COW&TS

ACCOUNT
BALANCE
ACCT. RECEIV. OTPUTED
POINT .NJ*8£f?
05
05
05
05
05
05
05
05
05
05
05
05
05
05
05
05
05
05
05
C5
f'.e
o;
i*
0:
if
Cf
OS
C-5
05
0£
C>6
06
06
06
C*
06
06
06
06
07
07
07
07
07
30013
30230
41179
41460
50138
50165
50315
503*2
50362
504*e
50&8&
51103
51163
51530
60329
60485
60555
sirs
8i:.*fi
W'i
S7(-S''.
87:19
87 NO
6?1 Si
S7;."
£72!:
905C1
9063=
vwoc:
21IE5
6104<|
W.91
6Ai20
6A268
6*30?
6A311
7A043
7B07S
7BC'5r
41077
R6000
R6033
teou
R6139
8Y AUDITOR
70243. 00
883268.55
45130.37
30396.34
20000.00
55301.00
3750.00
1686.35
452233. 00
32105.00
102737.00
28802.00
190357.05
95446.00
231135.12
27!2S46.29
126065.06
3T26.7Z
2-:>. 89
53. i^
:.ov
1534.6*
0. 00
fiOOfj. 00
52.79
0.00
29*6£.0d
104377,00
2iS«.C*
477538.40
50995.00
181.41
21.68
0.00
0.00
0.00
0.00
0.00
20.19
12063.00
85460.00
6170.00
107500.00
652.50
BALANCE
RECORDED
IN FWS
103787. 17
635445.00
44838.53
503%. 34
20000.00
55301.00
7500.00
2099.00
452233.00
25000.00
102777.00
26802.00
189990.30
95446. 00
23!l51.7i
27506e». 50
;26001.?8
35736. : 4
•:5j.to
0. 00
O.W
1575.57
O.W
8000. M
32.60
O.W
29*6£.00
1 04377. dO
2S160.00
4765:6.95
50995.00
121.50
-325.40
-77.80
0.00
0.00
0.00
0.00
32.82
13&23.20
80132.80
5487.50
1062)6.40
549.50
DIFFERENCE
BETWEEN
BALANCES
-33544.27
247823. 55
291.84
0.00
0.00
0.00
-3750.00
-412.65
O.W
7105.00
-40.00
0.00
366.75
0.00
-16. tO
ise:.»:
67.fr:
0. 58
173.69
59.6^
0,00
19.07
0. 00
0.00
20.19
0.00
0.00
0.00
-3*40.00
1021.45
0.00
59.91
347.08
77.80
0.00
0.00
0.00
0.00
-12.63
-1540.20
5327.20
662.50
-716.40
103.00


NOTES
3
1
3




3

2, 5 i 8


3

3
2
3
3
1,4.1:1::
£

3 t 6


1 » 4



3
3

3, 6 I 9
1, 6 t li
11




1 1 4
3
3, 5 I 8
3, 5 t 8
3
3, 5 1 8
                                                                   PC SrCULD NOT HPVE R£~
                                                                           REVISED DEB' Oh 2-27-86.
                                                                   NO TtfWS ON BILL AND BILL HAS

                                                                   F«S DID  NOT SHW 3-26-87 I <6TPL_«£T
                                                                   FXQ NOT  TOLD OF W*E«TS TO DCJ  .'-*:
                                                                        fi/R NC. ftSSIS'O TD £  Dl-E^T
                                                                                                     !L. r< $.'•
                                                                        DECIS:» 3-18-67
                                                                                      "OK6  =;;  :i
                                                                  IN ft33£ft. 3R1C* TD  2-21-85.
                                                                  IN OOPEfl. P»IOS TO  J-21-66.
                                                                  P«0 5-CJ.3 fcCT  H6V£ RiCDRritT' IT: =£5".
                                                                            K. PRID*  TO i-2i-6o.
                                                                  F«S DID NOT  S,<* 3-26-87 PQy«€>fT.
                                                                  FW SHOULD WT HftVE RECORCCB IN-*E^£ST.   IN
                                                                  F«0 SHOUJ NOT HflVE K£2;^€D
                                                                        DfiTED AFTER 2-21-66.
                                                 33

-------
Q3/04/S8
                                                      EIHIBH 1
                                           NflNY RECEimES IN T1€
                                           WERE UNDENTED OR OVERSTB'D
                                             DIE TO fl  VPRIETY OF REfiSCKS
                                                                  CflHHtNT
flCOXJVT
far. ssiv.
POINT >*j«£S
15
15
15
15
:s
.5
15
15
15
15
15
If
5
15
15
• j
15
V
J
C
^
fr
t
22
22
Zrt
ci
2c
22
2;
-7
c7
27
£7
i^
27
27
27
27
27
27
27
27
27
27
27
2?
27
6P063
6P066
63103
6*118
6315:
3^:20
PR214
PR330
PR36C-
P&393
?»42a
PR534
P%38
P9f4:
R7C:?5
"7:05
97;j5
R7140
R7:4'
"7; 45
0«X!
5C:33
K~*r,^t
2--'. 4
fcl'.'i?
'i.'.i.i»
7^ifc9
£0798
EC-6--?
"><•: jj
70::2
7C-137
70: 32
70i(^
70272
70279
70264
70235
70267
70289
70290
70306
70322
70324
703*0
BALANCE
COfP'JTED
BY ALDITOfi
0. 00
1476.97
653.73
0.00
536.04
536.00
0.00
422.71
0.00
0.00
0.00
0.00
0.00
0.00
271. 12
1264.85
3£5.33
435. 79
359. 32
800.00
445*. 09
30:72.3*
4?9f2.S»
295525.53
0. C-';
2Sfc:£.!2
65:. 25
0.00
0.00
0.00
0.00
96.76
0.00
169063.07
38400.00
11993.72
33130.14
5933.27
50291.67
29923S.42
0.00
1103.52
16236.32
34&3B
BALANCE
RECCWD
IN FKS
0.00
1293.17
561.00
0.00
536.04
435.52
-507.24
422.71
0.00
0.00
1186.94
932.43
758.17
yn.ci
27:. 12
1264.35
365.33
43*. 75
1076.56
900. C(
34C-S, bA
25077.68
47054.58
295525. £9
0.00
2b8:6.:3
602.25
0.00
0.00
0.00
0.00
96.19
0.00
169063.07
38400.00
11999.72
33129.04
5933.27
50290.00
299225.50
0.00
1103.52
16236.32
5466.33
DIfTiRENCS
BET1€SN
BALANCES NOTES
0.00
183. 80 3, 6 t 7
92.73 3, 6 1 7
0.00
0.00
100.48 3, 4 t 7
507.2* 3 * 12
0.00
0.00
0.00 14
-1186.94 14
-932.43 14
-753.17 1*
-501.27 14
o. to
0. OC
o. yj
0.00
-7:3.2* 12 i li
0.00
:^<^. A? 3
5094.46 3. 6 t 9
35?. 3t 3. 6 t 9
0.00
0.00
0.00
49.00 3, 6 1 8
0,00
0.00
0.00
0.00
0.57 3
0.00
0.00
0.00
0.00
i.;o 3
0.00
1.67 3
9.92 3
0.00
0.00
0.00
0.00
                                                                  (EVESSING DfTfiV.
                                                                  DEBTOR SIVEN PfiYME>-' 1*5 IN
                                                                  ENTRY £S3Qfi,

                                                                  A/R WR
                                                                  fl/R WRITTEN OFF SINCE FI.E COOi'
                                                                  a/ft TD s£ wrra 0^= sivcs FI.E
                                                                  fl/R T0 E€ URITTEK D^F SINCE •  IE  >
                                                                  fl/fi P:IS6 U»rTE-s Qc? SINCE r
                                                                  fl/R E€iM5 WRITTEN 2C? SIsCE
            H -2JC.
                                                                 APPEHLE0 ftF'ER 2-2:-86.
                                                                 FHO ROUNDED KN CanPUTlNS I^E-Es*.
                                                                 DO
                                                                 FW ROUNDS) t*€N
                                                                 FW SOUNDED UfN
INTEREST.
                                                 35

-------
P»g» No. 7
03/04/88
EXHIBIT 1
MANY RECEIVABLES IN THE SAMPLE
WERE UNDERSTATED OR OVERSTATED
DUE TO A VARIETY OF REASONS
» ACCOUNT
«CT. RECEIV.
POINT *KBER
99 S3408
99 S397*
99 54367
99 H0093
99 M0154
99 H0493
99 HOS07
99 H0964
99 H5:03
99 H5152
99 H5263
99 K54S9
99 H5679
99 H6156
oo ^^LA.'J'W
Jf ^V^W—
99 H6E07
39 H6523
99 H6odw
99 H660&
^^ 59 H6357
^fc 39 H6935
^^ 55 H69E9
r>Q . nrC TOLD IN 6-8? "-*" Bit. b£S ™'', "
NOT VfltID RECEIVABLE JCCAJSE *-E ~ll ••
13 6ILL UftS COUECTII' D-« 3-2(~S7.
3.6,9111
2 1 5
2 I 5
11 1 14

                                                                                               ;-3"
81206093.87  7821842&.28   29872S5.59
                                   37

-------
M«g« NO.
03/01/88

1




EXHIBIT
RECEIVABLES WITHOUT

^P ACCOUNTING
POINT
03
O4
15
15
15
15
15
99
39
93
^^ *** Total »»*

ACCOUNT
RECEIVABLE
NUMBER
36O34
316O8
PR399
PR428
PR534
PR538
PR541
H7096
G0418
3R073

BALflNCE
RECORDED
IN FMS ON
3-31-87
138. 14
75169. 00
0. OO
1 136. 94
332. 43
758. 17
501. 27
-34.2O
-21.07
-45. 00



2
DOCUMENTATION

APPROXIMATE
DATE OF
THE BILL
02/12/86
O7/ 18/84
O1/27/84
03/27/84
09/10/84
09/19/84
09/21/84
12/18/86
06/02/86
09/1 1/83

 78583.68
39

-------
  P«g» No.
  03/oi/aa
  ACCOUNTING
  POINT
                                          EXHIBIT 4

                         FIRST DEMAND  LETTER FOR A DELINQUENT DEBT
                         WAS SENT MORE THAN 6O DAYS  AFTER THE BILL
  01
  04
  O4
  04
  06
  OS
  07
  07
  O9
  09
  15
  IS
  15
  IS
  15
  22
  27
  33
  99
  99
  99
  99
»»» Total  *»*
 ACCOUNT
 RECEIVABLE
 NUMBER
 7R005
 29610
 61193
 K7022
 61O4S
 6A191
 R6198
 R8142
 4OO01
 90796
 6P011
 6P066
 6R103
 PR 120
 PR214
OMOO5
60798
3R322
4R130
A1040
B1005
B4646
BALANCE
RECORDED
IN FMS ON
3-31-87
123833.30
183446. 80
93872. 00
29. 12
50993. 00
121.30
0. OO
2070. 84
168. 29
20O52. OO
0. 00
1293. 17
561.00
433. 52
-5O7. 24
3409. 64
602.25
27312.00
8822. 00
6O. 00
-20.00
265.62

DATE
OF THE
BILL
12/10/86
09/22/82
12/09/86
02/20/87
05/11/80
O1/07/86
09/13/86
01/30/81
10/11/83
12/18/79
09/09/85
01/08/86
1O/28/86
12/17/8O
05/14/82
08/19/80
09/22/86
12/13/82
09/28/84
O5/02/84
04/O3/83
01/18/85
DATE OF
FIRST
DEMAND
LETTER
06/O1/87
07/26/85
O4/3O/87
03/22/87
06/01/81
04/10/86
11/25/86
06/25/81
01/12/84
03/O7/86
08/2O/Q6
05/29/86
04/06/87
07/16/81
04/11/83
O2/17/81
12/10/86
02/18/83
10/10/85
01/23/85
09/11/85
O6/14/85
                              147929.41
NUMBER  OF DAYS
   BETWEEN THE
  BILL  AND THE
 DEMAND LETTER
            173
           1038
            142
             91
            386
             33
             71
            146
             33
           2271
            345
            141
            16O
            21 1
            332
            182
             79*
             65
            377
            £66
            159
            147
* The debtor requested an extension to  collect information related to the
  bill.  The FMO granted the extension  and delayed sending the first demand
  letter.
                                       41

-------
                            EXHIBIT  6

                     INDEPENDENTLY DEVELOPED
                  SUPPLEMENTAL COMPUTER SYSTEMS
                 OPERATING  DURING THE  FIRST HALF
                         OF FISCAL  1987
  ACTIVITY  PERFORMED                     ACCOUNTING POINT
  BY SUPPLEMENTAL             	
  COMPUTER  SYSTEM                       5        22      27
                                 NOTE  1

GENERATES THE  BILL                      NO       YES      YES

GENERATES THE  DEMAND  LETTERS          YES       YES       NO

COMPUTES THE INTEREST                YES       YES       NO

COMPUTES THE HANDLING CHARGES         YES       YES       NO

COMPUTES THE PENALTY                  YES        NO       NO

UPLOADS ACCOUNTING DATA TO  FMS        YES        NO      YES
NOTE 1:  The computer  system  developed  by  accounting point 5
         (Chicago)  is  being adapted  by  accounting points 1
         (Boston),  8  (Denver),  9  (San Francisco), 10 (Seattle),
         and 99  (Headquarters).
                                43

-------
                                                              1
                   EXHIBIT 8

       FINANCIAL MANAGEMENT OFFICERS WITH
OUTSTANDING RECEIVABLES FOR FINES AND PENALTIES
             (SOURCE CODES 3 AND 6)
    ON DECEMBER 31, 1986, AND JUNE 30,  1987
                             OUTSTANDING?

                           12-31-86  6-30-87
   01 - BOSTON
   02 - NEW YORK
   03 - PHILADELPHIA
   04 - ATLANTA
   05 - CHICAGO
   06 - DALLAS
   07 - KANSAS CITY
   08 - DENVER
   09 - SAN FRANCISCO
   10 - SEATTLE
   99 - HEADQUARTERS
 NO
YES
YES
 NO
YES
 NO
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
 NO
YES
YES
YES
YES
YES
                       45

-------
               The selection of the audit sample was accomplished as follows:  First, each of :he
 4,337 accounts in the frame was assigned a uniform random number between 0 and 1.  Next,
 within each of the seven size classes defined in tabie  1, the universe  file was sored by SFO, j.-J
 then by :r.e previously-assigned random number within SFO. We note that sorting the file by SFO
 has the effect of introducing geographical stratification within size class.  Finally,  sys;erru::c
 samples were selected independently from each of the seven size classes. Table 1 sum-anzes :he
 number of accounts selected from each stratum and the corresponding  sampling rates.
      Table 1.     Distribution of eligible accounts and dollar balances in the frame, sample sizes and
                 sampling rales, by size stratum

Size stratum
(size of balance)
1. Negative
2. SO-25
3. $26-500
4. 5501-5,000
5. $5. 00! -100.000
6. Si 00.000-500,000
7, $500,000+
TotaJ
Number of
accounts in
frame
174
2,867
1.049
343
345
83
26
4,887

Aggregate
balance*
($336.122)
S2,414
$152,579
$597,298
$9.317,393
$17.475.583
$67,643,533
$94,852.680
Number of
accounts in
sample
35
46
35
34
69
42
26
287

Sampling
rate, 1 in ...
4.9"
62.33
29.97
10.09
S.uO
1.98
1.00

      'Dollar balances recorded in FMS.
              As can be seen in table 1, the distribution of dollar balances is highly skewed.  We
note that almost 90 percent of the total balance is accounted for by only 2.2 percent of the eligible
accounts receivable. Moreover, the variability in account balances increases substantially from the
small size stratum  to large  size stratum. As a consequence, a proportional sample, i.e., one in
which the distribution of accounts by size class is the satv.e as the distribution in the population,
would be highly inefficient for estimation of aggregative measures that are correlated with reported
dollar balance. For such aggregative measures, an approximately optimum allocation would give
the larger size strata considerably greater representation in the sample.  Since  the primary objective
                                             47

-------
                                                                  NDIX  1
 where yl-l = the audit balance for the ith sample account in stratum 1 was expected to provide a
 more precise estimate of the stratum total.  Consequently, an estimate of the total  audit balance
 (summed across aJl size strata) was computed from the formula
                                    " =
                                               h=2
              The corresponding estimated total difference  between the  recorded  and audit
 amounts was then computed as:
d" =  /- I Xh =  (yj'
         h=l
                                                     X(yh'-  xh')
                                                     h=2
 formulas:
where
              Moreover, the estimated total under- and over-statements were computed from the
                                              7  nh
                              Bunder" = Xl' +  S  Z
                                             h=i i=l
                                          £.?>
                                ,hi
                                 pos
                               h,
                 v,  - x,   if y.. > x,
                 * hi   hi    ' hi    hi
                  0, otherwise
where
              vh,
                                         x,  - y,.  if y,  < x,  ;
                                          hi  7hi    'hi    hi
                                         0, otherwise
 the recorded balance for the ith sample account in stratum h;
 the audit balance for the ith sample account in stratum h;
 the number of sample accounts in stratum h.
              Table 2 summarizes estimates of the total dollar balance, total difference, and total
under- and overstatements as computed from the formulas given above.

-------
and
where
                              sid"   ) =   / T s
                                  ovcr     V •„ ->
                                           V .T-..
                                      N
                                                                APPENDIX 1
and
              The standard errors of the various sample projections as calculated from the

formulas given above, and the corresponding 95 percent confidence limits, are summarized in

table 2.
Table 2.
                 Sample projections, standard errors, and 95 percent confidence bounds i,in SI ,000s >


Statistic
Total audit balance, y"
Tola] difference, d"
TotaJ understatement
Total overstatement


Estimate
S97.2I9
52,367
55,362
52,995
Standard
error of
estimate
S993
S993
S659
5700
Lower
95%
confidence
bound
595,273
S42I
S4.070
51,624
Upper
951
confidence
bound
599,164
S4.312
$6.654
S4.366
                                             51

-------
                                                ?3C3e 1 Of
                   RESPONSE TO RECOMMENDATIONS
               DRAFT AUDIT REPORT NO S1A67-11-3329
                   AUDIT 3F ACCOUNTS RECEIVABLE
    We have provided a response to each recommendation in the
report in this attachment.  Additionally, we have the following
general  comments concerning several issues discussed
                                                      n the report
    Some of the projections in the report, such as the projection
on page 12 regarding the lack of documentation, seem questionable.
The report identifies ten receivables for which there was no
supporting documentation.  It then projects that 3% of all
receivables (with 95% confidence) are undocumented.  This
projection concerns us since eight of the ten receivables were  in
one FMO .  The undocumented receivables appear unique to one 3F~,
especially since a previous audit found that the FMO had
prematurely retired some accounts receivable files and was aware
that they were missing some documentation.  Also, of this FMO ' s
eight receivables in the sample of ten, the report states that
four were in the EPA Claims Office awaiting processing of write-
off action.  This would seem to further distort the 3% projection
unless it was considered as part of the analysis.

    Your assessment of our processes highlights to us  the many
accounts receivable accomplishments and improvements that we  have
implemented.  The Office of Management and Budget and  the General
Accounting Office are not alone in realizing the  importance of  the
accounts receivable function.  We have also realized its  importance
and have emphasized throughout our financial community accouncs
receivable initiatives and the ongoing review of operations.  "or
example :

    o  We have continually stressed to Agency management  officials
       the critical importance of complying with EPA procedures  for
       reporting, billing, and collecting debts.

    o  We have taken an active role in communicating to  all Financial!
       Management Offices the importance  of a  strong and  effective
       Quality Assurance Program which routinely  reviews  and  tests
       financial operations, including accounts  receivable.

    o  During the last two fiscal years,  an independent  accounting
       firm has reviewed and tested all  financial  operations,
       including accounts receivable,  at  ten of  our  fourteen
       finance offices.

    o  The Financial Management Division  (FMD)  has  been  actively
       involved in a task force with  the  Office  of  Enforcement  and
       Compliance Monitoring  (OECM) assessing  the  overall effectivene
       of and strengthening controls  relating  to  the  tracking of
       fines and penalties under administrative  orders and  consent
       decrees.
                               53

-------
r~
                                         Attachment :
                                         Page 2 of 7
                  o   Accounts  receivable  policy  and  procedures  have  recently
                     undergone  extensive  review  with  revised  procedures  to be
                     released
                     System.
         as part or the Resources Management directives
                                   .inder too'<
The FVD sta:
year 1387 on  a wide range o
impiemented various actions
                                                              t s - =
                                             an  extensive  analysis  iuring  fiscal
                                                L.  accounts  receivable  issues  and
                                                 and  imorovements  to strengthen
                     our  processes.   An  August  14,  1937 memorandum  fro-n  the
                     Deputy  Director,  FMD  to  the  FMD  Branches  summarized  this
                     analysis  and  outlined  actions  to  be  taken.   The  implementation
                     of  these  actions  have  since  been  monitored  by  FYD staff.

                  o   Accounts  receivable was  included  as  a  review area on  all
                     Management  Assistance  Reviews  conducted during FY 1937.

                  o   Accounts  receivable for  Superfund was  reviewed during
                     Internal  Control  Reviews of  Superfund  Financial
                     Management  conducted  during  FY 1987  and will continue  to
                     be  reviewed  in  FY 1988.

                  o   The  Region  I  Comptroller sent  a  memorandum  to  all Region  I
                    program  officials  reminding  them  of  their
                    in  the area  of  accounts  receivable.
                                          resoonsioilities
                 o  A  Financial  Assistance  Review  conducted  by ~MO  in  Region  IX
                    included a review  of  accounts  receivable and  provided  assistan:
                    to  the  region  in drafting  desk  procedures for accounts
                    receivable.

                 Our numerous accounts  receivable  initiatives have  proved
             beneficial.  Accounts  receivable  processes  within the  Agency  have
             improved and controls  have been strengthened.   Additionally',  we  will
             continue working with  program  offices,  whose  support and  cooperation
             is essential to the accounts receivable process, to  ensure that
             all amounts due the Agency are accurately reflected  in our financial
             records.

                 Our responses to your  specific  recommendations follow:

             ALMOST FORTY PERCENT OF THE  DEBTS IN  THE ACCOUNTING
             RECORDS WERE UNDERSTATED  OR  OVERSTATED

             Recommendations/Responses

             1.  We recommend that  the  Director, Financial  Management  Division
                 make available  to  the  FMOs an automated method that will
                 chronologically list  the transactions for  all (or selected)
                 accounts receivable,  and require  the FMOs  to use this or
                 alternate  information  to identify and correct data entry
                 problems timely.
                                            54

-------
                                                               53
                                                               ns
                                                Attachment
                                                Page  3 of
    We agree that data entry problems should be identified and
corrected in a timely manner and we have processes in place for
this to occur.  We will continue to monitor all data entry ore-
edits and controls to ensure the accuracy of data input.   In
addition, we review transaction listings and accounts receivabl
reports to help isolate any errors that may have occurred.  The
steps,  along with t~e routine accounts receivable reconci1iatio
:see our response to your next recommendation), will help  locate
data entry errors so that corrections can be made.  Also,  as part
of our  on-going Quality Assurance activities, we will continue  to
routinely evaluate and monitor our controls and processes  to
determine that they are meeting control objectives,  and where
necessary we wil'  take appropriate action to strengthen our ron

2.  We recommend that the Director, Financial Management
    5T •/i s i'o n initiate and oversee an effort by the'rMOs to, by a
    certain date, (a)  perform a special reconciliation between
    the account receivable file and the accounting system for
    receivables outstanding on February 28, 1988, and  (b)  correct
    the accounting records for the proper additional charges and
    any other balance differences identified during the reconcili-
    at ion.
    We agree that FMOs should  reconcile  the  accounts  receivable
file with the accounting system and,  as  a  result,  correct  the
accounting records as necessary.  Although current guidance
requires a monthly reconciliation, we believe  that a  quarterly
reconciliation  is more appropriate.   The RMDS  Receivables  Chapter
2540 will require quarterly  reconciliations  by the FMOs  of the
accounts receivable file with  the outstanding  receivable balance
in the accounting system.  The RMDS  Receivables  Chapter  2543 was
circulated in Striped Border and should  be issued  in  April 1983.

3.  We recommend that the Director,  Financial  Management Division
    issue guidance requiring the FMOs to maintain  documentation
    showing, for the monthly  reconciliation  of  the file to FMS,
    who completed the work  and when  it  was completed.
    We agree.  The RMDS  Receivables  Chapter  2543  will  require
FMOs, when performing the  quarterly  accounts  receivable reconcili-
ations, to maintain documentation  showing  who completed the wor'<
and when it was completed.

4.  We recommend that the  Director,  Financial Management Division
    include as part of quality  assurance reviews  on accounts
    receivable, additional  tests  for compliance with Agency
    policy.

    We agree.  The Financial Management  Division, as part of its
Quality Assurance Reviews,  Financial Assistance Reviews, and when
it participates in the Office of  the Comptroller  Management
Assistance Reviews, will evaluate  and test compliance to accounts
receivable policy.
                               55

-------
                                                Attachment
                                                ?aae  4
 5.   We  recommend  that  the  Director, Financial Management Division
     make  available  tothe  FMOsan_automated method'to compute
     additional  charges  and,  if  possible,  send the  results" ro _FMS_.
     If_ this	is  ngt_  possible,  consider'and address  FMO concerns
     about resource  limitations  impacting  their ability to prcserly
     maintain  accounts.

     We  agree.   The  Financial  Management Division will -nake
 avaiiaole to  FMOs a copy of  the  software  and documentation for an
 automated method  that  generates  demand  letters for accounts
 receivable and  computes additional charges for receivables.
 However,  this  is  an interim  step prior  to IFMS Phase One
 implementation, which  will  include an  accounts receivable subsystem
 containing a  full range of accounts receivable functions and
 providing greater efficiency  of  operations.

 6.   We  recommend  that  the  Director, Financial Management Division
     issue guidance  that requires the  FMOs to tell  the program
     office to  immediately  send  the debtors a revised bill when
     a program  office fails to include  the correct  payment terms  on
     a bill It  generates.   In  addition/ when bills  continually
     lack  payment  terms, the  guidance  should require the FMOto
     (a) notify  (in  writing)  the  head  of the program office aoout
     the problem-and (b) send  copies ofthe notificationtothe
     addressee's supervisor and  the Director, Financial Management
     Division,  to  bring  about  corrective action.
    We agree that debtors  need  to  be  properly  notified  if  the
initial bill did not  contain  correct  payment terms.   The  RMDS
Receivables Chapter  2540 will contain guidance regarding  this
notification and will  instruct  FMOs  to take appropriate  action  in
cases where bills continually lack correct payment  terms.   As
mentioned earlier, this Chapter  should be  issued  in  April  1988.

AGGRESSIVE COLLECTION  ACTION  IS  NEEDED TO  ENSURE  THAT
DEBTORS PAY THE AGENCY IN  A TIMELY MANNER

Recommendations/Responses

1.  We recommend that  the  Director,  Financial  Management
    Division make available to  the FMOs an automated method that
    effectively generates  demand letters,  and, in the interTm,
    require the FMOs  to devote  the necessary  resources  to
    properly complete  collection activity.
    We agree.  The  Financial  Management Division will make aval la:
to FMOs a copy of the  software  and  documentation for an automated
method that generates  demand  letters  for accounts receivable and
computes additional  charges  for receivables.   However, this is an
interim step prior  to  IFMS  Phase One  implementation, which will
include an accounts  receivable  subsystem containing a full range
of accounts receivable functions and  providing greater efficiency
of operations.
                               56

-------
                                                Attachment I
                                                Page 5 of "
2.  We recommendthat the Director, Financial Management
                                                        , s: 3 n
     include as part of quality assurance reviews on accounts
     receivable, additional tests for compliance with Agency polirv
     for aggressively collecting receivables.

     We agree.  The Financial Management Division, as part of its
Quality Assurance Reviews, Financial Assistance Reviews, and
when it participates in the Office of the Comptroller Management
Assistance Reviews, will evaluate and test for compliance tD
accounts receivable policy.

3.   We recommend that the Director, Financial Management Division
     as part of the special reconciliation of the accounts receivable
     file and the accounting system  (per recommendation  for Findir.g 1'
     (a) initiate proper follow-up action, if needed, for collecti-g
     the receivable, and (b? correct the accounting records for  any
     differences in the source codes or bill date.
    As we stated in our response to recommendation *2 on page 3 c:
this attachment, we agree that FMOs should reconcile the accounts
receivable file with the accounting system and take appropriate
action to correct the accounting records.  Furthermore, the
Financial Management Division is preparing an accounts receivable
aging report that will be used to monitor the status of all
accounts receivable outstanding in excess of 120 days.  This will
serve as a tool to help identify further actions.
4.
We recommend that the Director, Financial Management Div
modify the FMS so the bi 11 date identified  in the accoun
    records can be corrected to reflect the date  on  the  bill  to
    the debtor.
    We agree that correct bill dates should be -identified  in  the
accounting records.  However, modifying  the FMS  is  not  needed  to
accomplish the correction.  Users can currently  modify  the  bill
date by reversing the erroneous record and replacing  it with  che
correct record.  This requires rekeying  the entire  entry.   Due to
system logic that FMS is based on,  this  is the most suitable
procedure until the new IFMS  is operational;  otherwise  substantive
resources would have to be devoted  to systems modification, which
is not a viable alternative.

ALL DEBTS OWED TO THE AGENCY  SHCJLD BE RECORDED
AS ACCOUNTS RECEIVABLE

Recommendations/Responses

1.  We recommend that the Director, Office of Enforcement  Policy,
    Office of Enforcement and Compliance Monitoring;

    (a) Emphasize in program  guidance related to fines and
        penalties that Agency guidance requires  the program
                                                             '•«•-<
    office (or legal counsel)  to  give  the  FMO a copy of
    administrativeorders and  other  documents that establis
    a debt;
                          57

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                                            Attachment
                                            Page  6  of  '
(b)  Identify any deviations  neededfromtheFMO's  normal
    collection actions  when  dealing with fines  and penalties
    provide  such information to the Director, Financial
    Management Oivisio_n,  and assist the Director  in rey'isi^.g
    the Financial Management Manual and the EPA Accounting
    Manual  to include  specialcollection actions  related  to
    fines  and penalties.
(b)
    CECM  agrees  with the recommendation.   Future OECM guidance
    documents,  issued by the Assistant Administrator, will
    address  this issue,  as  appropriate.  In addition, we will
    encourage the Regional  Counsels  to follow this guidance
    in regard to their own  enforcement activities.  However,
    the recommendation should be modified to request other
    program  assistant administrators to make similar commit-
    ments in regard to their own program guidance issuances.
    Also, as a  minor editorial comment, it should be noted
    that  the report apparently has assumed that fines and
    penalties are both civil remedies.  In fact, a fine is
    considered  a punishment and is therefore only available
    in criminal  cases.  The correct  term on the civil side  is
    "penalty."
    The Financial Management Division has also
    memoranda from the Deputy Administrator to
                                            prepared
                                            the  Office
 of
Solid
                                              finance off
                                                      r •*«'
                                                      L -iC^
Enforcement and Compliance Monitoring,  the  Office  of
Waste and Emergency Response, and  the Regional
Administrators emphasizing and  requesting  that  the
necessary documents and  information  relating  to  fines
penalties be forwarded to the appropriate
so that debts owed the Agency can  be properly rec
This was done in response to the OIG Audit  Report  No.
P5EH7-11-0022-80028  (CERCLA Audit  for FY  1986).

We agree that special collection actions  related to  fines
and penalties need to be  identified  and analyzed to  deter-
mine the proper procedures to be followed.   We have  already
taken actions to accomplish this task.   In  FY 1987,  three
reviews were performed jointly  by  the Office of Enforcement
and Compliance Monitoring  {OECM) and the  Financial Manage-
ment Division  (FMD)  regarding the  exchange  of information
between the Regional Counsel or program offices and  the
finance office for judicial and administrative orders.   An
analysis of the study was completed  including appropriate
recommendations.  A  draft report of  the OECM/FMD study has
been finalized and is currently undergoing review within
OECM.  Comments will be  incorporated into a final draft
for review by program and regional officials.  After
considering these comments, guidance will be issued to the
effected offices.
                          58

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                                                Attachment I
                                                Page 7 3f 7
2.  Werecommend that theDirector, Financial Management Division
    issue guidance that requires the FMOs to  (1) notify  (in writi
    the head of the program office when action documents were r.ct
    provided and (2)  send copies ofthenotificationto  the
    addressee's supervisor and the Director,  Financial Manager-en*
    division, when a program office continually fails to provide
    documents from wnich an account receivablesnouldbe recorded

    we agree that FMOs should take appropriate action when p:
offices do not provide the required documents to the FMO so \
accounts receivable can be properly recorded.  The RMDS
Receivables Chapter 2540 will contain such guidance.

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                                                Attachment
                                                Page  1 of 4
                        SPECIFIC COMMENTS TO
                DRAFT  AUDIT  REPORT  SO.  S1A67-11-0029
                    AUDIT  OF ACCOUNTS RECEIVABLE
 o   ?age  3,  Bottom  of  Page

    It  should  be  noted  that  FMOs have tested transactions  of  their
    financial  operations  in  fiscal years  1986 and  1987  (and are
    currently  doing  so  in FY  1988).  These evaluations, an integral
    aspect  of  our Quality Assurance Program  in  the  financial  community
    demonstrate our  commitment  to assessing  controls and  improving
    operations and  help us  fulfill our  responsibilities under  the
    Federal  Managers'  Financial  Integrity Act.   In  addition,  Artnur
    Young has  tested accounts receivable during  the  last  two  fiscal
    years at ten  of  our fourteen finance offices.   Also,  we have
    reviewed accounts  receivable as part of  Financial Assistance
    Reviews  and Management Assistance Reviews.

 o   Page  5,  Paragraph  3

    "The  EPA Claims  Officer  and  the Director, FMD  determine the
    final disposition  of  the  debt when  the FMO  is  unsuccessful  in
    collecting it."  During  the  audit, the Director,  FMD had limited
    authority  to  act on debts where the principal  amount  did  not
    exceed  $600.  This  authority has been raised to  $6300 by  the
    SPA Claims Officer, July  1987 and implemented  October 1987.

 o   Page  5, Table 1

    This  table is misleading.   It should  include data by  accounting
    point that reflects the  uncontrollable receivables  you identified
    on page  17 of the  report, where you state "...$50.8 million as
    unbilled,  reimbursable,  intergovernmental agreements, as  raceivablel
    being appealed,  or  as receivables being  paid in installments."
o  Page 12, Paragraph  1;  Page 20,  Paragraph  3  and  Page 44,
   "Note I14
   In addition to accounting  points  1,9  and  10,  adapting a
   supplemental computer  system developed  by accounting point
   5, accounting point  8  is currently  in the process  of utilizing
   an accounts receivable  system.

o  Page 15, Top of Page

   You state that a standard  aging  report  was available to the
   FMOs.  Furthermore,  you state  "the  data on the report was
   often incorrect so the  report  and the other aids were not as
   useful as they should  be."  You  did not specify what "data and
   other aids" were incorrect.  Then on  page 17,  bottom of page,
   you make a conclusion  that  $21.2  million  (or 481 of controllable
   receivables) was for receivables  over 1 year old.   This conclusion
   may be questionable  if  it  is based  on a standard aging report
   which "was often incorrect."
                               60

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                                                Attachment II
                                                ?aqe 2 of 4
    Page  15,  Paragraph  2

    Procedures  for  collection agency referral will be finalized
    when  the  Agency receives final Treasury guidance.  At that r;~e,
    appropriate  policies and procedures will be distributed.

    Page  15 ,  Paragraph  3
The FMOs1
32,000.30
1987.
             write-off authority for debts has been raised to
             by memorandum signed by the Director, ?MD on October "> ,
o   Page  1 8 ,  Par a g r a p h 4

    According  to accounting point 27, changes have been made to
    the supplemental computer system to record the bill date rather
    than  the  input date.

o   Page  23,  Last Paragraph

    We believe that the statements from the Deputy Director of ~MD
    have  been  taken out of context and have been misinterpreted.
    Your  conclusion that we "have a  limited role to play  in getting
    information when the receivables are generated by a program
    office" is inaccurate.  The point that we have made to you is
    that  FMOs  and FMD cannot continually, on a daily basis, be
    going to all program offices to  see what receivables  should  oe
    recorded.  Procedures are in place that program offices are  10
    follow and we will encourage them to do so, but we can only
    record receivables of which we are aware.  This is not a
    limited view of our role.  We are actively involved in
    promoting  the necessary interaction between program offices  and
    finance.  We are involved in various accounts receivable
    initiatives, including a joint study with OECM which  addresses
    the strengthening of controls to ensure more accurate records.
   We will continue working with program officials to stress our
    need  for all required documents  relating to debts owed the
   Agency.

o  Page  27, Exhibit 1

   Accounts Receivable 87014, accounting point 2,  is an  install-
   ment civil penalty.  Interest on past due amounts has been
    recalculated and agrees with the amount recorded  in the FMS ,
   not the auditors' calculation.

   Accounts Receivable 87026, accounting point 2,  is a civil penalty,
   However, the consent decree provided options for compliance
   by the respondent other than cash payment.  The accounts
   receivable was recorded as a possible debt of cash owed  to  the
   Agency so as to not understate Accounts Receivable.   A non-cash
   payment  option was accepted by our Office of Regional Counsel.
   Until this decision was reached  no interest was accrued.   Tie
   Accounts Receivable has subsequently been reversed out.
                               61

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                                                 Attachment  :
                                                 Page  3  of  4
    Page  30,  Exhibit  1
    Accounts  receivable  50643,  accounting  point  8,  indicates
    a  difference  of  $6,314.~3  in  computed  interest.   This  account
    receivable was  from  a  decision  letter.   According to Office  c
    Comptroller Transmittal  v,'o.  36-39,  dated  March  5," 1936, decis
    letters written  before February  21,  1986  were  to  be processed
    according to  the  Financial  Management  Manual,  Chapter  7  (12;'
    wnicn  deferred  any calculation  of  interest,  handling and  pena
    charges.  The date of  referral  of  this  account  was September
    1985;  therefore,  no  interest  should  have  been  calculated  and
    the  Region's  records,  in  this case,  were  correct.
                                            .3
                                            f tn-
                                            i on

                                            b) ,
                                            --'/
                                            13,
    Page  31, Exhibit
    Exhibit 4
1;  Page 36,  Schedule 1-1;  and ?aae 42,
   Accounts receivable  60793,  accounting  point  27,  concerned
   an EPA employee who  was  billed  for  the average  on  a  household
   goods shipment.   Prior  to  the end of  the  first  30  days,  the
   employee asked for an extension  because there were professional
   books in the shipment which  would change  the amount  due  EPA.
   The extension was granted  for an additional  33  days  and  interest
   was waived.  When the employee  did  not later comply,  the receivabl|
   was aged from the date  of  the extension.   This  is  all  documented
   in our file and was  explained to the  auditor during  the  site
   review.  Our management  understood  this would not  be a part  of
   the findings.  If it is  left  in  the report,  further  explanation
   is needed.

o  Page 41, Exhibit  3

   Accounts receivable  86222,  accounting  point  2,  was an
   Intergovernmental Personnel  Act  (IPA)  receivable with  payment
   received 6 days later.   One  follow-up  letter was sent.  This
   item should not be in this  exhibit,

o  Page 43, Exhibit  5

   Accounts receivable  85365,  accounting  point  2,  was a civil penalty
   Interest on this  receivable  was  booked prior to notification
   that a check had  been collected  through the  lock-box process.
   As such, the collection  was  made within the  required timeframe
   and no interest was  due  although the  interest was not
   reversed off the  books.

o  Page 44, Exhibit  6

   A supplemental computer  system  is currently  being utilized
   by accounting point  99  (Headquarters)  for Freedom of Information
   Act (FOIA) receivables.  The system generates demand letters,
   computes the intarest,  handling  charges and  penalties, as
   well as uploads accounting  data  to  FMS.
                               62

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                                                 Attachment  II
                                                 ?age  4  of  4
o  Page 45
   Exhibit 7 is misleading as it also should stress that  the
   receivables  ara being collected although the receivables were
   recorded.  We are taking aggressive action in the regional
   offices,  along with Regional Counsel and the program offices,
   record fines and penalties as accounts receivable.
                             63

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                            APPENDIX  3

                 DISTRIBUTION OF THE  AUDIT REPORT


 Recipient                                            Copies

 Action  Official:   Comptroller  (PM-225)                 2
 Assistant Administrator  for Administration
  and Resources  Management  (PM-208)                    1
 Assistant Administrator  for Enforcement
  and Compliance Monitoring (LE-133)                   1
 Assistant Administrator  for Water  (WH-556)             i
 Assistant Administrator  for Solid Waste
  and Emergency  Response  (WH-562A)                     1
 Assistant Administrator  for Air
  and Radiation  (ANR-443)                              1
 Assistant Administrator  for Pesticides
  and Toxic Substances (TS-788)                        1
 Regional Administrators, Regions l-io                  10             I
 Associate Administrator  for Regional                                 I
  Operations  (A-101)                                   1
 Director, Office of Enforcement
  Policy (LE-133)                                      1
 Director, Financial Management Division  (PM-226)       1
 Financial Management Officers                          14
Agency Followup Official, Resource Systems Management
  Division (PM-225)                                    1

                               64


                                                   01

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