[Audit Report on Office of Surface Mining Reclamation and
Enforcement Financial Controls Over the Technical Assistance
Agreement With the Republic of Indonesia]
[From the U.S. Government Printing Office, www.gpo.gov]
Report No. 00-i-191
Title: Audit Report on Office of Surface Mining Reclamation and
Enforcement Financial Controls Over the Technical Assistance
Agreement With the Republic of Indonesia
Date: January 31, 2000
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U.S. Department of the Interior
Office of Inspector General
AUDIT REPORT
OFFICE OF SURFACE MINING RECLAMATION AND ENFORCEMENT
FINANCIAL CONTROLS OVER THE TECHNICAL ASSISTANCE AGREEMENT
WITH THE REPUBLIC OF INDONESIA
REPORT NO. 00-I-191
JANUARY 2000
U.S. Department of the Interior
Office of Inspector General
EXECUTIVE SUMMARY
Office of Surface Mining Reclamation and Enforcement
Financial Controls Over the Technical Assistance Agreement
With the Republic of Indonesia Report (No. 00-i-191)
January 2000
BACKGROUND
In February 1995, the Office of Surface Mining Reclamation and
Enforcement (OSM) entered into a $3.2 million reimbursable
technical assistance agreement with the Bureau of Environment and
Technology of the Ministry of Mines and Energy, Republic of
Indonesia, for a project to provide technical assistance to the
Republic for developing, establishing, and implementing policy,
regulations, and guidelines to control environmental effects
caused by mining activities in Indonesia. In addition, the
agreement states that OSM is to "keep accurate and systematic
accounts and records . . . in such form and detail as will
clearly identify all relevant time charges and cost, and the
bases thereof." Further, the agreement requires OSM to submit to
the Republic and the International Bank for Reconstruction and
Development quarterly reports that include itemized project
expenditures for the previous quarter and an itemized estimate of
additional funds requested. As of June 30, 1999, OSM had
recorded $2.9 million of expenditures for the project.
OBJECTIVE
The objective of the audit was to determine whether OSM (1) took
adequate action to implement the recommendations contained in our
December 1996 audit report "Office of Surface Mining Reclamation
and Enforcement Financial Controls Over the Technical Assistance
Agreement With the Republic of Indonesia" (No. 97-I-165) and (2)
spent funds in compliance with the financial management,
accounting, and reporting requirements of the agreement. The
audit was initiated in response to a request from OSM's Acting
Deputy Director.
RESULTS IN BRIEF
We concluded that OSM had fully implemented the three
recommendations in our December 1996 audit report. In addition,
we concluded, based on our review of the implementation of
recommendations in the prior report, a review of the internal
controls for the financial requirements stipulated in the
technical assistance agreement, and verification tests of
selected transactions, that OSM had spent funds in accordance
with the terms of the technical assistance agreement with the
Republic of Indonesia.
RECOMMENDATIONS
The report did not contain any recommendations.
AUDITEE COMMENTS AND OIG EVALUATION
On January 4, 2000, we held an exit conference with officials
from OSM headquarters. The officials agreed with the conclusions
presented in a draft of this report.
E-IN-OSM-003-99-R
AUDIT REPORT
Memorandum
To: Director, Office of Surface Mining Reclamation
and Enforcement
From: Robert J. Williams
Assistant Inspector General for Audits
Subject: Audit Report on Office of Surface Mining Reclamation
and Enforcement Financial Controls Over the
Technical Assistance Agreement With the Republic
of Indonesia (No. 00-i-191)
INTRODUCTION
This report presents the results of our audit of the Office of
Surface Mining Reclamation and Enforcement's (OSM) financial
management, accounting, and reporting controls for funds
received under its technical assistance agreement with the Bureau
of Environment and Technology of the Ministry of Mines and
Energy, Republic of Indonesia. The audit was initiated in
response to a request from OSM's Acting Deputy Director. The
objective of the audit was to determine whether OSM (1) took
adequate action to implement the recommendations contained in our
December 1996 audit report "Office of Surface Mining Reclamation
and Enforcement Financial Controls Over the Technical Assistance
Agreement With the Republic of Indonesia" (No. 97-I-165) and (2)
spent funds in compliance with the financial management,
accounting, and reporting requirements of the agreement.
BACKGROUND
In February 1995, OSM entered into a $3.2 million reimbursable
technical assistance agreement with the Bureau of Environment and
Technology of the Ministry of Mines and Energy, Republic of
Indonesia, for a project to provide technical assistance to the
Republic for developing, establishing, and implementing policy,
regulations, and guidelines to control environmental effects
caused by mining activities in Indonesia. The project is funded
by a portion of a $260.5 million loan to the Republic from the
International Bank for Reconstruction and Development.
OSM's responsibility for the project is as follows: (1) its
resident Project Director in Indonesia has overall field
administrative responsibility; (2) its Finance Center staff in
Denver, Colorado, accounts for project costs and funds received;
and (3) the program staff in the headquarters office in
Washington, D.C., provide overall project coordination.
The agreement stipulates that the Republic provide periodic
advance payments to OSM to cover necessary and agreed-to project
expenditures. Specifically, OSM is to be reimbursed for all
direct costs of the services provided and for administrative
costs based on a fixed rate of 22.5 percent of the direct costs,
excluding equipment items such as automobiles identified in the
agreement. In addition, the agreement states that OSM is to
"keep accurate and systematic accounts and records . . . in such
form and detail as will clearly identify all relevant time
charges and cost, and the bases thereof." Further, the agreement
requires OSM to submit to the Republic and the Bank quarterly
reports that include itemized project expenditures for the
previous quarter and an itemized estimate of additional funds
requested. As of June 30, 1999, OSM had recorded $2.9 million of
expenditures for the project.
SCOPE OF AUDIT
Our audit was performed at OSM's headquarters office and its
Finance Center. In a February 17, 1999, memorandum from OSM's
Acting Deputy Director, we were requested to review and audit
funds expended by OSM under the agreement. As such, we
statistically selected 64 project expenditure transactions,
valued at $215,034, for the period of February 1995 through June
1999 to determine whether OSM spent funds in accordance with the
agreement. We also reviewed overhead calculations, project
billing statements generated from the accounting system, and
quarterly reports. We did not verify the accuracy of OSM's
overhead rate of 22.5 percent because it was established as a
fixed rate in the agreement. During our audit, we also reviewed
the actions taken by OSM to address the recommendations made in
our December 1996 audit report.
Our audit was conducted in accordance with the "Government
Auditing Standards," issued by the Comptroller General of the
United States. Accordingly, we included such tests of records
and other auditing procedures that were considered necessary
under the circumstances. We also reviewed the Departmental
Reports on Accountability for fiscal years 1997 and 1998, which
include information required by the Federal Managers' Financial
Integrity Act, and determined that there were no reported
weaknesses related to the objective and scope of our audit.
PRIOR AUDIT COVERAGE
During the past 5 years, the General Accounting Office has not
issued any audit reports concerning OSM's agreement with the
Republic. However, the Office of Inspector General issued the
audit report "Office of Surface Mining Reclamation and
Enforcement Financial Controls Over the Technical Assistance
Agreement With the Republic of Indonesia" (No. 97-I-165) in
December 1996. The report stated that OSM needed to strengthen
its internal controls over preparation of the quarterly financial
reports and the computation of overhead costs to ensure that (1)
costs reported in the quarterly reports submitted to the Republic
and the International Bank for Reconstruction and Development
were in agreement with the costs recorded in the accounting
records and (2) administrative overhead costs were properly
computed and accurately recorded. In addition, the report stated
that OSM needed to improve coordination between the Project
Director and other program staff in the Finance Center and the
headquarters office to ensure timely identification and
resolution of issues related to the agreement's financial
management, accounting, and reporting requirements. The report
contained three recommendations, all of which were considered
resolved and subsequently referred to the Assistant Secretary for
Policy, Management and Budget, Department of the Interior, for
tracking of implementation. On March 4, 1997, the Department
reported that the recommendations were implemented.
In addition, the Inspector General has issued six reports during
this period on OSM's financial statements, as required by the
Chief Financial Officers Act of 1990. The most recent report,
"Office of Surface Mining Reclamation and Enforcement Financial
Statements for Fiscal Years 1998 and 1997" (No. 99-I-245), issued
in February 1999, stated, "Our tests of the internal controls
over financial reporting and compliance identified no reportable
weaknesses or conditions."
The five prior financial statement reports contained similar
conclusions regarding OSM's internal control structure.
RESULTS OF AUDIT
We concluded that OSM had fully implemented the three
recommendations in our December 1996 audit report. In addition,
we concluded, based on our review of the implementation of
recommendations in the prior report, a review of the internal
controls for the financial requirements stipulated in the
technical assistance agreement, and verification tests of
selected transactions, that OSM had spent funds in accordance
with the terms of the technical assistance agreement with the
Republic of Indonesia.
Prior Audit Report Recommendations
Recommendation 1. Ensure that administrative overhead amounts
recorded in accounting billing statements are computed
accurately.
In our December 1996 report, we noted that OSM could not support
its calculation of administrative overhead costs because it did
not have adequate controls to ensure that the 22.5 percent fixed
overhead rate was properly applied to the appropriate direct cost
base. Specifically, OSM was unable to explain how the overhead
amounts included in the quarterly reports for the periods ending
September 30 and December 31, 1995, were calculated, including
what equipment items and costs were excluded from the direct cost
base before the overhead rate was applied.
In our followup review, we found that OSM had issued a memorandum
dated January 23, 1997, which provided new guidance on recording
direct costs and computing the overhead rate. Our review of
OSM's administrative amounts included in the quarterly reports
for fiscal years 1996, 1997, 1998, and 1999 (through June 30,
1999) showed that the costs were computed accurately and
supported by the official accounting records. Accordingly, we
consider the recommendation implemented.
Recommendation 2. Ensure that direct and overhead costs included
in the quarterly reports are reconciled to information in the
accounting billing statement and the official accounting system
and reviewed by either headquarters or Finance Center staff
before the quarterly reports are provided to the Republic of
Indonesia and the International Bank for Reconstruction and
Development.
In our December 1996 report, we noted that the amount included in
the billing statement, which was generated from OSM's automated
accounting system, at September 30, 1995, was not in agreement
with the amount reported by the Project Director in the quarterly
report to the Republic for the same period. We concluded that
this condition occurred because the Project Director, who was
located in Indonesia, prepared the quarterly report, which was
not reviewed by either the headquarters office or Finance Center
staff.
In our followup review, we found that OSM had issued a memorandum
dated January 23, 1997, which required that quarterly reports be
prepared by the Finance Center and be reviewed by the
headquarters office prior to submission to the Republic of
Indonesia. In that regard, we found that the Finance Center
prepared the quarterly reports and that the headquarters office
reviewed the reports. In addition, the Finance Center reconciled
the quarterly reports with the project billing statements that
were generated from the accounting system. Accordingly, we
consider the recommendation implemented.
Recommendation 3. Ensure that all program staff comply with the
terms and conditions of the technical assistance agreement
pertaining to the calculation of administrative overhead costs
and preparation of the quarterly reports.
In our December 1996 report, we noted that OSM needed to improve
coordination between the Project Director and other program staff
in the Finance Center and the headquarters office to ensure
timely identification and resolution of issues related to the
agreement's financial management, accounting, and reporting
requirements. We concluded that a contributing factor to this
situation was that OSM program officials did not fully understand
the agreement's overhead calculation process.
In our followup review, we found that OSM had issued two
memoranda, both dated January 23, 1997, which provided guidance
for recording project costs, calculating administrative overhead,
and preparing and reviewing quarterly reports. Based on our
review and tests of these procedures, we consider the
recommendation implemented.
On January 4, 2000, we held an exit conference with officials
from OSM headquarters. The officials agreed with the conclusions
presented in a draft of this report. Since this report does not
contain any recommendations, a response is not required.
Section 5(a) of the Inspector General Act (Public Law 95-452, as
amended) requires the Office of Inspector General to list this
report in its semiannual report to the Congress. In addition,
the Office of Inspector General provides audit reports to the
Congress.
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