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For information on downloading documents using File Transfer Protocol(FTP) see the file how2ftp in the following directory path: /pub/Bureaus/Miscellaneous/Public_Notices/ ***************************************************************** OFFICE OF INSPECTOR GENERAL MEMORANDUM DATE: March 18, 1996 TO: Chairman FROM: Acting Inspector General SUBJECT: Final Report on the Audit of Fiscal Year 1994 Spectrum Auction Implementation Cost The attached audit report reflects the efforts of the Office of Inspector General(OIG) to support the conduct of successful spectrum auctions and encourage the development and implementation of strong financial management controls within the Commission. The objectives of the subject audit were to: (1) examine the system implemented by the Commission to accumulate and report auction related accounting information; (2) validate the timeliness and accuracy of the information that was reported; and, (3) identify areas where improvements could be made. During the review, auditors identified $297,041 in questioned cost. For purposes of this review, we have used the definition of questioned cost contained in the Inspector General Act of 1978 (P.L. 95-452) 5.(f)(1)(B) which establishes questioned cost as "a finding that, at the time of the audit, such cost is not supported by adequate documentation." Questioned costs resulted from (1)inaccuracies in reported personnel compensation expenses; and (2) inadequate support for selected personnel compensation and automation charges. During the conduct of our fieldwork, the auditors worked with management to establish mechanisms to accurately capture valid auction related expenses for FY 1995 and latter years. Three specific recommendations for corrective action are contained in the final audit report. The Managing Director has formally concurred with all three recommendations. It should be emphasized that there is no indication that any fraud or malfeasance transpired within the scope of our audit. Rather, it is our determination that questioned costs resulted from inadvertent oversights on the part of responsible program officials and staff, operating under extreme time constraints. H. Walker Feaster III cc: Chief of Staff Managing Director Chief, Wireless Telecommunications Bureau REPORT ON THE AUDIT OF FISCAL YEAR 1994 SPECTRUM AUCTION IMPLEMENTATION COST Table of Contents Page EXECUTIVE DIGEST ............................................ 1 AUDIT OBJECTIVE ............................................. 3 AUDIT SCOPE ................................................. 3 BACKGROUND .................................................. 4 FINDING - Inaccuracies in Reported FY 1994 Auction Cost o Details of Finding .................................. 6 o Recommendations/Management Response ................. 17 APPENDIX I - Memorandum to Chief, Wireless Telecommunications Bureau, from Acting Inspector General ............................. 19 APPENDIX II- Memorandum to Acting Inspector General from Deputy Chief, Wireless Telecommunications Bureau ........................................ 21 APPENDIX III - Questioned Cost Table for Personnel Compensation ................................. 23 APPENDIX IV - Response to the Draft Audit Report by the Managing Director ............................. 24 APPENDIX V - Response to the Draft Audit Report by the Bureau Chief, Wireless Telecommunications Bureau ...... 27 EXECUTIVE DIGEST The objective of this audit was to examine the system implemented by the Commission in FY 1994 to record and report auction cost information and to determine whether the system was providing timely, accurate and meaningful financial information to Federal Communications Commission (FCC) management. Auditors from the Office of Inspector General (OIG) identified two areas, personnel compensation and automation, in which improvements can be made in the system to ensure that it provides timely and accurate financial information. Both areas involve the lack of adequate documentation to support reported cost. For purposes of this review, we have expressed the value of inadequately supported auction cost as "questioned cost" consistent with the definition contained in the Inspector General Act of 1978. In performing the audit, auditors identified that FCC program officials did not have a timely and accurate mechanism in place in FY 1994, to accumulate hours and salary rates of FCC employees which were determined to be chargeable as auction expenses. The lack of accurate records has resulted in questioned costs of $75,340. This amount reflects a summary of a number of categories to include: (1) hours charged to auctions not supported by documentation; (2) overtime hours charged for which no corresponding disbursement was made; and,(3) hourly rates charged for individuals assigned to auctions which were erroneous. In addition, FCC program officials were unable to provide OIG auditors with adequate documentation to support certain costs associated with automation initiatives which were expensed against FY 1994 auction proceeds. Questioned costs related to these transactions totaled $221,701. It is important to note that there is no evidence to suggest that the conditions identified in this review resulted from any deliberate attempt to circumvent accounting controls. Rather, the auditors are of the opinion that the Commission, in focusing it's energy and efforts towards instituting a successful auction program in a short time frame, did not adequately address administrative issues. To address the weaknesses identified, we recommend that FCC management adopt the corrective measures enumerated in this report in the current and subsequent fiscal years. The Managing Director and Chief, Wireless Telecommunication Bureau (WTB) concurred with the audit findings and recommendations. Their responses to the Draft Audit Report are furnished in entirety as Appendix IV and V to this report. Prior to initiating this audit, the OIG issued two audit reports which addressed specific components of the spectrum auctions program. These reports focused upon the methodology for accepting and processing initial application receipts; tracking and reporting on round by round bidding eligibility and activity; and, the collection and deposit of down payments received from successful bidders. Based upon audit findings, the OIG developed a number of recommendations for corrective action to address limited deficiencies noted in an overall extremely successful and well conceived program. AUDIT OBJECTIVE The objective of the audit was to examine the system implemented by the Commission to accumulate and report auction related accounting information and validate the timeliness and accuracy of the information that was reported. An additional objective was to identify areas where systemic improvements could be made to ensure the accuracy of future year reported cost. To accomplish our objective, we: (1) sampled reported cost elements and collected appropriate supporting documentation; (2) verified cost payment through the accounts payable system; (3) verified the accuracy of reported Bureau/Office reimbursement; and (4) interviewed managers involved in auction cost collection, recording, and reporting. AUDIT SCOPE The audit was conducted in accordance with Generally Accepted Government Auditing Standards and included such analysis, interviews and testing as required to support the audit findings. The scope of this review was limited to auction costs reported for FY 1994. The scope did not include an assessment of the Commission's interpretation of the statute with respect to the applicability of the cost nor the basis for the determination that FCC employee auction related salaries and expenses could be recovered from auction proceeds. Thus, if the Commission reported an expenditure as an auction related cost, we attempted to verify that the expense was incurred, but did not attempt to evaluate its applicability as an auction related cost. To support the auction process, WTB established and staffed a series GS-511 contract audit position within their organization. As part of our fieldwork, we interviewed the WTB contract auditor to determine the extent of FY 1994 contract review, and sampled auction contract audit work to verify its accuracy. Based upon our review of the completed work, we determined that, under GAO "yellow book" Government Auditing Standards, we could place reliance on the work being conducted by the WTB auditor. Accordingly, we were able to limit the level of audit work conducted. Although we placed audit reliance upon the WTB auditor's work, we identified a potential independence problem as defined by GAO as relates to the auditor's position and reporting responsibilities within the WTB organization. This issue was addressed to the Chief, WTB and is discussed in detail under Section A. Contract Cost of this report Audit fieldwork was performed within OMD and WTB from January 1995 to November 1995. BACKGROUND The Omnibus Budget Reconciliation Act of 1993, as amended on August 10, 1993, added a new section 309(j) to the Communications Act of 1934. This amendment to the Communications Act gave the FCC express authority to employ competitive bidding procedures to choose from among mutually exclusive applications for initial licenses. In Fiscal Year (FY) 1994, the Commission promulgated general rules governing the spectrum auction process and specific rules governing the auction of licenses for the narrowband Personal Communications Service (PCS) and Interactive Video and Data Service (IVDS) licenses. On July, 29, 1994, the Commission completed its auction of ten narrowband PCS licenses with a total high-bid value of $617,006,674. Concurrently with the narrowband PCS auction, the Commission conducted an auction of 594 IVDS licenses. The total value of bidding for these licenses, following adjustment for bidding credits, was $213,892,375. In addition to providing the Commission authority to auction licenses, the amendment gave the Commission the authority to receive reimbursement for the cost of implementing this means of allocating spectrum. Section (8)(B) of the new section 309(j), entitled Retention of Revenues, states the following: "Notwithstanding subparagraph (A), the salaries and expenses account of the Commission shall retain as an offsetting collection such sums as may be necessary from such proceeds for the costs of developing and implementing the program required by this subsection. Such offsetting collections shall be available for obligation subject to the terms and conditions of the receiving appropriations account, and shall be deposited in such accounts on a quarterly basis. Any funds appropriated to the Commission for fiscal years 1994 through 1998 for the purpose of assigning licenses using random selection under subsection (i) shall be used by the Commission to implement this subsection." On November 12, 1993, a memorandum was issued from the Acting General Counsel to the Associate Managing Director for Operations (AMD-O). This memorandum, entitled "Spectrum Auction Authorization," examined the time frame for which the Commission could retain auction proceeds to offset expenses. The question at this point was whether the language of the authorizing legislation allowed long term retention of revenue or if the intent was for retention of start-up costs only. The Acting General Counsel concluded that "the Commission is authorized to retain all offsetting revenues." On June 9, 1994, the Deputy Bureau Chief for Operations, WTB, issued a memorandum entitled "Spectrum Auction Costs" to those Bureaus and Offices participating in the auction process. This memorandum served to establish a process by which auction related costs could be accumulated and used to support requests for revenue retention. The memorandum requested that auction costs be reported in three stages. The first stage was hours and travel by staff member for the period prior to and including April 1, 1994. The second stage requested similar information for the period of April 4, 1994 through June 10, 1994. The third stage required weekly submission of hours and travel by employee, as well as, purchase order and contract information. In addition, costs incurred during stage three were to be reported by function (e.g., Management/Supervisory overhead, Marketing, Accounting, etc.) or by auction (e.g., narrowband, IVDS, etc.). INACCURACIES IN REPORTED FY 1994 AUCTION COST The FCC does not have adequate documentation to support all FY 1994 costs assigned to the development and implementation of spectrum auctions. The condition resulted from a number of factors including management's emphasis on successfully discharging the auction program, time constraints imposed on FCC staff, and lack of compliance by FCC staff with internal reporting procedures and applicable financial accounting requirements. The Policy and Procedures Manual for Guidance of Federal Agencies (Appendix 3 page 2-5), published by the General Accounting Office, states that "a fundamental requirement for any viable accounting system is that the financial transactions for which the system must account be adequately supported with pertinent documents and source records." The auditors have identified questioned costs in the amount of $297,041. This amount is broken down as $75,340 related to questioned personnel compensation and $221,701 questioned costs identified as automation costs. FY 1994 Spectrum Auction Costs Accumulated by the FCC In its initial stages, the Commission used funds from central accounts (i.e., Bureau/Office accounts) to implement the requirements of the auction authority and purchase the necessary goods and services in FY 1994. A special project code was established to track and reconcile auction related cost. After the first round of auctions were conducted, in July 1994, some charges were offset directly with auction proceeds. In addition, auction costs absorbed by central accounts were "realigned" from the direct appropriation account to an offsetting account and the central accounts were, in effect, "reimbursed with auction proceeds. This system reported $7,012,302 in auction related obligations in FY 1994. That cost is broken down as reflected in the following table on page 7: Classification Reported Percentage Contract Cost $3,839,105 54.75% Personnel Compensation 1,604,903 22.89% Automation Cost 1,282,744 18.29% Other Direct Cost 285,550 4.07% $7,012,302 100.00% Requirements for Accounting System Structure and Operation Federal accounting principles and standards are promulgated by the Comptroller General and officially transmitted in the "Policy and Procedures Manual for Guidance of Federal Agencies" published by the General Accounting Office. Appendix III of that manual, entitled "Accounting System Standards," establishes requirements for accounting system structure and operation, as well as accounting processes and procedures. For purposes of establishing these requirements, the Appendix defines the "accounting system" as, "that part of the overall financial management system which provides the total structure of methods and procedures used to record, classify, and report information on the financial position and operations of a governmental unit or any of its funds, balanced account groups, or organizational components." Section III cites the requirements of 31 U.S.C. 3512(a) which establishes a requirement for the head of each executive agency to establish systems of accounting and internal control which provide: complete disclosure of the financial results of agency activities; adequate financial information needed for agency management purposes; effective control over, and accountability for, assets for which the agency is responsible; and, reliable accounting results and reports that will be the basis for preparing and supporting agency budget requests, controlling budget execution, and providing financial information the President requires. In the section of Appendix III entitled "Accounting Processes and Procedures, the Comptroller General establishes requirements for transaction support. The section states the following in defining these requirements: "A fundamental requirement for any viable accounting system is that the financial transactions for which the system must account be adequately supported with pertinent documents and source records. These transactions, and any subsequent adjustments, should be authorized and executed in accordance with management criteria by personnel acting within the scope of their authority. They should be properly accumulated and correctly classified, coded, and recorded in all affected accounts. These transactions should be recorded in the accounts promptly and accurately, in the proper amount, to permit (1) preparation of financial reports in accordance with internal needs and external requirements and (2) prompt analysis of the information by management. Thus, information should be captured in the accounting records simultaneously with or immediately following the event that gave rise to the transaction." Selected Charges were Reported Inaccurately or were not Adequately Supported by Pertinent Documents and Source References During our detailed review of reported auction cost, we examined 59.8% of the total reported cost of $7,012,302 ($4,196,658/$7,012,302 = 59.8%). During that review, we identified $297,041 in cost which was not adequately supported by pertinent documents and source references as required by the Comptroller General and cited above. These results are broken down as follows: Classification Reported Reviewed Questioned Contract Cost $3,839,105 $1,488,960 $ 0 Personnel Compensation 1,604,903 1,174,711 75,340 Automation Cost 1,282,744 1,252,169 221,701 Other Direct Cost 285,550 280,818 0 $7,012,302 $4,196,658 $297,041 A. Contract Cost To support the auction process, the WTB established and staffed a contract audit position within their organization. As part of our fieldwork, the auditors interviewed the WTB contract auditor to determine the extent of FY 1994 contract review and sampled auction contract audit work to verify its accuracy. Based upon our review of the completed work, the auditors determined that reliance could be placed on the work being conducted by the WTB auditor per GAO definition. Therefore, the auditors were able to limit the level of audit work conducted. As previously stated, the determination to place reliance on the work of the WTB contract auditor was based upon our review of his work files. The OIG is cognizant of GAO Government Auditing Standards (commonly referred to as the "yellow book") language that recognizes that a "government auditors' independence can be affected by their place within the structure of the organization to which they are assigned." Furthermore, the "yellow book" states that "audit organizations should report the results of their audits and be accountable to the head or deputy head of the government entity and should be organizationally located outside the staff or line management function of the unit under audit." It is the opinion of the OIG that the placement of this audit position within the WTB violates the aforementioned audit standards. This determination was conveyed to the Chief, WTB, in a memorandum dated August 31, 1995 and is included as Appendix I to this report. In responding to this memorandum on October 27, 1995, the Deputy Chief, WTB, stated the following: I have carefully considered your suggestions to establish a reporting structure outside the Auctions Division for the contract audit position(s) currently assigned to that division. I believe that it is in the best interest to have these positions continue to report administratively to the Chief of the Auctions Division. The complete memorandum of the Deputy Chief, WTB is included as Appendix II to this report. This matter was not resolved at the time of the issuance of this audit report. As part of the review of reported contract cost, the auditors judgmentally selected six (6) vouchers from Contract No. RFP-FCC- 94-10 with Tradewinds Realty Corporation. Tradewinds Realty Corporation was the principal contractor retained by the Commission to assist the agency in the planning and conduct of spectrum auctions in FY 1994. The vouchers selected represent 38.8% of total reported FY 1994 contract cost ($1,488,960/3,839,105 = 38.8%). The vouchers the auditors selected are as follows: Task Order No. 1, Invoice No. 3 $ 299,351 Task Order No. 1, Invoice No. 6 791,183 Task Order No. 2, Invoice No. 3 105,068 Task Order No. 3, Invoice No. 3 98,839 Task Order No. 4, Invoice No. 1 62,041 Task Order No. 5, Invoice No. 4 132,478 $1,488,960 The six vouchers selected for review were traced back to all supporting documentation. The auditors did not find any cases where documentation was missing. The auditors also checked whether the fringe benefits, overhead, general & administrative expenses, and fees were consistent with the rates in the contract agreement and whether the amounts were correctly calculated. The auditors found the rates were consistent with the contract agreement and the amounts were calculated correctly. B. Personnel Compensation The FCC did not maintain adequate records to support all FY 1994 personnel compensation costs. In addition the FCC did not have adequate procedures in place to ensure that all costs were reimbursed. These conditions resulted primarily from the lack of compliance by FCC staff with internal reporting procedures, applicable financial accounting requirements and inadvertent errors on the part of the Cost Accountant. Federal accounting principles and standards promulgated by the Comptroller General state that "Fundamental requirement for any viable accounting system is that the financial transactions for which the system must account be adequately supported with pertinent documents and source records." The auditors have identified total questioned personnel costs of $75,340 as reflected in the following table: Fi nding Do llar Am ount For Ov ercharges Do llar Am ount For Un dercharges Paragraph Re ference Fo r Se ction B 1. Unsupportable Hours $2 0,792 1 2. Reimbursable Costs not Reimbursed to the Commission $1 4,656 2 3. Inaccurate Hourly Rate $13,300 3 4. Inaccurate Hourly Rates $1 ,678 3 5. Unsupportable Overtime $24,914 4 Totals $59,006 $16,334 As part of the audit fieldwork, the auditors requested supporting do cumentation from AMD-O for all direct labor hours worked and ch arged to auctions by FCC employees in FY 1994. These same re cords reportedly served as the source documentation used to su pport the Commission's request to Treasury for funds in the am ount of $1,604,903. These funds were reimbursed from auction pr oceeds. Of the $1,604,903, the auditors actually examined source do cuments totaling $1,174,711, or 73.2% of the aggregate. The ba lance was composed of amounts disbursed to other Federal ag encies that provided assistance to the FCC (the Resolution Tr ust Corporation and Federal Deposit Insurance Corporation) and Sp ecial Act and Performance Awards. These disbursements co mprising approximately 26.8% of the $1,604,903 did not fall wi thin the scope of the auditors review. Ba sed upon review of source documentation, the auditors id entified four finding areas as identified below: 1. Source documentation did not exist to support 752 direct labor hours for which reimbursement was obtained. These 752 hou rs translated to approximately $20,792. The aud itors were informed that the condition cited above resulted from the lack of compliance on the part of FCC employees in forw arding appropriate documentation (details of hours worked by indi vidual and salary rate) to the designated staff within AMD-O. This condition may also have resulted from insufficient control and record keeping by staff within AMD-O. 2. Through the review of detailed records, the auditors identif ied that a number of hours, which by FCC definition, should have been charged against auction proceeds were not. A total of $14,656 in reimbursable costs were not reimbursed to the Commiss ion. The $14,656 represents 421 hours worked on spectrum auctions by 9 employees. The auditors questioned the responsible officia l in AMD-O to ascertain how this situation transpired. The res ponsible official advised the auditors that she was not aware h ow the hours were mistakenly omitted. The $14,656 for which t he Commission should have sought reimbursement, is conside red as a questioned cost. The res ponsible official within AMD-O informed the auditors that signifi cant activity had taken place in FY 1995 to mitigate the potenti al for the condition cited above to have occurred in FY 1995. Specifically AMD-O has established a contact person in each Bu reau/Office who is responsible for accumulating and reporti ng on a pay period by pay period basis, the hours worked by empl oyees. Each contact point is responsible for submitting an auct ion labor hour report that includes the employees name, grade/s tep, and hours worked. The information is then sent to the AMD -O. Information is compiled by AMD-O officials and formatt ed into a consolidated report. At the time audit field work wa s completed, the information provided by the Bureaus /Offices was being manually recorded on a spreadsheet. The auditors were informed that a automated program using Paradox has bee n developed to replace the manual system. AMD-O plans to convert to this automated system in the near future. Further more, o n October 1, 1995 the Commission implemented a Cost Account ing System. This system has the capability of accumul ating labor hours charged to various programs including the Spe ctrum Auction Program. 3. FCC employee payroll records did not fully support labor h ours and hourly salary rates which were used as a basis for acc umulating auction related costs. The auditors have attribu ted this condition to inconsistent record keeping and incorre ct interpretation on the part of the Cost Accountant assigne d to AMD-O. Thus, the Commission is not in full complia nce with source documentation requirements contained in the Policy and Procedures Manual for Guidance of Federal Agencies Appendix III, Chapter 2  2-5. Questioned costs in the amount of $13,300 and $1,678 respectively, have been developed in this finding section. The aud itors compared official FCC payroll records to auction reimbur sable labor cost records maintained by the responsible AMD-O o fficial. Inaccuracies were identified in the billing rates f or 107 of the 109 employees (98%) who charged hours to the auc tion program in FY 1994. The auditors found 100 out of 109 emp loyees (92%) rates were higher than employees actual hourly rates. Actual versus rates used in reimbursement calcula tions ranged from $.03 to $19.15 per hour. Resulting questio ned costs totaled $13,300. This amount represents the amount by which the Commission was over reimbursed. The maj ority of the 100 discrepancies resulted from the calcula tion of hourly salary rates based upon a denominator of 2080 ho urs in lieu of the actual prescribed 2087 hours an employee works per year. While this resulted in relatively small billing discrepancies, the Commission inexplicably billed a rate signifi cantly higher than that actually earned by certain employe es. The most significant discrepancies are reflected in the tab le below: HOURS CHARGED TO AUCTION S RATE CHARGED TOTAL AMOUNT CLAIMED ACTUAL SALARY RATE SUPPORT ABLE BILLING AMOUNT QUESTIO NED AMOUNT 222 $41.29 $9166.38 $22.14 $4915.08 $4251.30 299 $29.61 $8853.39 $16.34 $4885.66 $3967.53 388 $46.88 $18,189.44 $43.24 $16,777.12 $1412.32 Additionally, the auditors identified 9 employees out of the 109 employe es (8%) who had higher hourly salary rates then those rates u sed in actual reimbursement calculations totaling $1,678. This am ount represents an under-billing for which the Commission was ent itled to reimbursement and thus, is classified as a questio ned cost. 4. The Commission was reimbursed for numerous overtime hours w orked for which no financial outlay was incurred by the agency. The Commission in FY 1994 did not provide salaried overtim e to persons involved in the auction. And while some employe es were able to earn and utilize credit hours, this was extreme ly limited due principally to the volume of auction related work in FY 1994. The aud itors compared official FCC payroll records to records maintai ned by the responsible AMD-O official. The auditors identif ied that overtime hours worked on the auctions by FCC employe es, while charged against auction proceeds as costs incurre d, were in fact not consistently paid to effected employe es. The auditors identified 17 employees who worked in excess of 80 hours per pay period on the auction program. For these 1 7 employees, the Commission was reimbursed approximately $31,849 (rounded) for expenses related to overtime earned. Out of the $31,849 the Commission was reimbursed from auction proceed s, the Commission only compensated the responsible employe es, in credit hours that can be translated to, $6,934 in equivalent salary. Assuming the validity of the Commission being reimbur sed for credit hours, this results in a net difference of $24,914 . (See Appendix III). C. Automation Cost Au tomation cost accounted for a significant portion of the total co st of implementing the spectrum auction in FY 1994. In fact, co sts associated with automation efforts accounted for 18.3% of th e total FY 1994 cost of $7,012,302 ($1,282,744/$7,012,302 = 18 .3%). As part of our review, the auditors judgmentally se lected twenty-seven (27) automation line items with a total va lue of $1,252,163. The selected charges represent 97.6% of the to tal FY 1994 auction automation cost of $1,282,744 ($ 1,252,163/$1,282,744 = 97.6%). Fo r each selected charge, the auditors requested all available do cumentation supporting obligation creation, procurement, and ve ndor payment. In addition, the auditors obtained and reviewed do cumentation supporting the reimbursement of individual Bureaus an d Offices with auction proceeds. During the detailed review of th e supporting documentation, the auditors identified the fo llowing transactions in which cost information was not ad equately supported by pertinent documentation: Purchase Order Line Reported Pr oduct/Service Number Item Dollar Value Reference CB IS 43-3JJ5-4-1033G 03 $ 70,482 1 CB IS 43-3JJ5-4-2431 03 54,477 1 CB IS 43-3JJ5-4-1187G 02 54,117 1 CD SI 43-3JJ5-4-0078 32,625 2 Be ll Atlantic 43-3JJ5-4-0878 01 10,000 3 $ 221,701 1. The auditors selected a series of charges incurred as part of an interagency agreement with an organization under contrac t with the Department of Justice (DOJ). This organiz ation, Cincinnati Bell Information Systems, Inc. (hereaf ter referred to as "CBIS"), was being used to perform program ming support to "application maintenance, development and convers ion efforts." For each selected charge we attempted to verify that work had, in fact, been performed and that the work was clearly auction related. Although in some cases the auditors were ab le to obtain accounting records which indicated payment against the respective purchase orders, these records did not provide a level of detail necessary to verify that the specific line it ems established for auction related efforts had been billed. The aud itors were informed by a representative for the office of the Ass ociate Managing Director for Information Management (AMD- IM) tha t "(f)or billing purpose, the DOJ receives the invoices from CBIS for services rendered, the FCC receives a status report in acco rdance with the terms of the DOJ contract and the interag ency agreement." AMD-IM went on to report that "FCC maintai ns records of these status reports." The auditors obtaine d and reviewed the status reports provided by the contrac tor through DOJ for the selected charges. A detailed review indicated that, although references to specific auction related tasks were made in the reports, cost information was provide d at the purchase order level. Therefore, because the purchas e order contains auction and non-auction work, reported auction cost could not be supported. 2. The auditors selected a charge attributed to "Facili ties Management Services and Programming Support for Fiscal Year 1994" incurred by Computer Data Systems, Inc. (hereaf ter referred to as "CDSI") in the amount of $32,625. Althoug h AMD-IM was reimbursed for the amount reported, the auditor s were unable to obtain any documentation supporting this charge including documentation supporting the creation of the charge (e.g., Data Automation Service Request, Request for Propert y or Services, etc.). The auditors were informed by an AMD-IM representative that "(t)his PO represents the services of one ind ividual who performed services considered auctionable. His records are available." We obtained a copy of the referenced records and determined them to be inadequate as they did not separat ely report auction and non-auction work. Instead, these records reported only total contract activity for each month. 3. The auditors selected a charge attributed to "(s)erv ices of a technician to perform repairs, moves, changes and ins tallations on current telephone systems for 6 months." This ch arge, incurred by Bell Atlantic, was in the amount of $10,000. Although AMD-IM was reimbursed for the amount reported, we were unable to obtain any documentation supporting payment of this ch arge with auction proceeds. The aud itors were informed by a representative from the AMD-O that th is was "an estimated cost provided by Information Managem ent", and that, as was often done during the final weeks of clos eout, "this was done verbally to expedite the action." AMD-O went on to state that "(a) number of Information Management line it ems were based on their best estimates of the pro rata share of funds reflected on an existing Commission contract which had bee n used to support Auction activities. The Budget Staff did not have the criteria used for these prorations. Information Managem ent should address the methodology which was used." We cont acted a representative from AMD-IM and were informed that "the al location for 43-3JJ5-5-0878 was made based on an estimate of the anticipated workload for phone work (new equipment, relocat ions etc.)." Although we requested documentation to support the estimate, this documentation was not provided. D. Other Direct Cost Ot her Direct Cost (ODC) accounted for 4.1% of the total FY 1994 co st of $7,012,302 ($285,549/$7,012,302 = 4.1%). As part of our re view, the auditors judgmentally selected fifteen (15) ODC line it ems with a total value of $280,817. The selected charges re present 98.3% of the total FY 1994 ODC cost of $285,549 ($ 280,817/$285,549 = 98.3%). Fo r each selected charge, the auditors requested all available do cumentation supporting obligation creation, procurement, and ve ndor payment. In addition, the auditors obtained and reviewed do cumentation supporting the reimbursement of individual Bureaus an d Offices with auction proceeds. During the detailed review of th e supporting documentation, the auditors observed that all re ported charges were adequately supported. RECOMMENDATIONS AND MANAGEMENT RESPONSE In order to address the conditions cited in the body of the report, the OIG has developed three recommendations for corrective action as appear below. The Managing Director concurred with each of the three recommendations. The complete text of his response to recommendations 1 and 3 respectively, are incorporated below. Due to the length of his response to recommendation 2, only an excerpt is provided in this report section. The full text of the response of the Managing Director is included as Appendix IV to this report. The OIG recommends that the Managing Director: 1. Formally document the process by which auction related expenditures are created, approved, processed, recorded, and reported. This document should clearly establish the requirement for supporting documentation and establish specific responsibilities for each organization involved in the auction accounting process. This document should be distributed to all organizations involved in the process. Management Response: Copies of Spectrum Auctions: Auction Cost Recovery Guidelines and Procedures were distributed in July, 1995. 2. Review the questioned labor and automation costs charged against auction proceeds and reach a determination as to the appropriate treatment of these questioned costs and institute appropriate action. Management Response: There were "questioned costs" in two areas, Personnel Compensation and Automation. Each of these questioned costs have been reviewed and have been determined to be accurate and appropriately treated, but lacking adequate records or backup documentation.... The new formal cost accounting system implemented on October 1, 1995 should resolve for the future the appropriate level of personnel compensation to be charged to auctions. 3. Review auction automation contracts to determine if cost reports, provided by contractors, separately report auction cost information. If not, take steps to ensure that future procurement actions contain provisions to ensure that this information is provided. Management Response: In FY 1995, all automation contracts were modified to provide specific cost accounting procedures for all auction-related tasks. These cost reports are currently being provided by the contractors involved. In responding to the draft report, the Chief, WTB, stated: With regard to the comments contained in the report concerning the establishment of an outside reporting structure for the auctions Division's contract auditor, I believe that the Bureau has fully responded to this issue in a memorandum dated October 27, 1995 and signed by our Deputy Bureau Chief.... The complete response of the Chief, WTB, is provided as Appendix V to this report. APPENDIX III OVERTIME HOURS WORKED EMPLOYEE HOURLY RATE USED TOTAL OVERTIME REIMBURSED CREDIT HOURS EARNED CREDIT HOURS IN DOLLARS QUESTIONED AMOUNT 17 $31.21 $530.57 12 $374.52 $156.05 20 $56.03 $1120.60 10 $560.30 $560.30 15 $43.39 $650.85 4 $173.56 $477.29 19 $46.88 $890.72 10 $468.80 $421.92 5 $31.22 $156.10 5 $156.10 $0 3 $43.39 $130.17 3 $130.17 $0 16 $34.05 $544.80 10 $340.50 $204.30 20 $43.39 $867.80 10 $433.90 $433.90 6 $13.93 $83.58 0 $0 $83.58 165 $25.62 $4227.30 16 $409.92 $3817.38 137 $43.39 $5944.43 38 $1648.82 $4295.61 50 $43.39 $2169.50 0 $0 $2169.50 134 $43.39 $5814.26 22 $954.58 $4859.68 55 $56.03 $3081.65 0 $0 $3081.65 15 $41.17 $617.55 13 $535.21 $82.34 170 $20.78 $3532.60 36 $748.08 $2784.52 36 $41.29 $1486.44 0 $0 $1486.44 885 $31,848.92 189 $6,934.46 $24,914.46 H. Walker Feaster III Acting Inspector General Paul Brachfeld Director of Audits Tom Bennett Senior Auditor Stephanie Dunscomb Auditor