FY 2001 Performance and Accountability Report Homepage Management Discussion and Analysis OPM's Mission and Strategic Goals FY 2001 Performance Summary Resources Used to Accomplish Goals Quality of Performance Data Analysis of Our Financial Performance Systems, Controls and Legal Compliance Looking Ahead Limitations of the Consolidated Financial Statements

 

Management Discussion and Analysis

Systems, Controls, and Legal Compliance

 

Management Control Program

The Federal Managers Financial Integrity Act of 1982 (FMFIA) requires that we annually assess the adequacy of our management controls. Management controls are the organization, policies, and procedures we use to reasonably ensure that:

• our programs achieve their intended results;
• we use our resources in a manner that is consistent with our mission;
• our programs and resources are protected from waste, fraud, and mismanagement;
• we follow all laws and regulations; and
• we generate and use reliable and timely information for decision making.

In assessing the adequacy of our management controls,we relied on the judgments of our senior executives of their program and administrative functions, the input of our Office of the Inspector General (OIG) and of our independent public accountants, and on our internal program of quality assurance reviews. We are pleased to be able to certify, with reasonable assurance, that our management controls are adequate, effective, and are achieving all intended purposes.

The Material Weaknesses in Management Controls Corrected in FY 2001 table describes the actions we have taken to resolve the four material weaknesses in management controls that were unresolved at the end of FY 2000.

 

Material Weaknesses in Management Controls Corrected in FY 2001
[subject to OIG validation]
Material Weakness	Description/Corrective Action
Health Benefits Program Enrollment and Premium Reconciliation	By evaluating the results of audits of employing agency enrollment and contribution remittance procedures, we are comfortable that the amounts we pay as premiums to community-rated carriers are accurate. A final resolution will come with the implementation of the FEHB Centralized Enrollment Clearing House System
Fraud and Abuse in the Health Benefits Program	Our final rule will be published in the Federal Register in FY 2002. After publication, we will implement the processing of cases under the statutory sanctions authority.
Revolving Fund and Salaries and Expense Account Cash Reconciliation and Control	We are in the process of implementing adequate procedures and controls over the Fund Balance with Treasury of the Revolving Fund Programs and Salaries and Expense account.
Revolving Fund and Salaries and Expense Account Data Reconciliation and Control	We are in the process of implementing adequate controls over transactions entered into the Revolving Fund Programs and Salaries and Expense general ledgers.

As the Summary of Material Weaknesses in Management Controls table indicates, we have no material weaknesses in management control outstanding at the end of FY 2001, subject to validation by our OIG.

Summary of Material Weaknesses in Management Controls
Fiscal Year	Beginning of the Year	New	Corrected (subject to validation)	End of the Year
2001	4	0	4	0
2000	7	2	5	4

Financial Management System Compliance

We have assessed our financial management systems as required by the FMFIA and the Federal Financial Management Improvement Act (FFMIA).

Federal Managers Financial Integrity Act Compliance. In accordance with the FMFIA, we have assessed the conformance of our financial management systems with Federal financial principles, standards and related requirements as stated in OMB Circular A-127. As a consequence, we can report that, with the exception of two material nonconformances, our financial management systems meet all government-wide requirements.

A description and status of corrective actions for each nonconformance, is shown in the Material Nonconformances with A-127 Requirements table.

Material Nonconformances with A-127 Requirements
Nonconformance	Targeted for Correction	Nonconformance/Status
Systems Development Life Cycle	2002	Nonconformance: We do not have a systems Development Life Cycle (SDLC) process in place for major systems implementation efforts. Status: We have made significant progress in implementing an SLDC process for our information for our information technology projects.
General EDP Control Environment	2002	Nonconformance: We need to strengthen four areas of EDP general controls: (1) entity-wide security; (2) access control; (3) control over application changes and systems development; and (4) service continuity planning. Status: We believe we have made significant progress in strengthening our controls and that all remaining issues will be resolved during FY 2002.

Federal Financial Management Improvement Act Compliance. To comply substantially with FFMIA, we must be able to accomplish the following in a way that is consistent with Federal accounting standards and with the Standard General Ledger (SGL):

• Prepare financial statements and other required financial and budget reports using information generated by our financial management systems;
• Provide reliable and timely financial information for managing our operations; and
• Account for our assets reliably, so that they can be properly protected from loss, misappropriation, or destruction.

Based on KPMG LLP's audit report on our FY 2001 financial statements and on our own independent assessment, we have determined that our financial management systems as a whole substantially comply with the FFMIA. We base our conclusion on the fact that no deficiency in our financial management systems prevents us from meeting the specific requirements of FFMIA listed above.

	"I am pleased to certify that OPM is in compliance with the provisions of the Federal Managers Financial Integrity Act, except for two material non-conformances with Federal financial systems requirements. We have taken aggressive action to correct these two."
	—Kay Coles James Director

In considering the compliance of our financial management systems with the FFMIA, KPMG LLP assessed individually the systems we use to administer the (1) Retirement, Heath Benefits, and Life Insurance Programs and (2) Revolving Fund and Salaries and Expenses account. In its audit report, KPMG LLP cited the financial management systems supporting the Revolving Fund Programs and Salaries and Expenses as being substantially non-compliant with the FFMIA. More specifically, they reported that as of September 30, 2001, the financial management systems we used to manage the Revolving Fund Programs and Salaries and Expenses account:

• Lacked a formal budgetary accounting structure, which compromises our ability to comply with budget preparation, execution and reporting requirements; and
• Did not provide for the recording of financial events in a manner that is consistent with the SGL.

On an agency-wide level, KPMG LLP reported that we did not provide adequate system security in that we do not have coordinated security procedures; lack effective incidence response and monitoring capabilities; do not conduct periodic risk assessments; and have not developed adequate security-related processes to protect our assets from unauthorized access or improper use.

We implemented our new core financial management system supporting the Revolving Fund Programs and Salaries and Expenses account on October 1, 2001. As a consequence, we believe that we will be able to report for FY2002 that the financial management systems are substantially compliant with the FFMIA. Further, we intend in FY2002 to resolve fully all issues that led KPMG LLP to conclude that we do not have in place adequate system security procedures.

Debt Collection Improvement Act Compliance

The Debt Collection Improvement Act (DCIA) has had a major impact on the way we make our payments and collect the monies owed us. We comply with the DCIA in the following ways:

Cross-servicing. The DCIA established the Treasury's Financial Management Service (FMS) as the collection agency for all Federal agency receivables that are delinquent for more than 180 days. As a consequence, we transfer all such receivables to FMS for collection or "cross-servicing". To collect on the accounts we transfer, FMS issues demand letters, administratively offsets, performs wage garnishment and refers accounts to private collection agencies. To date, 4,475 of our receivables for more than $1.4 million have been collected via FMS cross-servicing.

Computer-Matching. We believe that it is equally important to prevent overpayments in the first place as it is to collect them once they become debts. Thus, we maintain an aggressive and active program integrity function to prevent waste, fraud, and abuse of Retirement Program benefit payments. One of the primary tools supporting this function is the use of computer-matching agreements. As such, we exchange payment information with other benefit-paying agencies to identify individuals who have died or are otherwise no longer eligible for benefits. In FY 2001, our computer-matching activities identified more than $22 million in overpayments and prevented an additional $70 million from being overpaid.

Quality Assurance Program. We have incorporated a Quality Assurance Program in our Retirement Program claims adjudication process by performing quarterly reviews of recently adjudicated cases for errors.

Managing Receivables. The following chart summarizes our receivables management activity for FY 2001:

Retirement Program. Retirement Program receivables result when beneficiaries or family members inadvertently delay reporting certain changes in an individual's status (death, marriage, recovery from disability, etc.) that result in a changed benefit. In other cases, partial or incorrect information is provided by the individual or the employing agency, resulting in an overpayment. Our receivables management process demonstrates a balance between our accountability for the public's money vis-a-vis the needs of Federal employees and retirees who have performed vital al services on behalf of America's citizens. We recognize that our customers are generally aged, living on fixed incomes, and are often unaware of the rules that apply to the need to report changes in their circumstances.

In fact, Retirement Program receivables represent a very small part of our total assets, as we do not operate commercial programs that are material to our financial statements. In FY 2001, total Retirement Program overpayments were less than one percent of the total benefit payments we made. Further, almost 88 cents of every dollar that was overpaid was collected.

Retirement Program Receivables
($ in Million)
Total receivables at beginning of year	146.0
New receivables	166.6
Collections	145.8
Adjustments	9.4
Total receivables at end of year	140.7
Total delinquent	37.7
Percent delinquent (total)	26.8%

Health Benefits Program. Our Office of the Inspector General (OIG) performs financial and contract compliance audits of the participating insurance carriers. As a consequence of these audits, the OIG may question costs charged by the carriers to their contracts with the Program. If Program management agrees and decides that such costs should not be charged to the Program, a receivable is established.

During FY 2001, we won an important victory in the courts that will enhance the tool set we have at our disposal to collect monies due the Program. The ruling supported the ability of our OIG to identify, and management's right to collect, interest we lose when a carrier overcharges the Program through its premium rates.

As with the Retirement Program, Health Benefits Program receivables are relatively small, representing less than one percent of the total benefit and premium payments we make.

As can be seen in the Health Benefits Program Receivables table, we ended the year with $186.2 million in management decisions requiring final action, an increase of $113.6 million from the beginning of the year. The large increase is attributable to the fact that $125.4 million in management decisions were made during the last month in FY 2001.

Health Benefits Program Receivables
($ in Million)
Receivable at the beginning of the year	72.6
New receivables	241.1
Less collections and adjustment	102.0
Receivable at the end of the year	212.4
Less management decisions in appeal	26.2
Currently available for collection	186.2

Electronic Payments. The DCIA requires that we issue payments electronically. Ninety-three percent of our Retirement Program annuitants are now paid via Direct Deposit—the highest percentage among all Federal benefit—paying programs. We believe it may be difficult to convince a great many of the remaining annuitants to enroll, since they are older individuals who may be uncomfortable with the concept of electronic payments and banking. Most of the future growth in our direct deposit participation rate will come from our annuitants who live overseas. In fact, during the year, we initiated an effort to extend "International Direct Deposit" to our overseas customers and will begin paying annuitants living in Italy this way very soon.

As can be seen above, we ended the year with $186.2 million in management decisions requiring final action, an increase of $113.6 from the beginning of the year. The large increase is attributable to the fact that $125.4 million in management decisions were made during the last month in FY 2001.

The Electronic Payment table shows the percentage of payments we made electronically in FY 2001 by major category of payments:

Electronic Payment
(percentages)
Retirement benefits	92
Salary	95
Carriers participating in Health and Life Insurance Programs	100
Other vendors	85

Inspector General Act Compliance

The Inspector General Act, as amended, requires the Director to report to the Congress on the actions we have taken in response to audit reports issued by the Inspector General. The Office of the Inspector General (OIG) conducts periodic audits of the records of the carriers participating in the Health Benefits Program to determine whether amounts charged to the Program comply contractually and with Federal procurement regulations. Upon issuance of an audit report that questions the costs charged by a carrier, Program management must decide within six months whether to allow or disallow the questioned costs. Accounts receivable are recorded promptly upon a decision by Program management to disallow the costs questioned by the OIG.

Management Decisions on Questioned Costs
	Number of Audit Reports	Questioned Costs (in $millions)
No management decision on questioned costs at the beginning of the year	19	65.7
Questioned costs during the year	54	279.7
Management decisions made during the year	49	276.4
Costs disallowed		233.6
Cost not disallowed		42.8
No management decision on questioned costs at the end of the year	24	68.9
No management decision on questioned costs within six months of issuance of report	3	8.1
Note that the resolution of the three reports totaling $8.1 million at fiscal year-end 2001 and 2000 has been delayed at the request of the OIG.

The table above provides a summary of the status of management decisions on cost questioned by the OIG during FY 2001.

 

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