TREASURY INSPECTOR GENERAL

FOR TAX ADMINISTRATION

The Asset Management Program Can Be Successful Through Active Executive Monitoring and Oversight

November 2000

Reference No. 2001-10-018

Executive Summary

The Internal Revenue Service (IRS) has had longstanding problems with its systems and controls over property and equipment (P&E). The General Accounting Office (GAO) has reported on these weaknesses, most recently in its report on the IRSí Fiscal Year (FY) 1999 financial statements. The IRS has identified P&E as a material weakness since 1983 as part of the Federal Managersí Financial Integrity Act of 1982 (FMFIA) process.

The IRS has taken action to address these problems. For example, the IRS Commissioner designated the Chief Information Officer (CIO) as responsible for controlling and accounting for all Automated Data Processing (ADP) equipment and software. The CIO organization conducted a comprehensive inventory to ensure that all critical systems were identified and made Year 2000 compliant. Additionally, the Chief Financial Officer (CFO) engaged an outside consultant to conduct a statistical sample to derive an estimate for the September 30, 1999, P&E balance. Moreover, the CFO, CIO, and Chief, Agency-Wide Shared Services (AWSS), entered into a Memorandum of Understanding (MOU) listing actions each was responsible for in maintaining control over capital assets for purchases after September 30, 1999.

The overall objective of our review was to evaluate asset management in the IRS, taking into consideration public and private sector practices, accounting standards and principles, and guidance issued by various government entities.

Results

While the IRS has taken positive steps to improve P&E inventory, continued involvement by senior management is necessary to sustain a reliable inventory figure and to address fundamental issues that will have an impact on the long-term viability of an integrated financial management system. The IRS is at risk of having spent $1.5 million for a FY 1999 ending P&E balance that was reliable only on September 30, 1999. To minimize this risk and to improve the value of P&E financial reporting, the IRS should assign responsibility for P&E to one senior executive, resolve differences with the application of accounting standards and policies, and timely implement commitments listed in the MOU.

Responsibility for Asset Management Should Be Assigned to One Senior Executive

Several components of the IRS have responsibility for P&E accountability and financial reporting, including the CFO, CIO, and AWSS organizations. Further, accountability for and control over assets is vested throughout the management hierarchy as part of a managerís operational duties. The Chief Financial Officerís Act of 1990 designates agency CFOs as responsible for directing, managing, and providing policy guidance and oversight of financial management operations. These responsibilities include the implementation of agency asset management systems for property and inventory management and control. In the IRS, the CIO has sole responsibility for ownership and control of all ADP property, while financial information is obtained from a number of other functions. Also, neither the CIO nor CFO have authority over the resources provided by other functions to ensure the accuracy of the inventory databases. Because of this division of responsibilities, the IRS may continue to experience difficulties in maintaining an accurate and reliable inventory system. We are recommending the IRS Commissioner assign one senior executive the responsibility for overseeing the IRSí asset management program.

Differences with the Interpretation or Application of Accounting Standards and Policies Should Be Resolved

Considerable debate has been undertaken in the federal financial community concerning capitalization thresholds, working capital fund (WCF) assets, and leasehold improvements. Some IRS policies and procedures on these issues differ with accounting standards and definitions, general business practices, and other guidance. For example, the IRS in FY 1998 used a $50,000 threshold for capitalizing assets, a policy that is consistent with Department of the Treasury guidance but does not necessarily coincide with business practices in private sector entities. Additional factors that affect this issue and should be considered are the concept of materiality and the desire for accountability and control of assets from a stewardship standpoint, as compared to expensing or capitalizing assets from a financial reporting aspect.

A complete and accurate inventory system would allow the IRS to establish a capitalization threshold based on a sound analysis, account for WCF assets, and track leasehold improvements.

Memorandum of Understanding Commitments Should Be Implemented Timely

The IRS recognized that sustaining the FY 1999 P&E ending inventory figure was crucial for establishing a baseline for future valuations. In this regard, the IRS developed an MOU with the CFO, CIO, and Chief, AWSS, to establish interim procedures to be used until an integrated financial system was in place. While the IRS continues its efforts to integrate its financial system, existing systems can allow for the interim processes to be successful. With an updated and maintained inventory system, the IRS can achieve success in sustaining the P&E figure. Achieving this goal requires a diligent effort to timely deliver on commitments outlined in the MOU. The CFO, CIO, and AWSS organizations each had several action items to complete, many of which were interdependent. However, substantial implementation of the MOU had not occurred at the conclusion of our review. Accordingly, the IRS needs to timely act on several key provisions, including accounting for all purchases made after September 30, 1999, defining exception report parameters, and committing resources to P&E activities.

Summary of Recommendations

To have an effective asset management program, the IRS should assign overall program responsibility to one senior executive with the authority to direct appropriate resources to accomplish both accountability and control of assets and financial reporting. The IRS should also use data from existing systems, after the data are updated and validated, to determine a capitalization threshold that is consistent with accounting standards and sound business practices. IRS management in the CFO, CIO, and AWSS organizations should aggressively pursue action on the MOU to stabilize the P&E inventory process and increase the likelihood of a sustainable inventory figure.

Managementís Response: The IRS disagreed with most of our recommendations. In November 1999, the IRS gave the CIO the authority to perform those functions having Servicewide impact and relating to the acquisition of Information Technology (IT) and the management of information resources, and does not plan to designate another official responsible. There is a fundamental disagreement between the Department of the Treasury and the GAO about the appropriate level for capitalization threshold. The IRS followed Treasury policy; however, the capitalization threshold is no longer an issue since the IRS is adopting a pooling procedure. Under this procedure, the cost or value of an asset is not recorded in the inventory. Rather, the acquisition costs by year for each selected class of assets will be accumulated in the accounting records. When capitalization thresholds are re-evaluated, the IRS will consult with interested stakeholders. A subcommittee has been working on the property control material weakness, and as the work progressed, senior officials recognized the need to rework the MOU, which was recently completed.

Managementís complete response to the draft report is included in Appendix V.

Office of Audit Comments: The CIO does not have the authority to resolve conflicts that may arise between the CIO, CFO, Chief AWSS, and other functional organizations relating to the recording and control of P&E. Also, the CIO is not responsible for non-IT assets. The IRS is relying on all levels of management to assure that the policies for managing P&E are properly carried out. This is basically the same policy that the IRS followed in the past that resulted in inadequate control and accountability over P&E. We agree that capitalization thresholds do not apply to the pooling concept; however, at the completion of our fieldwork in March 2000, the pooling concept had not been adopted. At that time, IRS management was planning on recording the cost of FY 2000 purchases in the inventory systems and, accordingly, the capitalization threshold would have been an issue. Where appropriate in this report, we have included additional comments on managementís concerns with our recommendations on WCF assets, leasehold improvements, and the MOU implementation.