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

November 2000

Reference Number: 2001-10-018

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

November 24, 2000

MEMORANDUM FOR COMMISSIONER ROSSOTTI

FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner

Deputy Inspector General for Audit

SUBJECT: Final Audit Report – The Asset Management Program Can Be Successful Through Active Executive Monitoring and Oversight

This report presents the results of our review of the Internal Revenue Service (IRS) Asset Management Program. The objective of the review was to evaluate asset management in the IRS by reviewing plans and procedures to properly account for property and equipment (P&E).

In summary, we found that the IRS has taken action to address longstanding problems with its systems and controls over P&E. To improve upon these actions, we recommended that the IRS assign one senior executive responsibility for asset management, resolve differences with the interpretation or application of accounting standards and policies, and timely implement commitments in a Memorandum of Understanding between affected IRS offices.

IRS management disagrees with most of our recommendations. A brief description of their disagreement is included in the appropriate sections within the report, and their complete response is included in Appendix V. Where appropriate, we made suggested changes to the report and included additional comments to clarify our position on those recommendations where we have a difference of opinion. In some instances, IRS management has changed their course of action since the completion of our fieldwork in March 2000, and we have commented on the impact of those changes on our recommendations. We continue to believe that our recommendations will assist IRS in coming to terms with the longstanding issue of P&E accountability and control, and urge the IRS to consider them as it continues to implement changes to the P&E procedures and systems.

Copies of this report are also being sent to the IRS managers who are affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions, or your staff may call Maurice S. Moody, Associate Inspector General (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.

Table of Contents

Executive Summary

Objective and Scope

Background

Results

Responsibility for Asset Management Should Be Assigned to One Senior Executive

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

Memorandum of Understanding Commitments Should Be Implemented Timely

Conclusion

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Glossary of Terms

Appendix V – Management’s Response

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 IRS’ Fiscal Year (FY) 1999 financial statements. The IRS has identified P&E as a material weakness since 1983 as part of the Federal Managers’ 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 manager’s operational duties. The Chief Financial Officer’s 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 IRS’ 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.

Management’s 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.

Management’s 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 management’s concerns with our recommendations on WCF assets, leasehold improvements, and the MOU implementation.

Objective and Scope

The overall objective of this review was to evaluate asset management in the Internal Revenue Service (IRS). In particular, we evaluated IRS plans and procedures to properly account for property and equipment (P&E). We also determined whether effective procedures and controls were established to ensure the P&E balance sheet figures for the Fiscal Year (FY) 1999 financial statements will be sustained through FY 2000 and beyond. The audit was performed in the office of the Chief Financial Officer (CFO) in Bethesda, Maryland, during the period December 1999 through March 2000.

This audit was performed in accordance with Government Auditing Standards. Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

Every year since 1983, the IRS has reported under the Federal Managers’ Financial Integrity Act of 1982 (FMFIA) that it does not have a reliable system of accounting for property; therefore, it is unable to determine if property is being properly used or misappropriated.

The Chief Financial Officer’s Act of 1990 established the responsibility for the government to report on the financial condition of each agency and prepare consolidated government-wide financial statements.

In March 1999, the General Accounting Office (GAO) issued a qualified opinion on the IRS’ FY 1998 balance sheet because it was unable to obtain, through substantive audit procedures, reasonable assurance that IRS balances were reliable. In part, the GAO found evidence to conclude that P&E were likely materially understated.

In response to the GAO’s qualified opinion and the recurring material weaknesses in controlling and maintaining accurate P&E inventories, an outside consultant was engaged to address inventory concerns. Over the past 2 years, the IRS spent $1.5 million for assistance in resolving P&E weaknesses. Part of the contract provided for the vendor to identify and value IRS assets for use in a statistical sampling process. These efforts resulted in the IRS receiving a favorable opinion for the ending P&E inventory figure reported on the FY 1999 balance sheet. However, material weaknesses continue to plague the IRS because of the lack of internal controls over its P&E.

The CFO, Chief Information Officer (CIO), and Chief, Agency-Wide Shared Services (AWSS), are working to resolve both accounting and accountability issues. The CIO organization conducted a comprehensive inventory to ensure that all critical systems were identified and made Year 2000 compliant. This report provides the IRS with our assessment of the actions taken to improve P&E valuation and accountability. We are also issuing a separate report addressing issues specific to automated data processing (ADP) assets.

Results

The IRS took steps to obtain a year-end figure acceptable to the GAO for the value of P&E reported on the September 30, 1999, balance sheet. The consultant used a statistical sampling process to identify and value IRS P&E assets. The GAO accepted the sampling plan because it provided for an auditable figure for P&E as of September 30, 1999. The IRS’ total P&E was estimated at $1.3 billion as a result of the sampling process.

Also, the IRS initiated action to sustain the reliability of the September 30, 1999, balance sheet figure through FY 2000 and beyond. A Memorandum of Understanding (MOU) was developed and agreed to by the CFO, CIO, and Chief, AWSS. The MOU identified the responsibilities of each function. The CFO also established an Asset Valuation Project Office to assist in accounting for inventory. The IRS is in the process of developing procedures to accomplish the goals outlined in the MOU.

While the actions taken allowed the IRS to obtain an acceptable P&E valuation for FY 1999 and to lay a foundation for an improved inventory accountability process, the following additional actions are needed:

Responsibility for Asset Management Should Be Assigned to One Senior Executive

Several components of the IRS have responsibility for different aspects of P&E financial reporting and accountability.

Further, accountability for and control over assets is vested throughout the IRS management hierarchy as part of the managers’ operational duties.

Sustaining the P&E figure is one of the goals of IRS financial management and is dependent on the ability of the three functions to coordinate and deliver on their responsibilities. However, these cross-functional responsibilities create a challenge for the IRS in effectively managing its P&E. Neither the CIO nor CFO have authority over the resources provided by other functions to ensure the accuracy of the inventory databases.

The Chief Financial Officer’s Act of 1990 designates agency CFOs as responsible for directing, managing, and providing policy guidance and oversight of agency financial management operations. These responsibilities include the implementation of agency asset management systems. The Department of the Treasury is one of the agencies listed in the Act. As a bureau of the Department, the IRS is charged with ensuring its compliance with the legal and departmental requirements.

Since the existing IRS responsibility for administering the asset management program crosses functional lines, an overall asset manager responsible for accountability and accounting needs to be assigned. The IRS took a positive step in this direction when the IRS Commissioner designated the CIO as the sole official responsible for ownership and control of all ADP property.

An additional designation of a single senior executive with overall responsibility for all P&E should improve the IRS’ ability to sustain the FY 1999 P&E figure and to properly manage and control capital assets.

Recommendation

  1. The Deputy Commissioner Operations should designate a senior executive responsible for overall asset management. This executive should have the authority to resolve conflicts over functional responsibilities.

Management’s Response: Management disagrees with the recommendation. Since the Commissioner gave authority to the Chief Information Officer (CIO) to perform those functions having Servicewide impact and relating to the acquisition of information technology (IT) and the management of information resources, the IRS does not plan to designate another responsible official. However, the IRS will use the new Inventory Technology Asset Management System (ITAMS) for non-IT P&E so that the IRS will have one P&E inventory system. All levels of management will be responsible for assuring that policies for managing the P&E are carried out.

Office of Audit Comment: Although the Commissioner gave the CIO the authority to perform those functions impacting and relating to the acquisition of IT assets and the management of information resources, 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.

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

The GAO raised several concerns over the application of accounting standards and policies followed by the IRS in its FY 1999 IRS Financial Statement Audit. The concerns centered on recurring material weaknesses with the inventory system and the IRS’ inability to control its assets.

The accounting profession defines assets as tangible or intangible items that have probable economic benefits. Capital assets are defined as non-expendable property with a useful life of 2 or more years and an acquisition cost above a pre-determined dollar value threshold. The IRS also has stewardship (accountability) responsibility over Working Capital Fund (WCF) assets, which are defined as goods and services acquired by the Treasury’s WCF to maximize economic benefit. See Appendix IV, Glossary of Terms, for additional definitions.

The IRS needs to address the following issues to resolve existing differences in the interpretation or application of accounting standards and policies:

Re-evaluate financial information used to support any capitalization threshold used in the future

Establishing an appropriate threshold for capitalizing assets has been the subject of considerable debate in the Department of the Treasury, IRS, and GAO. There are differences between the IRS and GAO concerning the appropriateness of the threshold level. The IRS used a capitalization threshold of $50,000 for FY 1998, a level within the provisions of Treasury policy. The GAO’s position was that the threshold may be too high. In its report on the IRS’ FY 1999 financial statements, the GAO stated that the upward adjustment of over $1 billion to the net P&E balance for FY 1999 confirmed its FY 1998 conclusion that P&E were likely materially understated. This understatement was due in part to the threshold allowing millions of dollars of P&E purchases to be expensed rather than capitalized as assets.

Statement of Federal Financial Accounting Standards (SFFAS) No. 6 provides for the accounting treatment of federally owned P&E. However, SFFAS No. 6 does not specify an amount for the capitalization threshold. The SFFAS requires federal entities to consider their own financial and operational conditions in establishing an appropriate threshold. The Department of the Treasury established a departmental policy for capitalization thresholds between $25,000 and $50,000.

In addition to the guidance for acceptable thresholds, the Statement on Auditing Standards No. 47 and Financial Accounting Standards Board Concepts No. 2 establish guidance on materiality. Materiality is stated to be a matter of professional judgment with considerations for quantitative and qualitative analysis.

We contacted several private sector businesses to identify best practices on the establishment and use of thresholds and found frequent use of capitalization thresholds between $500 and $5,000. One factor that should be considered when establishing a threshold is what an outside reader of financial statements reasonably expects a P&E figure to represent, taking into account the definition of capital assets and the concept of materiality.

Hampering the IRS’ ability to effectively analyze its current inventory system is the fact that the system does not capture cost or valuation information for all assets. To do so with its existing systems, the IRS should use a data element (such as a purchase order or procurement award number) common to both the financial and inventory systems so that cost information can be linked to the assets, thus facilitating a capitalization threshold analysis.

In the past, the IRS has analyzed its inventory systems, providing dollar amounts and unit counts of P&E on various threshold levels. As mentioned previously, because the cost information has not always been properly recorded and controls over property are a material weakness, the reliability of the data in these analyses is at risk. Once these issues are corrected, a re-evaluation of the data may suggest an appropriate threshold level that effectively balances sound financial reporting with the costs to maintain associated records.

Determine the appropriateness of actions related to the stewardship of WCF assets

Existing differences between the GAO and IRS on handling WCF assets need to be resolved. The GAO’s position is that the assets should remain in the IRS’ inventory systems. However, the IRS intends to delete the assets from the existing inventory system.

Assets purchased through the WCF are goods and services acquired on behalf of Treasury bureaus to maximize economic benefit. An outside consultant advised the IRS that the Department of the Treasury, not the IRS, owns WCF assets. Accordingly, the consultant recommended the WCF assets be shown in the Departmental Office’s financial statements. The outside consultant also reported that the IRS records WCF assets in its P&E inventory system for safeguarding, tracking, and configuration purposes.

The GAO also proposed that the IRS continue recording the WCF assets in its inventory system. However, according to the MOU, the IRS plans to delete the assets from its inventory system. Deleting the WCF assets from the inventory system will jeopardize the IRS’ compliance with stewardship (accountability) requirements over assets. The IRS should reconsider its position to delete WCF assets until differences with the GAO’s position and generally accepted accounting principles are resolved.

Define a method for treatment of leasehold improvements

The IRS’ treatment of leasehold improvements has been the subject of recent debate. The GAO’s position on leasehold improvements is that capitalization should be based on the total completion of stated improvements. The IRS’ position, which is consistent with the position of its outside consultant, is that capitalization should be based on incremental completion and use.

SFFAS No. 6 states that P&E include not only assets acquired through capital leases but also leasehold improvements. This statement is silent on any further definitions or provisions for the accounting treatment of leasehold improvements.

Accounting Principles Bulletin No. 17 defines leasehold improvements to be capitalized by the lessee in a separate leasehold improvement account. The leasehold improvements are to be amortized over the shorter of the lease term or the life of the property resulting from the improvement, but shall not exceed 40 years.

Furthermore, Treasury Department Policy (TDP) 32-01 states that improvements made to non-government owned buildings, structures, and systems occupied by a bureau as lessee should be capitalized as leasehold improvements. Capitalization should be based on the cost to the bureau and amortized over the period of the lease or the life of the improvements, whichever is less.

Although these pronouncements do not specifically address the issue of when to start amortizing leasehold improvements, the accounting principle of matching expenses with the useful benefits of the improvement suggests that the IRS position may be preferable.

Recommendations

  1. The IRS should ensure that pertinent cost or valuation information is included in the inventory systems, and that this information is re-evaluated to establish any capitalization threshold used in the future. The GAO and the Department of the Treasury should be consulted on any changes to the threshold.
  2. Management’s Response: The IRS has adopted a process to pool assets for valuation purposes. Under the pooling procedure, the cost or value of assets is not recorded in the inventory. All cost information comes from the IRS system of record for financial information, the Automated Financial System. Under the pooling procedure, capitalization thresholds are not applied to pooled assets. The cost of all assets included in the pool would be accumulated. In addition, the IRS did not use capitalization thresholds in FY 1999 or FY 2000. However, when the IRS re-evaluates capitalization thresholds, they will consult with interested stakeholders.

    Office of Audit Comment: 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. IRS management was planning on recording the cost of FY 2000 purchases in the inventory systems, and the capitalization threshold would have been an issue. We also agree that the threshold was not used for FY 1999, as the consultant’s statistical sample was taken without regard to the value of the assets shown on IRS records. As described earlier in this report, this sampling process was used for FY 1999 to identify and value IRS P&E assets. Our recommendation now focuses on the need to re-evaluate capitalization thresholds if the pooling concept is not employed in future attempts to record the value of P&E in financial or inventory management systems. Additionally, we are encouraged by IRS management’s commitment to consult with interested stakeholders on this issue.

  3. The CFO, CIO, and Chief, AWSS, should reconsider their position to delete WCF assets from the current inventory system until the inconsistencies around the treatment of WCF assets are resolved. This would ensure that the IRS is in closer compliance with established accounting standards and policies and its stewardship of assets.
  4. Management’s Response: Management disagrees with the recommendation. In a recent management letter to IRS, the GAO clearly recognized that the Department of the Treasury owns the WCF assets. The accounting standards and policies do not require the IRS to include Treasury owned assets on its property records, and the IRS believes it is appropriate to delete these assets from IRS property records.

    Office of Audit Comment: As our report states, an outside consultant advised the IRS that the Department of the Treasury and not the IRS owns WCF assets, and we agree with the ownership issue as it relates to recognizing the value on Departmental (as opposed to IRS) financial statements. The ownership and financial reporting of WCF assets was also the thrust of the background paper that IRS management provided to us in September 1999. Our concern over WCF assets involves the proper treatment of these assets for inventory tracking (as opposed to valuation) purposes. In its March 1999 report, the outside consultant stated that the WCF assets are entered in the IRS inventory system for safeguarding, tracking, and configuration purposes and recommended that the IRS use a specific code to identify WCF assets. In our opinion, this would enhance IRS’ ability to effectively carry out its stewardship responsibilities, as the IRS has physical custody of these assets.

  5. The IRS should resolve with the GAO the differences over the accounting treatment of leasehold improvements by establishing a position that is consistent with both the pronouncements governing leasehold improvements and the matching principle.
  6. Management’s Response: Management disagrees with this recommendation. The IRS believes that they have established a position that is consistent with the accounting standards. GAO disagrees with that position, but at this point has not given the IRS a basis for changing the IRS’ approach.

    Office of Audit Comment: The intent of our recommendation is to bring the GAO and IRS together to resolve the difference of opinion on the leasehold improvement issue. The fact that GAO disagrees with the IRS position on leasehold improvements is the basis for our recommendation.

    Memorandum of Understanding Commitments Should Be Implemented Timely

    For FY 1999, the GAO concurred with a statistical approach for establishing a baseline value for capital assets. The IRS recognized the need for sustaining this value and developed an MOU to describe interim procedures to be followed by the CFO, CIO, and AWSS organizations. These interim procedures will be used until an integrated system is in service.

    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 properly maintained inventory system, the IRS can achieve success in sustaining the P&E figure. However, it will also require a diligent effort to timely deliver on commitments outlined in the MOU.

    Many of the commitments and planned actions in the MOU are contingent upon additional actions that need to be taken. For example, exception reports will be used to determine equipment purchased, but not recorded; however, report parameters have not yet been defined. Resources were committed to the establishment of the Single Point Inventory Function to account for ADP assets, but resources have not yet been committed to account for new purchases or the recordation of the assets purchased in FY 2000. In addition, the CFO function has created an Asset Valuation Project Office to assist with implementing actions in the MOU. As of March 2000, only one staff position had been dedicated to this office.

    At the end of our fieldwork, nearly half the fiscal year had passed. Accordingly, if the IRS does not implement the MOU commitments, it is at risk of not sustaining the P&E figure established for the FY 1999 financial statements. Also, if the IRS does not identify and accurately account for all assets purchased after September 30, 1999, the IRS will not sustain the FY 1999 P&E figure. As a result, the IRS will have spent $1.5 million for contractors to obtain a P&E figure for FY 1999, and may not be able to efficiently build upon this effort for FY 2000 and beyond.

    Recommendation

  7. The CFO, CIO, and AWSS organizations should immediately commit to the tasks and actions outlined in the MOU and provide sufficient resources to effectively carry out the intent of the MOU.

Management’s Response: Since February 2000, a subcommittee has been working on the property control material weakness. A number of procedures have changed, and as work progressed it became clear to senior officials that the MOU needed to be reworked. A revised MOU was adopted in September 2000.

Office of Audit Comment: Since completion of our fieldwork, the IRS has adopted a pooling concept to account for the value of assets. In their response, IRS management advised that the acquisition costs by year for each selected class (pool) of assets will be accumulated in the accounting records and depreciated over the useful life of the assets. Pooling will allow the IRS to eliminate the differences between values in property (inventory) and accounting records because no or nominal values will be recorded in the property records. In our opinion, this reduces our concern about the ability to build on the efforts expended by the contractors in FY 1999, as the IRS will no longer be entering cost information in its property records and using that information for financial reporting purposes. Prior to adopting the pooling concept, the IRS was planning on entering cost information in the property records as in prior years.

Conclusion

The IRS took steps to obtain a figure acceptable to the GAO for the value of P&E reported on the FY 1999 balance sheet and appropriately recognized the need to sustain the figure for FY 2000 and beyond. The IRS developed an MOU identifying the responsibilities of the CFO, CIO, and Chief, AWSS, and the CFO established an Asset Valuation Project Office as tools to better manage P&E.

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 a P&E inventory system. The IRS needs to ensure that responsibility for asset management is assigned to one senior executive, differences with accounting standards and policies are resolved where necessary, and commitments in the revised MOU are implemented timely.

Appendix I

Detailed Objective, Scope, and Methodology

Our overall objective was to evaluate asset management in the Internal Revenue Service (IRS). In particular, we evaluated IRS plans and procedures to properly account for property and equipment (P&E) and determined whether effective procedures and controls were established to ensure P&E balance sheet figures for Fiscal Year (FY) 1999 financial statements will be sustained through FY 2000 and beyond. We completed the following audit tests:

I. Determined whether the IRS performed readiness checks to properly account for P&E.

    1. Reviewed policies and guidelines governing the proper accounting for P&E in terms of capitalization thresholds, internal use software, bulk purchases, capital leases, and working capital fund purchases.
    2. Identified current industry standards and accepted practices for properly accounting for P&E. Visited private sector firms in the financial and information technology areas as well as comparable federal agencies (through the respective Inspectors General).
    3. Determined whether the IRS is appropriately allocating resources to address General Accounting Office concerns related to properly accounting for P&E.
    4. Determined whether the IRS has established accountability, at both the executive and operating levels, and committed the resources to effectively manage and account for P&E.
    5. Determined whether proper levels of training have been provided to functions and personnel responsible for asset management.
  1. Determined whether procedures and controls were established to ensure FY 1999 P&E balance sheet figures could be sustained through FY 2000.
    1. Reviewed current policies and procedures in place to account for P&E.
    2. Identified current systems and processes that the IRS used to account for P&E and the effect of any planned changes to these existing systems.
    3. Evaluated the IRS methodology for proper valuation of P&E for both existing and new purchases.
    4. Evaluated the appropriateness of the IRS’ accounting for assets from October 1, 1999, through the date of the inventory validation performed by the contractor.
    5. Identified efforts to integrate a system to properly account for P&E from procurement through disposal.

Appendix II

Major Contributors to This Report

Maurice S. Moody, Associate Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)

John R. Wright, Director

Dan Cappiello, Audit Manager

Rick Viscusi, Senior Auditor

Mike Della Ripa, Auditor

Ben Hawkins, Auditor

Frank Maletta, Auditor

Appendix III

Report Distribution List

Deputy Commissioner Operations C:DO

Chief Financial Officer CFO

Chief Information Officer IS

Chief, Agency-Wide Shared Services A

Director for Systems and Accounting Standards CFO:S

Director, Legislative Affairs CL:LA

Chief Counsel CC

National Taxpayer Advocate C:TA

Office of Management Controls CFO:A:M

Director, Office of Program Evaluation and Risk Analysis M:O

Appendix IV

Glossary of Terms

Assets – tangible or intangible items, owned by the federal government, which would have probable economic benefits that can be obtained or controlled by a federal government entity.

Bulk Purchases – include the acquisition of like items over a short period of time that collectively exceed the capitalization threshold of an entity, but the cost of the individual assets is less than the threshold.

Capital Assets – land, structures, equipment, and intellectual property (including software) that are used by the federal government and have an estimated useful life of two or more years.

Capital Leases – leases that transfer substantially all the benefits and risks of ownership to the lessee. If, at its inception, a lease meets one of the following four criteria, it is classified as a capital lease by the lessee:

a) transfers ownership of the property to the lessee by the end of the lease term; b) contains an option to purchase the leased property at a bargain price;

c) lease term is equal to or greater than 75 percent of the economic useful life of the leased property; or

d) present value of rental and other minimum lease payments, excluding that portion of the payments representing executory cost, equals or exceeds 90 percent of the fair value of the leased property.

Capitalization Threshold – Statement of Federal Financial Accounting Standards No. 6, Accounting for Property and Equipment (P&E), does not set a capitalization threshold for P&E. The Federal Accounting Standards Advisory Board noted the diversity of federal entities and determined that thresholds should be established by individual entities rather than centrally.

Internally Developed Software (Internal Use Software) – software developed by personnel employed by the reporting entity. This includes modifications made by entity personnel to purchased or contractor-developed software.

Leasehold Improvements – permanent improvements to leased property that is occupied by a bureau as a lessee.

Property and Equipment – tangible assets that: a) have an estimated useful life of 2 or more years; b) are not intended for sale in the ordinary course of business; and c) are intended to be used or available for use by the entity.

Statement of Federal Financial Accounting Standards No. 6, Accounting for Property and Equipment – establishes standards for most capital assets.

Working Capital Fund (WCF) Assets – goods and services acquired by the WCF for Department of the Treasury bureaus to maximize economic benefits.

Appendix V

Management’s Response to the Draft Report

The response has been removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.