TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
The Information Systems Organization Can Improve Processes to Manage Its Budget Appropriation
Reference No. 2001-20-062
The budget cycle at the Internal Revenue Service (IRS) begins with estimates of funds needed to operate its programs in a designated fiscal year. The IRS presents these estimates to the Department of the Treasury, the Office of Management and Budget (OMB), and the Congress. The budget cycle continues with processes to allocate funds to functions, organizations, and programs and to track and report actual expenditures.
The Information Systems (IS) organization has an Office of Financial Planning and Budget (FP&B) that works with the Chief Financial Officer (CFO) and the Financial Plan Managers from IS’ divisions to manage its budget appropriation. The FP&B office’s duties include assisting the CFO in formulating the IS budget, developing the IS financial plan, and monitoring the execution of the IS budget. The IS budget appropriations for Fiscal Years (FY) 2000 and 2001 are $1.45 billion and $1.58 billion, respectively.
The objective of this audit was to determine whether the IS organization’s FP&B office has sufficient controls to provide for adequate budget development, program funding, and accurate accounting of IS operations and resources. We analyzed the processes, controls, and related record reviews used in the formulation, execution, and monitoring activities for the FY 2000 and 2001 IS budgets.
The FP&B office is currently part of the IS Office of Information Resources Management and is scheduled to complete its transfer to the IS Office of Strategic Planning and Client Services early in Calendar Year 2001. This change is intended to increase the FP&B office’s independence within IS and mirrors the structure of the CFO’s organization. The transfer will also facilitate coordination of strategic planning and support of IS operations with its financial planning and budgeting activities.
The FP&B office’s current processes and controls are not providing adequate analyses of incoming budget appropriation estimates, approval and processing of financial plan changes, and review and reporting of IS’ spending throughout the fiscal year.
IS needed to shift significant amounts of funds within its appropriation ($360 million in FY 2000, almost 1 dollar of every 4 dollars budgeted) and request an additional $40 million from another appropriation to meet its budget needs. While much of the fund shifting and transfer was due to the transition to a new IS organizational structure that began during the year, adjustments were also needed because of changes in program direction or divisional priorities, and revised or inaccurate plans. Improved controls for budget monitoring and review will help IS assess its future budget requirements and improve the efficiency and effectiveness of its budget execution.
Without adequate controls over IS budget appropriation formulation, execution, and review, the IRS does not have assurance that IS program initiatives are properly prioritized for approval and funding. In addition, records of prior year budget accomplishments cannot be relied upon and used to formulate subsequent year budgets.
Problems Identified During Budget Estimate Reviews Were Not Formally Documented and Reported
The FP&B office’s Formulation Section does not formally document questioned data or discrepancies identified in the budget estimates received from IS divisions. It does not have any written guidelines or operating procedures documenting Formulation Section staff duties and responsibilities for soliciting, receiving, reviewing, and reporting IS budget estimates submitted from IS and IRS operations. Although Formulation Section staff stated they communicate with IS and IRS budget analysts to resolve problems identified, they do not maintain contact logs or reports to support the identification and resolution of these problems.
Without appropriate and consistent review and reporting processes, inaccurate IS budget estimates may not be identified. Additionally, without documenting, reporting and analyzing problems identified in budget estimate reviews, the Formulation Section cannot provide budget analysts direction to improve future year estimates.
Financial Plan Changes Were Processed Without Supporting Documentation or Managerial Approval
Financial Plan Changes (FPC) are made to establish fund balances for program spending and to address budget shortages and surpluses that occur during the fiscal year due to changes in program direction, changes in divisional priorities, or adjustments to plans. We reviewed 13 FPCs involving a total of $20 million from the IS financial plan and found preparation and processing problems in all 13 FPCs.
Although the FP&B office has guidelines to ensure appropriate FPC processing, the Execution Section did not ensure the FPCs were appropriate and justified. The FP&B Chief stated that IS executives directed fund realignments requiring FPCs, but the Chief did not require formal documentation or approval to process FPCs resulting from the directed fund realignments.
Adequate internal controls are necessary to ensure FPC requests are properly documented, approved, and reviewed to prevent misapplication of funds. The absence of controls may also affect the accuracy of the amounts budgeted for program initiatives and can affect decisions involving the development of future year budget estimates.
The Spending Review Process Could Be Improved for Planning and Monitoring Budget Appropriations
The OMB requires that agencies review financial plan spending to assess the execution of budget plans. The review results enable the agencies to make funding adjustments when necessary. The FP&B Analysis Section reviewed IS spending throughout FY 2000 and reported its review results in four briefing documents in March, April, May, and June 2000, highlighting potential spending problems to IS executives. Also, the FP&B Chief presented information on spending plan status at monthly IS executive meetings. However, there was no indication that the spending concerns highlighted in the four briefings and monthly IS executive meetings were brought to the attention of the responsible budget analysts to timely correct imbalances in IS spending initiatives.
Analysis of the FY 2000 IS appropriation showed that, as of August 2000, financial plan balances varied from plans by as much as $216 million, or approximately 15 percent of the $1.45 billion FY 2000 IS budget. The FP&B staff did not contact budget analysts about correcting accumulated financial plan imbalances until the end of FY 2000.
The CFO is required to report financial plan balances to the IRS, Treasury, and OMB monthly. These entities rely on accurate financial plan balances for use in planning and monitoring budget appropriations. The absence of sufficient spending plan reviews and timely reporting of review results precludes the meaningful analysis of current year budget status and future year planning.
Summary of Recommendations
To ensure that the IS budget is appropriately accounted for and managed, the Chief Information Officer (CIO) needs to develop and implement formal processes in the FP&B office to: 1) review and report problems and discrepancies with IS budget estimate submissions to IS and IRS operations budget analysts; 2) allow only FPCs that are clearly documented, appropriately reviewed, and approved to be processed; and 3) conduct the FP&B office spending reviews, timely correct imbalances, and report financial plan status to IS and IRS operations budget analysts.
These processes should include feedback developed by the FP&B office to Financial Plan Managers about trends in problems with initiative budget estimates, FPC requests, and initiative spending reviews. This feedback can serve as a means to improve the effectiveness and efficiency of future year budget formulation and program management.
Management’s Response: Management agreed with the audit recommendations and believes it is critical for the IS organization to implement processes to effectively manage the IS appropriation under its restructured Office of Strategic Planning and Client Services. Specifically, the CIO is working to develop and/or improve processes for budget estimation, financial plan changes, and appropriation spending reviews. Management’s complete response to the draft report is included as Appendix IV.