Executive Summary

Objectives and Scope

Background

Results

Detailed Objectives, Scope and Methodology

Major contributors to this Report

Memorandum #1 - Budgeting and Accounting for Year 2000
conversion Efforts

Management Response to Memorandum #1 - Budgeting
and Accounting for Year 2000 conversion Efforts

Management Response to Draft Report – Review of the
Service’s Effectiveness in the Monitoring and Reporting
of Year 2000 Funds

Report Distribution List

The century Date change (cDc) Project Office established a Budget Office to obtain, distribute and manage Year 2000 (Y2K) appropriated funds. The Office’s responsibilities include managing Information Systems (IS) and non-IS funds identified for the cDc project and tracking budgetary information for the cDc Project Office, Internal Revenue Service (IRS) executives, and other internal and external stakeholders. The cDc Budget Office is also responsible for monitoring and reporting the availability and use of congressionally mandated funds; unobligated funds transferred from expired IRS accounts; and, supplemental full time equivalents (FTE) from within the IRS’s operational budget.

The overall objective of our audit was to determine whether the Service was effectively budgeting and accounting for all Y2Kear 2000 conversion efforts.

Overall, the Service has been effective in accounting for Y2K funds. However, more attention is needed in the identification of decreased funding requirements and the recording of payroll expenditures related to Y2K efforts. While the cDc Budget Office uses a Working Budget report and Bi-Weekly Budget meetings to monitor the availability of budgeted Y2K funds and assess additional budget needs, management must become more proactive in identifying unused funds. In addition, management needs to ensure that complete and accurate information is recorded and reported for IS FTEs expended on Y2K efforts.

The cDc Budget Office is not being informed of all decreases in funding requirements resulting from procurement activities, which increase the availability of funds to be allocated to other Y2K projects. Though the identified funding decreases represented minimal amounts, this ineffective process creates the potential that large amounts of available funds will not be identified. If available funds are not identified, the cDc Budget Office may unnecessarily request supplemental funds from the congress or request that funds be reprogrammed from other areas. This could delay the initiation of essential Y2K projects.

Information Systems’ employees are expending time on Y2K efforts but not always recording their time using the Y2K Project cost Accounting Subsystem (PcAS) codes. Further, time charges to the Y2K PcAS codes are not complete, accurate or properly classified. Additionally, time may not be accurately reported for work performed on non-Y2K projects that have Y2K implications. Without complete and accurate information, the Service cannot monitor FTEs expended on Y2K efforts or justify requests for additional funding.

In addition to the issues identified in this report, on June 9, 1998, we issued an Internal Audit Memorandum on June 9, 1998, to advise management of needed improvements in the Service’s monitoring and reporting of Y2K funds. The memorandum is included as Attachment III to this report. Specifically, the Quarterly congressional Report on IRS’s Year 2000 conversion program was not comprehensive or consistent and did not reflect information on the expenditure of funds as required by the conference Report. The conference Report that accompanies the appropriation legislation required the reporting of expenditures related to cDc efforts. The conference Report does not establish mandated activities; however, following its requirements is advisable for sound financial management. Additionally, we noted that several non-Information Systems offices, contributing to the Y2K effort, were not reporting their time using the Y2K PcAS codes.

Management responded positively to these issues. The June 1998 Quarterly Report was modified to incorporate our recommendations and management indicated that steps would be taken to ensure that non-IS cDc work is accurately recorded. Management’s response is included as Attachment IV to this report.

To improve procedures for monitoring available funds and for reporting accurate and complete payroll expenses related to Year 2000 conversion costs, we recommend that Information Systems management:

• Monitor Y2K funds past the commitment level to ensure available funds can be identified for Y2K project needs.
• Ensure that employees are recording their time to the appropriate PcAS codes and that time charges are complete and accurate.

In addition, our June 9, 1998, memorandum recommended that the information in the Quarterly congressional Report comply with the requirements of the conference Report and that the cDc project office address the concerns of those offices not charging Y2K efforts to the Y2K PcAS codes.

Management Response: Management agreed with the facts cited in the report and is taking the appropriate corrective actions. Portions of the management response related to each recommendation are included in the report. Attachment V contains the complete text of management’s response. See Attachment IV

This audit was initiated as part of the Annual overall Internal Audit Plan emphasis area on century date change issues. The overall objective of our audit was to aid Service management in ensuring the effectiveness of budgeting and accounting for Year 2000 (Y2K) conversion efforts.

We conducted this audit at the National Office from March through August 1998. Audit work was performed in accordance with generally accepted government auditing standards. Attachment I contains the detailed objectives and scope of our review. A listing of major contributors to the report is shown in Attachment II.

During the review, we issued an audit memorandum communicating several issues. This audit report presents both a summarization of the memorandum and a presentation of audit results not previously reported. A copy of the memorandum is included in this report as issued can be found in Attachment III and management’s response to the memorandum is presented contained in as Attachment IV.

The IRS has determined that the majority of its computer systems are, or soon will be, at risk because of their potential inability to accurately process date information at the turn of the century. This problem is extremely critical to the Service, as many of its tax processing and collection functions are date driven. Additionally, numerous other Service operations, including law enforcement, personnel, accounting and procurement are also highly date driven.

Public Law 105-61 provided for the Service’s 1998 appropriations and included funding for cDc efforts. An associated conference Report contained the requirements for the availability of cDc funds. The cDc Budget Office, within the Information Systems function, is responsible for monitoring and reporting the availability and use of $170,000,000 in congressionally mandated Y2K funds; $50,000,000 of unobligated funds transferred from expired IRS accounts for fiscal year 1998; and an additional $20,000,000 identified for FTEs (full time equivalents) from within IRS’s operational budget.

The conference Report, though not actual legislation, provides guidance and cites requirements that are designed to ensure adequate financial management of the Y2K funds. Not following the requirements of the conference Report could lead to misunderstandings while communicating with or reporting to congress.

As part of the conference Report, congress directed the Service to provide quarterly reports tracking its progress in meeting the cDc strategy. One of the conference Report requirements was that the reports include the expenditure of funds.

Overall the Service has been effective in accounting for Y2K funds. However, more attention is needed in the identification of decreased funding requirements and the recording of payroll expenditures related to Y2K efforts. The cDc Budget Office uses a Working Budget report and Bi-Weekly Budget meetings to monitor the availability of budgeted Y2K funds and assess additional budget needs. However, management must become more proactive in identifying unused funds to ensure that no Y2K projects are delayed due to a lack of awareness of available funds. In addition, in order to accurately monitor FTEs expended on Y2K efforts and to determine future budget needs, management needs to ensure that complete and accurate information is recorded and reported.

The cDc Budget Office tracks and monitors cDc project requests and subsequent approvals for the use of available funds through the Budget System of Records (BSR). The Working Budget, generated from the BSR, is a constantly changing document that shows the current status of funds availability and use. Initial Budget Item Submissions (BIS) for the fiscal year are usually rough estimates of the requestor’s needs; therefore, throughout the fiscal year, the cDc Budget Office solicits updated cost estimates. Through these updates the cDc Budget Office attempts to have the Working Budget reflect the most current Y2K funding needs. However, we determined that not all information on available funds is being communicated to the cDc Budget Office.

Our review of 18 approved BIS’s showed that, in two instances, the amount of the BIS exceeded the amount of funds actually used and the cDc Budget Office was not informed that the funding requirements changed. The changes in funding requirements were due to a contract being awarded for less than expected and the invoiced amount of equipment purchased being less than the amount requested.

In addition, the cDc Budget Office uses the "FY 1998 Requisitions Report" generated by the Automated Financial System (AFS) to perform a reconciliation of the amounts recorded in the BSR to AFS. We determined that the reconciliation of the BSR was successful in identifying recording discrepancies; however, the reconciliation is performed only to the commitment level without regard to subsequent obligations, which causes the reconciliation to be incomplete.

We also reviewed seven requisitions with closed commitments from the "FY 1998 Requisitions Report" and compared them to the information recorded on the BSR. As a result, we identified three commitments that were correctly closed on AFS with unobligated amounts remaining; however, the BSR still reflected the initial commitment amounts.

The identified funding decreases represented minimal amounts. However, this ineffective monitoring process creates the potential that large amounts of available funds will not be identified for use on other Y2K projects.

Through our discussions with partner organizations, we also determined that some offices may not know the status of their fund utilization, since they do not actively monitor their costs. The points of contact, for 6 of 18 BIS’s reviewed, indicated that they monitored costs using either a spreadsheet or database. Three contacts indicated that they only monitor the obligation internally and the invoices are tracked by Procurement. Two contacts indicated that they do not monitor fund status, rather, Procurement was responsible for tracking the funds. The remaining contacts either had not incurred costs at the time of our discussions, or indicated that they informally monitor costs; however, they did not have any spreadsheets or databases for this purpose. Since some offices do not monitor their costs, they may not be aware of funds availability and, therefore, are not able to inform the cDc Budget Office when funds become available.

The cDc Budget Office is not able to maintain the current status of Y2K fund availability when field and customer offices do not inform them of changes in funding requirements. Further, since the cDc Budget Office only monitors funds to the commitment level, unless informed, they will not be aware of the funds that become available. If available funds are not identified, the cDc Budget Office may unnecessarily request funds from congress or request that funds be reprogrammed from other areas. This could delay the initiation of essential Y2K projects.

1. The cDc Budget Office needs to develop a means to monitor the status of funds past the commitment level to ensure that unused previously committed funds are used for Y2K project needs. This could be achieved by the cDc Budget Office reconciling to obligation and expenditure data generated from AFS.

Management Response: cDc Project Office management is working with Procurement to obtain Record Tracking System (RTS) reports which will contain information regarding the processing status of Y2K requisitions up through the contract award step, including what becomes the AFS obligation amount. These reports will be produced weekly and allow for much more frequent and timely reconciliations with the cDc Working Budget.

 

2. The BIS points of contact need to develop a way to monitor the obligation and expenditure of funds to ensure the cDc Budget Office is informed timely of all funding changes. in a timely manner.

Management Response: cDc Project Office management believes that obtaining information directly from RTS/AFS to monitor the changes in obligations is most efficient and more timely than tasking the BIS point of contact/initiator. Therefore, management will rely on the corrective action taken for recommendation number one.

The Service developed the Project cost Accounting Subsystem (PcAS) to record subproject allocations and capture costs pertaining to IRS activities. Y2K resource partners are responsible for ensuring that costs are being recorded in the accounting system completely and accurately, and for continually evaluating the resources allotted for their projects. For fiscal year 1998, four PcAS codes were established to assist the Service in monitoring Y2K costs based on congressional reporting categories.

We reviewed AFS reports showing National Office Information Systems’ employee time charges to the Y2K PcAS codes. Our analyses showed that employees’ time charges to the Y2K PcAS codes are not complete, accurate nor properly classified.

Time reported to the Y2K PcAS codes is not complete. We reviewed the time charges of 206 employees who were identified as working on Y2K efforts. Our analysis of AFS reports showed the following:

• 38 (18%) employees did not appear on the reports, and
• 30 (15%) employees had 10% or less of their time charged to Y2K PcAS codes.

Time reported to the Y2K PcAS codes is not accurate. From a separate sample, we analyzed the responses of 47 (51 confirmations sent) employees we contacted to confirm the time charges that appeared on the AFS payroll reports. Our analysis showed the following:

• 14 (30%) had time charges on the AFS reports that differed from their estimates of time spent by more than 30%, and

12 (26%) did not show any time charges on the AFS reports for dates they specified as working on Y2K activities.

Also, some employees commented that they worked on projects that are not specifically Y2K projects, but have aspects that relate to Y2K efforts. For example, in 4 (9%) responses, employees stated that although the project they worked on was not a Y2K effort, their work had Y2K implications and they did not accurately allocate their time to account for their Y2K activities.

Time reported to the Y2K PcAS codes is not properly classified. In 13 (28%) responses, employees stated they performed work related to certification efforts. However, all of their time was reported under the conversion & Testing/Telecommunications PcAS code.

During our assessment, we also identified that significant time adjustments (160 hours or more, either added or removed) were made for 38 employees represented in our samples. In most instances, we could not determine whether a corresponding adjustment was made to another PcAS code to offset the adjustments. This need and frequency for adjusting recorded payroll entries further suggests that employees’ time expended on Y2K efforts is not being accurately or completely recorded.

As a result of our June 9, 1998, memorandum, the cDc Project Office is re-instituting its efforts to pro-actively identify and monitor Y2K time charges throughout the IRS. As part of this effort, the cDc Project Office holds weekly meetings with field and customer partners to identify under-reporting. However, this process will only serve to identify discrepancies after the fact and should only be relied upon as a compensating control to ensure that accurate and complete time charges are being recorded. By not recording all Y2K conversion expenditures, the Service is unable to monitor and report accurate cost figures for the Y2K conversion efforts.

1. Information Systems should emphasize the importance of recording time to the correct PcAS codes and develop procedures to ensure that employees are charging their time accurately, completely and to the appropriate PcAS codes.

Management Response: cDc Project Office is in the process of expanding their its reports to capture and track reported verses anticipated FTE use, which will provide the opportunity for their partners to correct their reporting habits up front. Management has reviewed the expanded reports process and has determined that it is a reasonable attempt to ensure accurate time reporting, and will continue to apply this approach throughout Fiscal Year 1999.

In addition to the issues identified in this report, we issued an Audit Internal Memorandum on June 9, 1998, to advise management of needed improvements in the Service’s monitoring and reporting of Y2K funds. The memorandum is included as Attachment III to this report. Management responded positively to the issues reported in the memorandum and subsequent management actions are being taken to implement our recommendations. In our memorandum we identified the following areas where we believe the Service could improve the monitoring and reporting of Y2K conversion efforts.

cost information presented in the Quarterly congressional Report on IRS’ Year 2000 conversion program was not comprehensive and consistent. The Quarterly congressional Report on IRS’s Year 2000 conversion program does not reflect information on expenditure of funds as required by the conference Report. Also, the columns included in the report do not contain information consistent with their respective titles.

Without a coordinated, comprehensive and consistent disclosure of information in the Quarterly congressional Report, the Service cannot ensure an effective accounting and control of appropriated funds, nor meet conference Report requirements.

Full time equivalents of non-Information Systems organizations used for Year 2000 conversion efforts are not always being charged to the Year 2000 project cost accounting codes. The Service has issued numerous memorandums emphasizing the importance of reporting time to the correct PcAS code. However, several non-Information System offices, contributing to the Y2K effort, were identified as not charging time to the Y2K PcAS code.

By not capturing all Y2K conversion expenditures, the Service will be unable to maintain accurate cost figures for the Y2K conversion efforts.

The overall objective of this audit was to determine the effectiveness of the Service’s budgeting and accounting for Y2K conversion efforts and that funds were adequately monitored and accurately reported. Specifically, we:

1. Determined how Y2K budget needs were identified and whether sufficient
   funds were anticipated to be received.
2. Determined if budgeted funds were allocated only to Y2K projects and if the allocation was based upon the critical need of the projects.
3. Reviewed a judgmental sample of 18 Budget Item Submissions and determined how the cost estimates were developed.

2. Determined the cDc Budget Office’s role in monitoring fiscal year 1998 funds (labor and non-labor) and the accuracy and usefulness of actual and projected expenditures reported to external oversight organizations.  

1. Determined the levels (i.e. commitment, obligation, expenditure) at which the cDc Budget Office monitors funds.
2. Reviewed internal reports to determine how funds are monitored.
3. Determined if reports, submitted to external oversight organizations, were consistent with recorded financial events and provided information that is valuable to those organizations.

2. Analyzed fiscal year 1998 Y2K full time equivalent (FTE) allotments and determined whether FTEs were being recorded and reported accurately.  

1. Interviewed cDc Budget Office and cFO personnel.
2. Analyzed the cDc Budget Office reports used to track FTEs.
3. Determined the accuracy and completeness of 253 employees’ time charges to the Y2K PcAS codes. Names of 206 employees were obtained from BIS points of contact and compared to the AFS payroll reports. An additional sample of 51 employees was judgmentally selected from the AFS payroll reports and sent confirmations, of which 47 responses were received.