UNITED STATES GOVERNMENT
National Labor Relations Board
Office of Inspector General
August 21, 2003
To: Richard A. Siegel, Associate General Counsel
Karl E. Rohrbaugh, Finance Branch Chief
From: Jane E. Altenhofen
Inspector General
Subject: Backpay Financial Management and Reporting Requirements (OIG-INS-27-03-04)
The National Labor Relations Board (NLRB or Agency) Office of Inspector General retained Cotton & Company LLP to review financial management and reporting requirements for Backpay funds and whether systems maintained at Headquarters and Regional Offices can generate timely and accurate information to make necessary accounting entries. This report presents the results of the evaluation and is organized in the following sections:
EXECUTIVE SUMMARY
NLRB currently uses a Deposit Fund to record Backpay transactions that are deposited with the United States (U.S.) Treasury or invested in Treasury securities. Deposit Funds are accounts outside the budget that record amounts that the Government (a) holds temporarily until ownership is determined or (b) holds as an agent for others. We considered various accounting standards, including standards for dedicated collections, trust funds, special funds, and fiduciary transactions1. We concluded that Backpay transactions accounted for in the deposit fund do not precisely align with any of the current or proposed accounting standards. While some government activities accounted for in some deposit funds may meet the criteria for fiduciary activities specified in the exposure draft, Backpay does not fit into the existing definition according to a legal analysis performed by the Division of Operations-Management (Operations-Management) and Special Litigation Branch (Special Litigation).
In the absence of clear accounting standards for deposit funds, we gave careful consideration to the accounting and reporting requirements proposed in the exposure draft covering fiduciary activities. We performed a limited review of the legal analysis prepared by Special Litigation and acknowledge their legal opinion that Backpay is not a fiduciary activity. Backpay transactions do have some important similarities, however, to the categories of fiduciary assets discussed in the exposure draft. The exposure draft requires fiduciary assets to be recognized as increases in assets and liabilities, without recognition of revenue. This accounting is similar to the existing United States Standard General Ledger (USSGL) accounting for deposit funds.
We concluded that NLRB is required to provide footnote disclosure only, related to Backpay funds that are not deposited with the United States Treasury; and is required to provide footnote disclosure and report on its Balance Sheet, non-entity assets and liabilities associated with Backpay funds that are deposited with the US Treasury or invested in Treasury securities. This report contains twelve suggestions for the Finance Branch (Finance) Chief and the Operations-Management Associate General Counsel to develop and implement suitable accounting policies and procedures to enable NLRB to prepare required footnote disclosures and properly report Backpay transactions (when required) on its Balance Sheet.
We also determined that NLRB should recognize an accounts receivable prior to receipt of Backpay cash, if receipt of such cash is pending at the balance sheet cutoff date. Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 1, Paragraph 123, recommends that a receivable be recognized when a claim to cash or other assets is established based on the government's legal authority to levy and collect. Such authority exists where there is a court judgment enforcing a Board order liquidating Backpay or other monetary remedy, or where there is a court order requiring the immediate payment of money pursuant to sections 10(e) or 10(j) of the National Labor Relations Act (NLRA), the Federal Debt Collection Procedures Act, or other legal authority.
NLRB's accounting procedures and business processes associated with collecting, disbursing, and handling Backpay will require certain modifications and enhancements to meet federal financial accounting and reporting standards. The extent of these changes depends on the nature of Backpay transactions. The systems used to record and process Backpay transactions by Finance have the capability to properly record Backpay transactions, and management maintains that it has developed and implemented reconciliation and verification controls. The systems, however, do not technically comply with Office of Management and Budget (OMB) Circular A-127, Financial Management Systems.
The Backpay system and Federal Financial System (FFS) do not have an automated interface for electronically transferring detailed or summary information. Additionally, the Backpay database currently does not record financial events consistent with accounting transaction definitions and processing rules and in sufficient detail to support compliance with USSGL at the transactional level. This report contains two suggestions related to seeking long-term solutions to ensure that NLRB's financial management system is capable of providing timely and accurate financial data necessary to comply with requirements for financial statements prepared in accordance with the form and content prescribed by OMB and other reporting requirements prescribed by the Treasury Department.
A draft of the inspection report was sent to the Operations-Management Associate General Counsel and Finance Chief on August 7, 2003. We met with office representatives on August 19 and incorporated their comments to clarify sections of the report. Management did not submit comments on the conclusions and suggestions, as they have not completed their evaluation of the nature of the Backpay fund and accounting standards.
BACKGROUND
NLRB, an independent federal agency, administers the principal labor-relations law of the United States. The NLRA is generally applied to all enterprises engaged in interstate commerce, including the United States Postal Service, but excludes some other governmental entities, as well as the railroad and airline industries. The five-member Board, appointed by the President, primarily acts as a quasi-judicial body in deciding cases on formal records. The General Counsel, also appointed by the President, is responsible for investigating and prosecuting formal complaints in cases leading to Board decisions. The General Counsel has general supervision of NLRB's nationwide network of offices.
In Fiscal Year (FY) 2003, NLRB was authorized 1,905 full-time equivalents and received an appropriation of $237,428,617, net of a 0.65-percent reduction. Approximately 30,000 unfair labor practice cases and 5,000 representation cases were filed with NLRB in FY 2002.
With the passage of the Accountability of Tax Dollars Act of 2002, Public Law 107-289, the Chief Financial Officers Act of 1990 was expanded to include all executive agencies with appropriations exceeding $25 million. As a result, NLRB is required to produce audited financial statements beginning in FY 2002. OMB granted a general waiver to all Federal agencies covered by the Act for FY 2002, and granted NLRB an additional waiver for FY 2003. Thus, NLRB's first audited financial statements will be required for the FY ending September 30, 2004. To prepare for this audit, NLRB contracted with Cotton & Company to review the financial management and reporting requirements for Backpay funds.
Backpay is a "typical" Board remedy whenever a NLRA violation results in a loss of employment or earnings. Remedies may include amounts necessary to make employees whole for loss of earnings as Backpay, or reimbursement of initiation fees, union dues, or other monetary losses caused by the unfair labor practices. Board orders may also require the payments of amounts due to labor organizations and/or health and welfare, pensions, or other funds. Additionally, court orders may require respondents to make payments for attorneys' fees, costs, or contempt fines. For this report, we refer to all such remedies as "Backpay". Respondents are responsible for making appropriate withholding of Federal Insurance Contribution Act (FICA) amounts, and federal and state income taxes from the wage portion of all Backpay remedies. Backpay transactions can be handled in a variety of ways; we have classified them into four categories for purposes of discussion in this report.
Category A: Respondent, typically an employer, disburses checks payable to discriminatees, directly to the discriminatees, upon conditions prescribed by NLRB Regional Offices. In such cases, the respondent must provide the Regional Office with receipts or other suitable evidence of payment.
Category B: Respondent delivers checks, payable to individual discriminatees, to a Regional Office. The Regional Office then distributes the checks to the discriminatees.
Category C: Respondent submits a check payable to NLRB to the Regional Office. The check is forwarded to Finance and deposited into a Deposit Fund escrow account (Fund Symbol 63X6154). Upon notification from Regional Offices, Finance disburses Backpay awards to individual discriminatees from the Deposit Fund.
NLRB policy states that escrow accounts are appropriate when:
Sometimes it is appropriate for NLRB to invest Backpay funds in Treasury securities rather than maintain the monies in its Fund Balance with Treasury (FBWT). Interest earned on these investments is credited and distributed to the discriminatees.
Category D: NLRB collects court-awarded contempt fines, attorneys' fees, and court costs. Finance deposits these funds in a Miscellaneous Receipts Fund (Fund Symbol 633220). NLRB may not use these funds and remits them to the U.S. Treasury.
OBJECTIVES, SCOPE, AND METHODOLOGY
The objectives of this review are to determine whether:
1. Backpay should be recorded in the Agency's financial system and in what manner;
2. Backpay should be recorded in the Agency's financial statements and in what manner; and
3. Systems maintained at Headquarters and in the Regional Offices can generate timely, accurate information to make necessary accounting entries.
We used the following criteria and guidance in conducting our review:
We conducted interviews with NLRB management and personnel in Finance and Operations-Management. We reviewed current accounting and reporting procedures used by Finance to record the receipt and disbursement of Backpay funds. We also obtained an understanding of the Regional Offices' Backpay settlement policies and procedures.
Additionally, we consulted with FASAB to obtain clarification on its April 2003, exposure draft, Accounting for Fiduciary Activities. This exposure draft and FASAB's responses, while meaningful and insightful, are not final at this time.
We considered various accounting categories addressed within the existing and proposed accounting concepts and standards, including budget expenditure and receipt accounts. In particular, we reviewed discussions on Dedicated Collections (SFFAS No. 7, Other Financing Sources, Paragraphs 83, 84 and 87) in which a reporting entity is responsible for funds financed with dedicated collections that are held for later use to accomplish the fund's purpose. Current standards state that funds financed with dedicated collections include all funds within the budget classified as "trust funds", "special funds" when similar in nature to trust funds, and those funds that are fiduciary in nature (both inside and outside the budget)2. Trust and special funds are budget expenditure and receipt accounts that are assigned by OMB under specific circumstances. Backpay has not been treated as Federal funds within the budget and has not been assigned a trust or special fund symbol by OMB.
Backpay collections deposited with Treasury are currently accounted for in a deposit fund, which is a Treasury account rather than a budget account (SFFAC No. 2, Budget Perspective, Paragraph 14). Deposit funds are accounts outside the budget that record amounts that the Government (a) holds temporarily until ownership is determined or (b) holds as an agent for others (SFFAS No. 7, Transactions Not Recognized as Revenues, Gains, or Other Financing Sources, Paragraph 370). While some activities accounted for in deposit funds may meet the fiduciary activities criteria specified in the exposure draft, Backpay does not fit into the existing definition of Fiduciary activities according to a legal analysis performed by Special Litigation. Special Litigation concluded that a fiduciary relationship does not exist between NLRB and the discriminatees and the discriminatees do not have an ownership interest in Backpay awards prior to their receipt of Backpay funds.
In the absence of clear guidance for deposit funds, and because backpay is not revenue, we gave careful consideration to the accounting and reporting requirements proposed in the exposure draft covering fiduciary activities. Although we acknowledged the legal opinion that Backpay is not a fiduciary activity, NLRB's Backpay transactions do have some important similarities to the categories of fiduciary assets discussed in the exposure draft. This approach is the most reasonable accounting treatment in light of NLRB's non-fiduciary responsibilities for Backpay.
The review was conducted in accordance with the American Institute of Certified Public Accountant (AICPA) Standards. We followed the AICPA Statement on Standards for Consulting Services.
CONCLUSIONS
Below we present our conclusions related to the four Backpay categories described above. Our conclusions describe NLRB's current accounting practice, FASAB guidance, and suggestions for NLRB's consideration.
Category A: Respondent disburses checks payable to discriminatees, directly to the discriminatees, upon conditions prescribed by NLRB Regional Offices. In such cases, the respondent must provide the Regional Office with receipts or other suitable evidence of payment.
NLRB currently tracks the status of all cases in its Case Activity Tracking System (CATS), which includes memorandum notes describing the agreed-upon settlement amounts. This information is not compiled or summarized for financial accounting or reporting purposes.
Criteria: The exposure draft (Accounting and Reporting for Fiduciary Activities, Paragraph 16) discusses three methods used to account for fiduciary assets; all three methods describe fiduciary assets "held by a component entity" (ie: NLRB). Category A Backpay funds are not held by NLRB or accounted for in a Budget receipt or expenditure account or a Treasury deposit account. In the absence of clear accounting guidance, we relied on SFFAS No. 1. The question to be asked is whether NLRB need establish an accounts receivable for such funds if the respondent is in noncompliance with NLRB stipulations. SFFAS No.1, states that a receivable should be recognized when a federal entity establishes a claim to cash or other assets against other entities, either based on legal provisions, such as payment due date, or goods or services provided. In addition, an allowance for estimated uncollectible amounts should be recognized to reduce the gross amount of receivables to the net realizable value. (SFFAS No. 1, Entity Assets vs. Non-Entity Assets, Paragraphs 25 and 26 and Accounts Receivable, Paragraphs 41 and 45)
We conclude that a decision to record an account receivable will need to be made on a case-by-case basis. If a judgment of other court order requires the payment of a liquidated amount of money and the respondent does not comply, the NLRB should recognize an accounts receivable (net of an allowance for uncollectible amount) in its financial statements. It should be classified as a non-entity asset (not available to the entity) and an equal amount should be recognized as a liability. We do not think that revenue or expense transactions should be recorded for Backpay; accordingly, we suggest that NLRB only recognize an asset and equal liability on its financial statements for cases in which an account receivable is established. NLRB should disclose in its footnotes, the major categories of receivables, by amount and type, the methodology used to estimate the allowance for uncollectible amounts, and the allowance amount.
Suggestions: We suggest that Finance Chief, in conjunction with the Operations-Management Associate General Counsel:
1. Develop policies and procedures to identify and account for valid receivables (ie: monthly or quarterly depending on frequency of financial statements), and establish accounting guidelines for: recording such receivables (and related liabilities) in FFS; reporting them as non-entity assets on the balance sheet; establishing an allowance for non-collectable receivables, if appropriate; and providing the required footnote disclosures.
Category B: Respondent delivers checks, payable to individual discriminatees, to a Regional Office. The Regional Office then distributes the checks to the discriminatees.
The Regional Office currently accepts and distributes the checks. Regional Offices record the gross settlement amount in CATS; the individual check amounts (data) are not entered. Although Regional Offices can record the detailed check amounts, CATS currently does not have the capability to perform mathematical calculations. The check data also is not summarized and sent to Finance for accounting or reporting purposes. We were told that each Regional Office maintains its own procedures for verifying amounts paid to discriminatees and securing the checks before distribution.
Criteria: The existing SFFAS do not explicitly address Category B transactions. SFFAS No. 1, states that cash consists of readily negotiable instruments such as checks and bank drafts on hand or in transit for deposit (SFFAS No. 1, Cash, Paragraph 27). The checks received by NLRB in Category B are made payable to discriminatees and are not readily negotiable by NLRB.
In the absence of clear guidance for Category B type assets, we looked to FASAB's exposure draft on Fiduciary Activity because it does discuss a similar situation with respect to fiduciary assets. The exposure draft discusses three methods to account for fiduciary assets. We conclude the Category B Backpay transactions are similar to FASAB's third example: Fiduciary Assets Held by a Component Entity of the Federal Government, outside the Treasury, in the Name of the Non-Federal Party, under the Supervision of the Federal Component Entity (Exposure Draft, Paragraphs 30 and 31).
The exposure draft states that such cash or other assets should not be recognized as assets or liabilities in the component entity's financial statements, although footnote disclosure is required. Records need be maintained for these assets, consistent with the legal duties applicable to the fiduciary relationship, for the purposes of disclosure required by Paragraphs 32-35 and any other purposes the entity deems necessary. Further, minimum disclosure requirements include:
Footnote disclosure requirements will impose some changes on NLRB and, in particular, the Regional Offices. NLRB does not have a uniform policy or procedures for accumulating, summarizing or recording Category B Backpay transactions, either within or outside of its financial management system.
OMB Circular A-127, Section 7, Financial Management System Requirements, states, in part:
Agency financial management systems shall maintain accounting data to permit reporting in accordance with accounting standards recommended FASAB and issued by the Director of OMB and shall maintain data in accordance with the applicable accounting standards used by the agency for preparation of its financial statements. Additionally, agency financial management systems shall be able to provide financial information in a timely and useful fashion to ... (5) comply with internal and external reporting requirements, including, as necessary, the requirements for financial statements prepared in accordance with the form and content prescribed by OMB and reporting requirements prescribed by Treasury ....
Suggestions: We suggest that Finance Chief, in conjunction with the Operations-Management Associate General Counsel:
2. Develop appropriate language for the required footnote disclosure, including the applicable legal authority and responsibilities of NLRB, the objective of the Backpay activity, and the general description of the beneficial owners or class of owners.
3. Develop policies and procedures to identify, accumulate, summarize and record data necessary to prepare the required footnote disclosure, including the summary of changes in Backpay assets and the summary of Backpay assets.
4. Seek long-term solutions to record, maintain and account for, within NLRB's financial management system, the financial data necessary to permit the required footnote disclosures. Such solutions might entail use of memorandum general ledger accounts.
Category C: Respondent submits a check payable to NLRB, to the Regional Office. NLRB Finance deposits the check into a Deposit Fund escrow account (Fund Symbol 63X6154). Upon notification from Regional Offices, Finance disburses backpay awards to individual discriminatees from the Deposit Fund.
NLRB currently processes Category C Backpay transactions in two separate systems: FFS and the Backpay Database (in Access). FFS is NLRB's accounting system and system of record for recording receipts and disbursements of appropriated and non-appropriated funds. NLRB's financial statements are prepared from transactions recorded in FFS.
For this evaluation, we considered the Backpay Database a subsidiary system supporting the summary receipts and disbursements reported in FFS. NLRB uses the Backpay Database to record detailed information provided by Regional Offices, reflecting deposits from respondents and disbursements to discriminatees. It creates a payment file in the Backpay Database that is transmitted to Treasury for disbursements to discriminatees. Finance summarizes the detailed deposit and disbursement transactions from the Backpay Database and records the summary transactions in FFS using manual journal vouchers.
FFS and the Backpay Database do not electronically interface and, therefore, are not compliant with OMB Circular A-127, Section 6, Policy, and Section 7 e, Financial Reporting. Management has established manual reconciliation and verification procedures to ensure the accuracy and completeness of information contained in each system (See Other Matter to Report).
The accounting entries currently used to record the receipts and disbursements are a debit to Fund Balance With Treasury (FBWT) and a credit to a liability, reflecting the liability for the pending disbursement to discriminatees. In addition, Finance may invest the funds in Treasury marketable securities, if requested by the Regional Office. Interest earned on marketable securities is prorated and disbursed to the discriminatees.
Criteria: We conclude the Category C Backpay transactions fall under the exposure draft's first accounting method: Fiduciary Assets Held by a Component Entity of the Federal Government, in the Treasury, in the Name of the Federal Component (Exposure Draft, Paragraphs 18 through 23). The exposure draft states that fiduciary cash held in the Treasury should be recognized as FBWT and an equal and offsetting liability should be recognized. The liability must be titled to indicate that it is owed to a non-Federal entity.
The asset and liability should be reported on the face of NLRB's balance sheet; the fiduciary asset (FBWT) should be reported as a non-entity asset. Disbursements from FBWT to purchase investments should be recognized as an exchange of assets (decrease FBWT and increase Investments in Securities). Investments should also be reported on the face of the balance sheet as non-entity assets. Investment income and/or losses should be reported by increases or decreases in assets, respectively, and offsetting increases or decreases in liabilities, respectively.
The exposure draft requires footnote disclosure for Category C Backpay transactions identical to the disclosure requirements described above. Additional disclosures are necessary related to Investments, in accordance with OMB Bulletin 01-09 and SFFAS No.1, Investments in Treasury Securities, Paragraph 72.
Finally, the exposure draft clearly states that Statements of Custodial Activity are not required for fiduciary activity (Exposure Draft, Paragraph 36). In addition, the exposure draft also requires the collection or receipt of fiduciary assets to be recognized as an increase in assets and liabilities rather than revenue, as the collection or receipt of fiduciary assets do not meet the definition of revenue or other financing sources contained in current FASAB standards (Exposure Draft, Paragraph 78). Therefore, we conclude that NLRB will not be required to prepare a Statement of Net Cost and/or Statement of Changes in Net Position related to Backpay transactions. Finally, we conclude that Backpay transactions do not generate budgetary resources and thus NLRB will not be required to prepare a Statement of Budgetary Resources and/or Statement of Financing related to Backpay transactions.
It does not appear that the USSGL currently contains pro-forma accounting entries applicable for fiduciary transactions. The exposure draft provides some guidance although it appears ambiguous and incomplete.
In addition, the exposure draft does not address circumstances where agencies may need to recognize an account receivable prior to receipt of fiduciary cash. Per SFFAS No.1, Paragraph 123, FASAB recommends that a receivable be recognized when a claim to cash or other assets is established based either on goods or services provided or the government's legal authority to levy and collect. This authority exists for a formal settlement subject to a court judgment enforcing a Board order, as well as judgments obtained independently under sections 10(e) or 10(j) of the National Labor Relations Act or obtained independently under the Federal Debt Collection Procedures Act.
Suggestions: We suggest that the Finance Chief:
5. Revise accounting policies and procedures to ensure that all Category C Backpay transactions are properly recorded in FFS, in accordance with guidelines established in the exposure draft and/or provided by Treasury in the USSGL.
6. Revise financial reporting procedures and guidelines to ensure that Category C Backpay transactions (both FBWT and Investments) are recorded on the balance sheet as non-entity assets and that the related liability is titled to indicate that it is owed to a non-Federal entity. This may entail the use of sub-accounts to the USSGL account structure.
7. Develop, in conjunction with the Associate General Counsel, Operations-Management, policies and procedures to identify and account for valid receivables (ie: monthly or quarterly depending on frequency of financial statements). Establish accounting guidelines for: recording such receivables (and related liabilities) in FFS; reporting them as non-entity assets on the balance sheet; establishing an allowance for non-collectable receivables, if appropriate, and providing the required footnote disclosures.
8. Develop, in conjunction with the Associate General Counsel, Operations-Management, policies and procedures to identify, accumulate, summarize and record the data necessary to prepare the required footnote disclosure, including the summary of changes in Backpay activities and the summary of Backpay assets, prescribed in the FASAB exposure draft.
9. Seek long-term solutions to ensure that the Backpay Database and FFS are compliant with requirements in OMB Circular A-127, Section 6, Policy, and Section 7 e, Financial Reporting.
Category D: NLRB collects court-awarded contempt fines, attorneys' fees or and court costs. Finance deposits these funds in a Miscellaneous Receipts Fund (Fund Symbol 633220). NLRB may not use these funds and remits them to the U.S. Treasury.
NLRB records receipt of court-awarded contempt fines, attorneys' fees, and court costs in its accounting system. Such funds are transferred to Treasury's general fund.
Criteria: Such funds, per SFFAS No. 1, Paragraph 25, are non-entity assets (assets held by an entity but not available for use by the entity). SFFAS No. 1, Paragraph 26, requires that non-entity assets be reported in an entity's financial statements, but segregated from entity assets. Additionally, an equal amount should be recognized as a liability.
In addition, SFFAS No.1, Paragraph 123, FASAB recommends that a receivable be recognized when a claim to cash or other assets is established based either on goods or services provided or the government's legal authority to levy and collect.
Suggestions: We suggest that the Finance Chief:
10. Revise accounting policies and procedures to ensure that all Category D Backpay transactions are properly recorded in FFS, in accordance with guidelines established by Treasury in the USSGL.
11. Revise financial reporting procedures and guidelines to ensure that Category D Backpay cash and receivable transactions are recorded on the balance sheet as non-entity assets and that the corresponding liability is titled to indicate that it is owed to Treasury. This may entail the use of sub-accounts to the USSGL account structure.
12. Develop, in conjunction with the Operations-Management Associate General Counsel, policies and procedures to identify valid receivables related to court awarded contempt fines, attorneys' fees, and court costs pending receipt of funds at the financial statement cut-off period (ie: monthly or quarterly depending on frequency of financial statements). Establish accounting guidelines for: recording such receivables (and related liabilities) in FFS; reporting them as non-entity assets on the balance sheet; and establishing an allowance for non-collectable receivables, if appropriate.
Other Matter to Report
It was not within the scope of this review for Cotton & Company to review or test the Regional Offices or Headquarter controls related to ensuring the accuracy and completeness of Backpay transactions recorded within FFS, the Backpay database, or CATS or maintained by Regional Office representatives. We did note, however, that one sample case within the Backpay database showed disbursement amounts exceeding deposits, resulting in a negative balance. We suggest that in conjunction with the accounting policies and procedures suggested above, NLRB also establish and implement internal control procedures to ensure that data maintained in various systems reconciles between systems and reconciles to the underlying source documentation, which will be a basis for audit evidence. In addition, we suggest that prior to its first audit, NLRB perform a complete review and reconciliation of its Backpay transactions to ensure that they are valid, properly valued, actually exist, and are adequately supported by source documents.
1 FASAB has issued an exposure draft titled Accounting for Fiduciary Activities (April 2003), which we relied upon as part of this review.
2 FASAB noted in the exposure draft that current accounting standards do not address the universe of fiduciary activities, and existing standards lack clarity about how activity of Federal "trust funds" differ from fiduciary activity (Exposure Draft, Executive Summary, and Introduction, Paragraph 3).