FF-AR-07-075 Fiscal Year 2006 Financial Installation Audit – Contract Postal Units

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FF-AR-07-075 Fiscal Year 2006 Financial Installation Audit – Contract Postal Units

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January 25, 2007 LYNN MALCOLM VICE PRESIDENT, CONTROLLER KATHY AINSWORTH ACTING VICE PRESIDENT, DELIVERY AND RETAIL SUBJECT: Audit Report – Fiscal Year 2006 Financial Installation Audit – Contract Postal Units (Report Number FF-AR-07-075) This report presents the results of our audits of 16 statistically selected contract postal units (CPU) during fiscal year 2006 (Project Number 06BD003FF000, formerly Project Number 06XD003FF000). We conducted the audits to support the audit of the U.S. Postal Service financial statements. Based on the items we reviewed, financial transactions were reasonably and fairly presented in the accounting records, and, generally, the internal controls we examined were in place and effective. However, the CPUs had internal control and compliance issues related to cash and stamp accountability, xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx, 1and the xxxxxxxxxxxxxxxxxxxxxxxx. We made recommendations to district management addressing the findings at each unit. District management’s comments were responsive to our findings and recommendations and the actions taken or planned should correct the issues identified at these installations. The Postal Service reviewed a draft of this report and chose not to respond since there were no recommendations. 1 In this report, we discuss only those findings reported at three or more CPUs. Appendix B is a summary of all ...

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January 25, 2007 LYNN MALCOLM VICE PRESIDENT, CONTROLLER KATHY AINSWORTH ACTING VICE PRESIDENT, DELIVERY AND RETAIL SUBJECT: Audit Report Fiscal Year 2006Financial Installation Audit Contract Postal Units (Report Number FF-AR-07-075) This report presents the results of our audits of 16 statistically selected contract postal units (CPU) during fiscal year 2006 (Project Number 06BD003FF000, formerly Project Number 06XD003FF000). We conducted the audits to support the audit of the U.S. Postal Service financial statements. Based on the items we reviewed, financial transactions were reasonably and fairly presented in the accounting records, and, generally, the internal controls we examined were in place and effective. However, the CPUs had internal control and compliance issues related to cash and stamp accountability, xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx, and the xxxxxxxxxxxxxxxxxxxxxxxx 1 . We made recommendations to district management addressing the findings at each unit. District management’s comments were responsive to our findings and recommendations and the actions taken or planned should correct the issues identified at these installations. The Postal Service reviewed a draft of this report and chose not to respond since there were no recommendations.

1 In this report, we discuss only those findings reported at three or more CPUs. Appendix B is a summary of all findings reported to district management.

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We appreciate the cooperation and courtesies provided by your staff during the audit. If you have any questions or need additional information, please contact Linda Libician-Welch, Director, Field Financial West, or me at (703) 248-2100. E-Signed by John Cihota ERIFY authenticity with Approve

John E. Cihota Deputy Assistant Inspector General for Financial Operations Attachments cc: William P. Galligan H. Glen Walker Fredrick Hintenach, III Vincent DeVito Janet L. Webster Steven R. Phelps

Fiscal Year 2006 Financial Installation Audit Contract Postal Units TABLE OF CONTENTS Executive Summary Part I Introduction Background Objectives, Scope, and Methodology Prior Audit Coverage Part II Audit Results Contract Postal Units Cash and Stamp Accountability xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxx Audit Comment Management’s Comments Appendix A. Contract Postal Units Audited Appendix B. Audit Findings Reported at Contract Postal Units Appendix C. Accountability Examination Summary

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Results in Brief

Fiscal Year 2006 Financial Installation Audit FF-AR-07-075 Contract Postal Units EXECUTIVE SUMMARY Introduction This report summarizes the results of our audits of 16 statistically selected contract postal units (CPU) for fiscal year 2006. We conducted these audits in support of the annual audit of the U.S. Postal Service financial statements, which is required by the Postal Reorganization Act of 1970. The audits at each of the CPUs were unannounced. Our overall objectives were to determine whether financial transactions of field operations were reasonably and fairly presented in the accounting records and whether internal controls were in place and effective at the 16 statistically selected CPUs. Based on the items we reviewed, financial transactions were reasonably and fairly presented in the accounting records, and, generally, the internal controls we examined were in place and effective. However, the CPUs had internal control and compliance issues related to cash and stamp accountability, xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx, and the xxxxxxxxxxxxxxxxxxxxxxxx. 2 Appendix B gives details of the findings for all 16 CPU audits, and Appendix C shows the results of our accountability examinations at each CPU. We made recommendations to district management addressing the findings at each unit. District management’s comments were responsive to our findings and recommendations, and the actions taken or planned should correct the issues identified at these installations. Therefore, we are not making recommendations in this report. The Postal Service reviewed a draft of this report and chose not to respond since there were no recommendations.

2 In this report, we discuss only those findings reported at three or more CPUs.

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Fiscal Year 2006 Financial Installation Audit Contract Postal Units INTRODUCTION Background Beginning with fiscal year (FY) 2001, the U.S. Postal Service Office of Inspector General (OIG) assumed responsibility from the Postal Inspection Service for conducting financial field audits at revenue-generating units and stamp distribution offices. Revenue-generating units include post offices, contract postal units (CPU), self-service and automated postal centers, and business mail entry units. These audits are conducted in support of the overall audit of the U.S. Postal Service financial statements. A CPU is a post office located inside a retail establishment and operated by the retailer’s employees. CPUs provide postal services to remote, underserved, and seasonal locations where traditional post offices are not available or are overburdened. The units operate under contract to the Postal Service and provide postal services to the public, which can include mail acceptance, postage sales, other postal products and services, and Postal Service money orders. Generally, the contractor must provide a surety bond 3 from an approved source in an amount sufficient to cover the value of all stamp stock, cash, and the value of postage on the meters. 4 The contracting officer’s representative (COR) should monitor the CPU’s accountability regularly to ensure it does not exceed the current bond amount. CORs assist the contractors and maintain the CPU administrative file. In addition, CORs are required to conduct quarterly performance reviews and annual financial examinations, 5 including a review of the contractor’s bond to ensure that it has been paid, is current, and reflects the CPU’s current accountability. The following publications, along with the unit’s contract agreement, establish procedures for CPU unit operations and oversight:

34 AP bond is not required for performanced-based contracts with a xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. 7.23, Au 5. 5 Fiunbalinccaitailo en x1a5m6i,n a P t o io st n a s l a S r e e r v n i o c t e c G o u n i d d u e c t t o e d C a P t U u s n,i tSs ewcittiho na 5x-xxxxxxxxgxxuxstx x2x0x0xxxxxxxxxxxxxxxxx.

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Fiscal Year 2006 Financial Installation Audit FF-AR-07-075 Contract Postal Units Objectives, Scope, and Methodology

• Handbook F-1, Post Office Accountability Procedures , November 1996 (updated with Postal Bulletin revisions through June 9, 2005). 6 • Publication 116, Contract Postal Units Operations Guide, August 2002. • Publication 156, Postal Service Employee Guide to Contract Postal Units , August 2005. • Postmaster/Field Guide Version 5.0, July 2006. Postal Operations Manual , Issue 9, July 2002. • • Management Instruction, AS-220-1999-1, xxxxxxxxxx xxxxxxxxxxxxx. Our overall objectives were to determine whether financial transactions of field operations were reasonably and fairly presented in the accounting records and whether internal controls were in place and effective. To accomplish these objectives, we performed fieldwork at the 16 statistically selected CPUs 7 from November 2005 through August 2006. 8 (See Appendix A for a list of units and OIG Report Numbers.) The audits performed at each unit were unannounced. We performed accountability examinations on the cash, stamp stock, and money orders maintained at the units. We observed the unit’s closeout procedures and preparation of the bank deposits. We conducted this audit from November 2005 through January 2007 in accordance with generally accepted government auditing standards and included such tests of internal controls as we considered necessary under the circumstances. We discussed our observations and

6 Management suspended updates to the Handbook F-1 on August 18, 2005, and plans to issue a revised handbook in FY 2007. 7 Our sampling universe did not include units using xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. These units pay in advance for their stamps, metered postage, and supplies. Consequently, these units do not require bonding; completion of Postal Service (PS) Form 1412, Daily Financial Report ; financial audits; or separation of funds; and do not sell postal money orders or offer post office box services. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. 8 These 16 units reported revenue of $2.7 million in FY 2005.

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Fiscal Year 2006 Financial Installation Audit Contract Postal Units Prior Audit Coverage

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conclusions with management officials and included their comments where appropriate. We issued individual reports to management at each unit. The OIG issued a report entitled Fiscal Year 2004 Financial Installation Audit Contract Postal Units (Report Number FF-AR-05-100, dated March 31, 2005). The report disclosed internal control and compliance issues related to accountability over cash and stamps, safeguarding assets, xxxxxxxxxxxxxxxxx, and provisions of the Bank Secrecy Act. We recommended management reinforce instructions to CORs regarding accountability specifically, maintaining excess cash and safeguarding assets at CPUs to improve compliance with Postal Service procedures. Management agreed with our findings and recommendations.

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Cash and Stamp Accountability

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Fiscal Year 2006 Financial Installation Audit Contract Postal Units AUDIT RESULTS Contract Postal Units We conducted audits at 16 statistically selected CPUs. Based on the items we reviewed, financial transactions were reasonably and fairly presented in the accounting records, and, generally, the internal controls we examined were in place and effective. However, the CPUs had internal control and compliance issues related to cash and stamp accountability, xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx, and the xxxxxxxxxxxxxxxxxxxxxxxx. 9 Employees of the CPU, host post office, and the COR did not always follow policies and procedures for cash and stamp accountability. Specifically: • CPU employees at six units did not follow procedures for preparing the bank deposit. 10 Employees stated they were either unaware of or did not fully understand the requirements for preparing the deposit. Not following the procedures increases the risk of loss of funds and the misstatement of assets in the financial statements. • CPU employees at four units did not secure stamps or cash during nonbusiness hours. 11 At three of the four units, employees stated they were unaware of the requirements or did not fully understand them. At the other unit, employees stated they overlooked the requirements and forgot to secure stamps and cash as required. When assets are not safeguarded as prescribed, there is an increased risk that cash and stamps could be lost or stolen. • At three units, the COR and host post office employees did not perform the annual cash and stamp accountability examinations. At two of those units management cited time constraints or said that other duties took priority. At the third unit, management stated

9 In this report, we discuss only those findings reported at three or more CPUs. See Appendix B for a summary of all findings reported to district management. 10 Handbook F-1, Post Office Accounting Procedures , Section 333.2.7, November 1996 (updated with Postal Bulletin revisions throu 2005). 11 Publication 1g1h6 ,J u C n o e n t 9 r , a ct Postal Unit Operations Guide , Section 1-4.5, August 2002.

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they had conducted the examinations, but could not locate any supporting documentation. When management does not follow cash and stamp accountability procedures, there is an increased risk of loss of cash, stamps, or other sensitive items. CPU employees did not always follow policies and procedures for xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Specifically, CPU employees at three units did not adequately xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx during nonbusiness hours. 12 Employees stated they were unaware of the requirements for xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx or did not fully understand them. If unit employees do not xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx, the Postal Service has an increased risk that the xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Employees of CPUs and host post offices did not always follow policies and procedures to implement fully the xxxx xxxxxxxxxxxxxxxxxxm. 13 Specifically: • xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxx. • xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. • xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. • xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Contractors and host post office employees said they did not fully implement the xxxxxxxxxxxxxxxxxxxxxxxx because they were not aware of the requirements or did not fully understand them. When policies and procedures for the

12 Handbook F-1, Section 422.13. 13 Management Instruction, AS-220-1999-1, xxxxxxxxxxxxxxxxxxxxxxxx .

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Fiscal Year 2006 Financial Installation Audit Contract Postal Units Audit Comment

’ Management s Comment

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xxxxxxxxxxxxxxxxxxxxxxxx are not followed, there is an increased risk the Postal Service will lose cash, and investigative leads could be lost or delayed. We made recommendations to district management addressing the findings 14 at each installation. District management’s comments were responsive to our findings and recommendations, and the actions taken or planned should correct the issues identified at these installations. We did not identify any corrective actions required by Postal Service Headquarters regarding these issues. Therefore, we are not making additional recommendations in this report. The Postal Service reviewed a draft of this report and chose not to respond since there were no recommendations.

14 Individual reports addressed the issues discussed in this report and the issues identified in Appendix B.

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Fiscal Year 2006 Financial Installation Audit Contract Postal Units APPENDIX A. CONTRACT POSTAL UNITS AUDITED This table presents the 16 CPUs statistically selected for audit. FY 2005 OIG Report Unit Name Location Revenue 15 Number 1. xxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxx, PA $101,907 FF-AR-06-195 2. xxxxxxxxxxxxxxxxxxxxx xxxxxxxx, WY 174,264 FF-AR-06-221 3. XXXXXXXXXxxxx XXXXXXXXX, NV 308,039 FF-AR-06-214 4. XXXXXXXXxxxxxxxxx XXXXXXXX, NY 325,791 FF-AR-06-144 5. XXXXXXxxxx XXXX, OK 403,920 FF-AR-06-158 6. XXXXXXXXXXXXXXXXxxxxx XXXXXXX, AZ 449,366 FF-AR-06-157 7. XXXXXXXXXXXXXXXxxxx XXXXXXXXX, FL 127,491 FF-AR-06-151 8. XXXXXXXXxxxx XXXXXXXX, MN 183,111 FF-AR-06-171 9. XXXXXXXXXXXxxxx XXXXXXXXX, MN 41,005 FF-AR-06-255 10. XXXXXXXXXXXXXXXXXXxxxx XXXXXXX, VA 54,614 FF-AR-06-199 11. XXXXXXXXXXXxxxx XXXXXX, TX 44,021 FF-AR-06-238 12. XXXXXXXXXXxxxxx XXXXXXXX, ME 39,412 FF-AR-06-240 13. XXXXXxxxx 16 XXXXX, OH 11,280 FF-AR-06-173 14. XXXXXXXXXXxxxx XXXXXXXXX, PA 8,683 FF-AR-06-189 15. XXXXXXXXXXXXXXXXXXXxxxx XXXXXX, GA 141,060 FF-AR-06-067 16. XXXXXXXXXXXxxxx XXXXXXXXX, WA 412,498 FF-AR-06-095

1165 As reported in the Standard Accounting for Retail . Community Post Office (CPO) is a contract unit that provides postal services in small communities where an independent post office has been discontinued.

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