The improper  and questionable activities and transactions that we identified  demonstrate the Academy did not have assurance that it complied with  applicable fund control requirements, including those in the ADA. Specifically, we identified improper and questionable midshipmen fee- related transactions with respect to: (1) collections for goods and services  that were not the midshipmen’s responsibility, (2) collected amounts that  exceeded the actual expense to the Academy for the goods or services  provided to the midshipmen, and (3) the use of accumulated fee reserves  for questionable purposes. Fee Collections and Uses of Fees not Related to Goods and Services Provided to All Midshipmen

For fiscal years 2006 and 2007, the Academy collected fees of  approximately $7 million from midshipmen. Weak Control Environment and Flawed Academy Internal Controls

We found that a weak overall control environment and the flawed design  and implementation of internal controls were the root causes of the  Academy’s inability to prevent, or effectively detect, the numerous  instances of improper and questionable sources and uses of funds  discussed previously. We found that there was little  evidence of awareness or support for strong internal control and  accountability across the Academy at all levels, and risks, such as those  that flow from a lack of clear organizational roles and responsibilities and  from significant activities with affiliated organizations, that were not  addressed by Academy management. The internal control weaknesses we  identified were systemic and could have been identified in a timely manner  had Academy and MARAD management had in place a more effective  oversight and monitoring regimen. Further, we found that the Academy  did not routinely prepare financial reports and information for use by  internal and external users that could have helped to identify the improper  and questionable sources and uses of funds. Actions by the Department, MARAD, and the Academy to Address Certain Accountability and Internal Control Challenges

Over the course of our review, we found that various actions were taken,  and were in process, that were intended to improve the Academy’s and its  affiliated organizations’ internal controls. Another  significant action was the creation in July 2008 of the position of Assistant  Chief Financial Officer for the Academy with direct reporting  responsibility to the MARAD CFO. This position was initially temporary,  but made permanent in March 2009. It provides for a senior financial  official at the Academy to conduct oversight and monitoring of Academy  financial activities on a real time basis. We recommend that the Secretary of the Department of Transportation  direct the Administrator of MARAD, in coordination with the  Superintendent of the Academy, to take the following actions: To improve the design and operation of the internal control system at the  Academy, we recommend that the following actions be taken:   Establish a comprehensive risk-based internal control system that  addresses the core causes and the challenges to proper administration  that we identify in this report, including the risks and challenges that  flow from the close organizational and transactional relationships  between the Academy and its affiliated organizations and implement  internal controls that address the elements of our Standards for  Internal Control in the Federal Government, including the role and  responsibilities of management and employees to establish and  maintain a positive and supportive attitude toward internal control and  conscientious management, and the responsibility for managers and  other officials to monitor control activities. Our specific objectives were to determine whether there  (1) were any potentially improper or questionable uses of funds by the  Academy, including transactions with its affiliated organizations; (2) was  an effective control environment with key controls in place over the  Academy’s sources and uses of funds, including transactions with its  affiliated organizations; and (3) were any actions taken, under way, or  planned to improve controls and accountability over the Academy’s funds  and resources. Specifically, we  reviewed laws, regulations, policies, and procedures over Academy  operations and activities;  reviewed the MARAD report and discussed the objectives, scope, and  methodology of the internal control review with MARAD officials;  interviewed selected Department, Department—Office of Inspector  General (OIG), MARAD, Academy, and NAFI staff and officials to  obtain an understanding of (1) their roles and responsibilities, (2) the  internal control environment at the Academy, including the Academy’s  organizational structure and relationships to the NAFIs and  management’s attitude towards and knowledge of internal controls;   (3) the internal controls over selected Academy payments and  activities with its affiliated organizations—the 14 NAFIs and 2  foundations; and (4) MARAD and Department practices for overseeing  and monitoring the Academy; and    obtained an understanding of the sources of funding for both the  Academy and the NAFIs, including the appropriated funds of the  Academy. We identified numerous improper or questionable activities and uses of  funds.
Why GAO Did This Study

The U.S. Merchant Marine Academy (Academy), a component of the Department of Transportation's Maritime Administration (MARAD), is one of five U.S. service academies. The Academy is affiliated with 14 non-appropriated fund instrumentalities (NAFI) and two foundations. GAO was asked to determine whether there (1) were any potentially improper or questionable sources and uses of funds by the Academy, including transactions with its affiliated organizations; (2) was an effective control environment with key controls in place over the Academy's sources and uses of funds; and (3) were any actions taken, under way, or planned to improve controls and accountability. GAO analyzed selected transactions from fiscal years 2006, 2007, and 2008 to identify improper or questionable sources and uses of funds and reviewed documents and interviewed cognizant officials to assess the Academy's internal controls, and identify corrective actions to improve controls.

What GAO Found

GAO identified numerous instances of improper and questionable sources and uses of funds by the Academy and its affiliated organizations. These improprieties and questionable payments GAO identified demonstrate that, while MARAD and the Academy have been taking action to improve the Academy's internal controls, the Academy did not have assurance that it complied with applicable fund control requirements, including the Antideficiency Act (ADA). Further, the Academy had numerous breakdowns in its important stewardship responsibilities with respect to maintaining accountability over the receipt and use of funds. For example, GAO identified improper and questionable midshipmen fee transactions related to: (1) fee collections and uses of fees unrelated to goods and services provided to all midshipmen, (2) fee collections that exceeded the actual expense to the Academy for the goods or services, and (3) the use of accumulated excess midshipmen fees for improper and questionable purposes. GAO found that a weak overall control environment and the flawed design and implementation of internal controls were the root causes of the Academy's inability to prevent or effectively detect numerous instances of improper and questionable sources and uses of funds. Specifically, GAO found that there was a lack of awareness or support for strong internal control and accountability across the Academy at all levels and risks, such as those that flow from a lack of clear organizational roles and responsibilities and from significant activities with affiliated organizations. The internal control weaknesses GAO identified were systemic and could have been identified in a timely manner had Academy and MARAD management had a more effective oversight and monitoring regimen. For example, GAO found that the Academy did not routinely prepare financial reports and information for use by internal and external users. GAO found that various actions were taken and in process that were intended to improve the Academy's internal controls, including actions to address issues of accountability with its affiliated organizations. For example, a permanent position of Assistant Chief Financial Officer (CFO) for the Academy was established in March 2009 with direct reporting responsibility to the MARAD CFO. This action provides a senior financial official at the Academy with authority to conduct needed oversight and monitoring of financial activities on a real time basis. Further, following discussions GAO had with Department and MARAD officials, the MARAD CFO took steps to secure and protect accumulated reserves held in commercial bank accounts of an affiliated organization. However, even though MARAD and the Academy have taken actions, much more needs to be done, including determining the amount of midshipmen fees that were used to cover official Academy expenses, performing a comprehensive analysis of the risks posed by the Academy's organizational structure and its relationships with its affiliated organizations, and establishing and implementing policies, procedures, and internal controls over many Academy activities.