Skip to Main Content

Commission Oversight of NAFI

This document is an HTML formatted version of a printed document. The printed document may contain agency comments, charts, photographs, appendices, footnotes and page numbers which may not be reproduced in this electronic version. If you require a printed version of this document contact the United States Securities and Exchange Commission, Office of Inspector General, Mail Stop 11-7, 450 Fifth Street N.W., Washington, D.C. 20549 or call (202) 942-4460.

COMMISSION OVERSIGHT OF NAFI

Audit No. 346
March 7, 2002

EXECUTIVE SUMMARY

We found that Commission oversight and management controls for its non-appropriated funding instrumentality (NAFI), the Recreation and Welfare Association (RWA), can be improved. Among other steps, the Office of Administrative and Personnel Management (OAPM) should issue guidance describing its oversight responsibilities; develop and execute a memorandum of understanding or other agreement with the RWA; require RWA to enhance its financial controls; and discuss with RWA ways to enhance its management structure and effectiveness.

OAPM agreed with our recommendations (see the attachment).

OBJECTIVES AND SCOPE

Our objective was to determine if Commission oversight of its NAFI (the Recreation and Welfare Association) was adequate, and related management controls were appropriate and operating as intended. During the audit, we reviewed available documentation, interviewed Commission and RWA staff, and obtained information on NAFI oversight at several federal agencies, among other procedures. We did not audit the operations or finances of the RWA, but we are planning an audit of RWA finances in the future.

We performed our review in accordance with generally accepted government auditing standards between October and November 2001.

BACKGROUND

Employees in numerous agencies have established non-appropriated funding instrumentalities (NAFI) to promote employee welfare and morale. As their name implies, these organizations typically do not receive appropriated funds, but instead are dependent on member dues and revenues from their activities.

While a NAFI is not a direct federal agency (and does not receive appropriated funds), it is considered a government enterprise and may own and use property only in that capacity. Since government agencies generally create NAFIs, those agencies have traditionally provided for their operations and carried out their oversight by regulation. (See the Appendix for additional legal background.)

Established in 1964, the Commission's NAFI, the Recreation and Welfare Association (RWA), promotes employee welfare through several activities, including employee parking, sale of Commission memorabilia, social events (e.g., ice cream socials), and short-term loans to employees. These activities have been generally limited to headquarters staff. The Commission has not established regulations concerning the RWA's operations or the Commission's oversight responsibilities.

The RWA's constitution and by-laws, as amended, provide for election of a six- person board of directors. Members of the board also serve as RWA officers (i.e., President, Vice-President, Treasurer, Secretary, Welfare Committee Chairman, and Social Chairman). The constitution and bylaws also require payment of dues by members (originally $2 annually, then reduced to $1), the holding of annual meetings and elections, issuance of financial statements, maintenance of financial records, and annual audits.

Currently, RWA officers are limited to a President (who manages the RWA's parking program) and a Treasurer (who handles RWA financial transactions and memorabilia sales). The President and Treasurer have served for several years, without annual elections. The RWA has not had annual financial audits performed. In addition, it no longer collects member dues.

RWA funds primarily derive from rental of 80 parking spaces at headquarters, and sale of Commission memorabilia. The RWA pays the Commission's landlord $80 monthly for each space, and leases the spaces to employees for $100 monthly (below the market rate).

The President receives checks for monthly parking from about half of the participants in the program. After logging in the checks, the President gives them to the Treasurer for deposit in RWA's bank account. The other monthly parking payments are made by electronic funds transfer to this account, which is maintained by the Treasurer.

According to RWA officers, gross parking revenue last year was about $96,000. Expenses were about $88,000, for a profit of about $8,000. Total memorabilia sales in 2000 were about $31,000, with a profit of about $800. The RWA reports its taxable income from these activities on Internal Revenue Service Form 990 (used for local employee associations, under 26 U.S.C.§ 501(c)(4).

AUDIT RESULTS

The Commission should improve its oversight and management controls for the RWA. Moreover, the Commission should ask the RWA to consider several improvements to RWA's management controls, which would enhance its financial accountability and effectiveness. Our detailed findings and recommendations are presented below.

AGENCY REGULATION

As stated in the Background, the Commission has not issued a regulation defining the role of the RWA and assigning oversight responsibility for it. The Office of Administrative and Personnel Management has coordinated with the RWA in the past on parking.

Recommendation A

In consultation with the Office of the Executive Director, the Office of Administrative and Personnel Management should issue a regulation on the RWA, describing RWA's role and assigning oversight responsibilities.

We understand that the Office of the Executive Director has assigned the oversight role to OAPM.

MEMORANDUM OF UNDERSTANDING

In 1995, the Commission and the RWA signed an agreement on RWA's parking sub-lease.1 However, they have not yet signed an overall agreement (memorandum of understanding) detailing their relationship and responsibilities.

We reviewed memoranda of understanding (MOU) for employee organizations at the Federal Election Commission and the Department of Agriculture. The MOUs covered lawful practices, permissible uses of facilities and services, and allowable excused absences, among other matters.

Recommendation B

In consultation with the Offices of the Executive Director and General Counsel, OAPM should execute a memorandum of understanding with the RWA covering the matters discussed above.

RWA BY-LAWS

RWA's by-laws were written many years ago, and do not reflect its current management structure and practices (see Background). The RWA Treasurer indicated that the by-laws need to be updated.

Recommendation C

OAPM should ask the RWA to update its by-laws. The updated by-laws should reflect any changes made to RWA's management controls and management structure (see below).

MANAGEMENT CONTROLS

RWA's management controls for its financial records and assets can be improved, as explained below. 2

Separation of Duties

The Treasurer is responsible for almost all RWA financial transactions. He signs all RWA checks (RWA by-laws require two signatures), maintains RWA financial records, performs bank reconciliations, and has custody of RWA's inventory of Commission memorabilia.

The Treasurer has custody of assets (the memorabilia) and maintains the related records, an undesirable practice. The lack of separation of duties increases the risk of errors and irregularities in RWA's financial records and reports, especially considering the number of transactions and their size (i.e., over $100,000 annual revenue).

Credit Card

The Treasurer uses his personal credit card to pay for some RWA purchases. He then pays for these purchases on the credit card bill with an RWA check. This practice is not desirable, as it mixes the Treasurer's personal accounts with RWA's. He indicated that some vendors require use of a credit card, and RWA does not have a business credit card.

Physical Inventories

The RWA told us that it performs an annual physical inventory of its memorabilia stock. Because of RWA's lack of resources, documentation of the inventory was limited. Additional documentation of the inventory (reconciliation and analysis of beginning and ending inventory balances) would help ensure that items are properly accounted for, identify loss or theft of items, and provide information for calculating taxable income.

Financial Audits

RWA indicated that its tax return on IRS Form 990 serves as its financial statement. However, its financial records and bank account are not independently audited as required in the RWA constitution and by-laws.

Periodic independent audits would provide information on RWA's activities for its management and members, and enhance financial accountability. We are planning a future audit of RWA finances.

Recommendation D

OAPM should require RWA to improve its management controls as discussed above (as RWA's resources permit), including enhancing its separation of duties, obtaining a business credit card, and enhancing documentation of annual inventories, among other measures.

MANAGEMENT STRUCTURE AND MEMBER PARTICIPATION

RWA currently has a limited management structure (an unelected President and Treasurer, rather than the six person board of directors authorized by its constitution). In addition, since it no longer charges member dues, it does not have a list of active members.

This limited participation in its activities hinders RWA's ability to establish adequate management controls, such as the separation of duties. The lack of participation also hinders RWA's effectiveness.

A number of steps could enhance participation in RWA, including:

  • Requiring parking program participants to be members (as was formerly done),
     
  • Providing incentives to RWA officers (such as discount parking or memorabilia items), to motivate members to serve on the board of directors,
     
  • Encouraging other Commission recreational and social clubs (such as the Toastmasters) to become affiliated with the RWA,
     
  • Sending an e-mail to Commission employees (including regional employees3) inviting their participation in RWA, and announcing the dates of RWA meetings and elections, and
     
  • Developing an Intranet web site describing RWA's mission, structure, and activities, and listing memorabilia items for sale.

Recommendation E

OAPM should discuss with RWA ways to enhance RWA's management structure and member participation, as discussed above.

APPENDIX

Non-Appropriated Funding Instrumentalities

Legal Background

Non-Appropriated Funding Instrumentalities (NAFI), such as the Recreation and Welfare Association (RWA), are recognized as federal instrumentalities. However, they constitute a special breed of federal instrumentality, "which cannot be fully analogized to the typical federal agency supported by appropriate funds." Cosme Nieves v. Deshler, 786 F2d. 445, 448 (1st Cir.), cert. denied, 479 U.S. 824 (1986). While a NAFI is not a direct agency of the United States and is not supported by appropriated funds, "it is unquestionably a Government enterprise and may own and use property and equipment only in that capacity." 40 Comp. Gen. 587 (1961). Courts have held that the property of a NAFI constitutes a thing of value of the United States, or any department or agency thereof, for purposes of 18 U.S.C. § 641 (theft of government property). See, e.g., United States v. Town, 842 F2d. 740 (4th Cir.), cert. denied, 487 U.S. 1240 (1988).

Since NAFIs were generally created by government agencies, those agencies have traditionally provided for their operations and carried out their oversight by regulation. Principles of Federal Appropriation Law, Vol. IV, (2d Ed. Mar. 2001), at 17-249. For example, the Department of Defense has extensive regulations concerning NAFIs, covering everything from their creation, their purpose, funding, contracting, employment, audits, financial management, property management and their dissolution. Id. The Commission has established no regulations concerning the RWA's operations or the Commission's oversight of those operations.

1 The agreement continued a long-standing practice of RWA providing parking for some Commission staff.

2 Our findings are based on discussions with RWA officers and review of selected documentation. We did not audit RWA operations or finances, as explained in the Background. An audit of RWA itself might have disclosed additional findings or resulted in modifications to these findings. We are planning a future audit of RWA finances.

3 The RWA could offer benefits (such as social events) to regional employees to encourage their participation.