Senator COHEN. Tell me about those. Mr. LESSEY. That was a question of interest differential practice in compensation for employees moving from one area to another. Senator COHEN. Stop right there. If you sell your house and you have a mortgage at 9 percent, and you move to an area and you have to buy another house, you have to pay 12 percent, that is the kind of mortgage interest differential you are talking about? Mr. LESSEY. Yes, sir. The issue here was the fact that the house at the prior location was not sold. That is the second exception which Mr. Trant cited in his audit in that case, yes, sir. Senator COHEN. What were the findings of the Corporation with respect to those payments? Mr. LESSEY. The Corporation has allowed that claim for payment, and that is what I was referring to when I said that has been forwarded to the Board of Directors by the Corporation. The Board of Directors has not yet acted upon it. Senator COHEN. Even if the audit committee does not take any action on this, do you have any authority in this matter, any further authority? Mr. LESSEY. Well, I am supposed to be a persistent junkyard dog, and I am, so I am still reviewing that. But we do our internal audit in coordination with the external auditor, and I have already conferred with my external auditor, and my external auditor, on an informal and preliminary basis, does not see this as a normal practice. So I am assuming that the matter will probably come up for review when the forthcoming external audit is performed. Senator COHEN. In your May 10 report, outlining the exceptions you took to the May 10 report, you say, and I quote "The Corporation should not be allowed to delay the auditing process. Do you think the Corporation is acting swiftly enough to resolve these questions? Mr. LESSEY. I don't know. I would isolate out these particular exceptions but in general, I feel, and my internal auditor feels, that the responses to the audit work have been slow, yes, sir. Senator COHEN. There was one other item that you questioned, I believe. That was $3,000 in expenses. What is the status of that? Mr. LESSEY. The question on that was really a question of lack of documentation at the time that Mr. Trant performed the internal audit-such things as an airline ticket receipt which was missing, and so forth. The Corporation has provided documentation covering that period. Let me say that procedurally this whole audit response has not been returned to me. I am aware of what it contains because I have received courtesy copies from the Corporation. Procedurally it has gone from the Corporation to the Board of Directors and the audit committee, but I have not officially received answers back from them as yet. So until they act on it, I am sort of sitting on the sidelines. I would say, just in a conversational sense, that probably the documentation to fill the gap in that third item has been provided. Senator COHEN. But you are unaware of that at this time? Senator COHEN. Gentlemen, I thank you both for your testimony. [The prepared statement of Mr. Lessey follows:] United States Synthetic Fuels Corporation 2121 K Street, N.W. Washington, District of Columbia 20586 Telephone: (202) 822-6600 TESTIMONY OF S. KENRIC LESSEY, JR. U.S. SYNTHETIC FUELS CORPORATION SENATE COMMITTEE ON GOVERNMENT AFFAIRS Mr. Chairman, Members of the Subcommittee: As Inspector General of the United States Synthetic Fuels Corporation, I act under the authority of Section 122 of the United States Synthetic Fuels Corporation Act of 1980, part of the Energy Security Act passed by the 96th Congress. Along with the Deputy Inspector General, it is my duty to supervise, coordinate, and provide policy direction for all auditing, investigative and inspection activities of the Corporation in order to promote economy and efficiency in the programs and operations of the Corporation and to detect and prevent fraud, waste and abuse. In order to address these responsibilities, Congress has authorized me to have access to all of the Corporation's records and information, authority to request assistance from all other government entities, and the ability, through use of subpoena power, to collect whatever investigative materials and information I deem necessary. My Deputy and I enjoy direct access to the Board of Directors, to whom we report, and have been fortunate in bringing together a small staff of employees and Consultants with signficant experience in the several areas which concern our office. It is our basic responsibility to keep the Board of Directors and the Congress fully and currently informed concerning problems which come to our attention, to make recommendations, and to follow-up on corrective actions. I am pleased to appear before this Subcommittee today to discuss the activities of the Office of the Inspector General, as well as any of our audit findings concerning the economy and effectiveness of the Corporation's operations. After coming to Office in May 1982 we initiated an administrative review of all Congressional inquiries, existing consultant reports (especially the "Administrative Practices Review"), outside auditor comments, and other critiques of the Corporation to "clear the decks" to determine if there were any areas of "old business" which demanded immediate attention before we undertook any new initiatives. We especially examined instances where recommended actions had not been taken by the Corporation. As a result of this Administrative Review, completed in June 1982, we determined that there were two administrative areas needing immediate attention: control procedures with respect to consultants and contractors, and automated data processing, information and office systems. Therefore, we initiated special reviews of these two areas in the Summer of 1982, and reported our findings on 22 July 1982 and 18 August 1982, respectively. Both of these reports fall within the scope of your current requests for reports on contracting procedures and copies have been provided to this Subcommittee. The thrust of our work was to assure that adequate procedures were in force to promote economy and efficiency in the Corporation's administrative operations. These reports are summarized as follows: (1) The report on "Contracting Controls" found the Corporation's (a) Insufficient rationale of the need for a contract, (c) Basis for contractor selection undocumented, (d) Insufficient scrutiny of executive search contracts, (2) The "Inspection of Automated Data Processing, Information and Office Systems" identified problems to which management should give closer scrutiny. We recommended substantial improvement in appropriate controls, monitoring, and centralized direction of procurement and management. The Annual Report of the Inspector General, required by statute, was published and delivered to the Board of Directors on 30 November 1982. It was forwarded without comment by the Board of Directors on 30 December 1982 to the President, the Committee on Energy and Natural Resources of the Senate, and the Speaker of the House of Representatives. As the new fiscal year began, my Office coordinated its internal financial audit with the annual audit being performed by the outside accounting firm of Peat, Marwick, Mitchell & Co. This resulted in my selection of travel and relocation expenses and employee advance accounts as an area of concentration. Our complete report, "Fiscal Year 1982 Travel and Relocation Expenses and Employee Advance Accounts", has been provided to this Subcommittee. It is a detailed review of accounts, vouchers, and payments and was designed to discover any instances of fraud, waste and abuse in what are especially sensitive areas of discretionary reimbursements. The Auditor's Certificate for the Corporation's 1982 audit by Peat, Marwick, Mitchell & Co. is published on page 25 of the 1982 Annual Report of the Corporation. Their management letter, dated 3 December 1982, states that "we did not identify any condition which we believe to be a material weakness in internal accounting control" but goes on to observe several conditions which they believed should be noted. In the Spring of 1983, my Office completed a survey of industry's perception of the U.S. Synthetic Fuels Corporation during the First and Second Solicitations. This Survey was intended as a tool, under independent auspices, to bring to the Corporation's attention non-attributive comments of project sponsors to help management evaluate the effectiveness of its dealings with sponsors and others and thus improve its way of doing business in future solicitations. This Survey was not analytical in nature and contained no findings and recommendations by the Inspector General. The industry consensus was that the Corporation got off to a slow start, has made substantial progress, and is functioning reasonably well in the face of unusual "Washington-oriented" handicaps not found in a typical private sector corporation. Industry felt that the managment's learning curve had produced a sense of corporate maturity which would continue to develop in the future. As the above summary indicates, my Office has looked into a variety of administrative areas. As a result, certain improvements in operations have been made and some savings realized. More important, the Corporation has initiated steps to improve its administration. There is room for reasonable improvement and my staff will continue, through specific audits and inspections, to seek to impact positively upon the overall operations of the U.S. Synthetic Fuels Corporation. One unusual element which impacted adversely upon the economy and efficiency of the U.S. Synthetic Fuels Corporation should be mentioned here. That is the uncertainty of leadership which prevailed for the first 15 months following the establishment of the Corporation. The Corporation was formed slowly under the stewardship of a recess appointment Board of Directors, all of whom departed the scene by 20 January 1981. It was not until late in 1981 that the Corporation had a quorum of new, Senate confirmed Directors and until August 1982 that it had a full Board of seven Directors. This divides the Corporation's history into three separate management periods: the early management, the transition period, and the present management. The present management inherited difficulties frm the earlier period, which did not reflect good economy and efficiency. In short, the Corporation suffered a bad start. Therefore, the present management has had to spend an inordinate amount of time addressing these problems and answering to critics for its predecessor's actions. The above comments are in response to the Subcommittee's request concerning administrative matters and administrative expenses of the Corporation. Indeed, some of these themes may have slowed the Corporation in terms of narrowing the distance to be travelled before its mission is accomplished. However, I think it is important to note here that the largest sums of taxpayer's money to be at risk will be those sums (up to $13.2 billion budgeted at this time) committed to financial assistance for the synthetic fuels projects. Most of the effort of my staff is dedicated to oversight of the long and complicated solicitation process, negotiations, term sheets, loan guarantee and price guarantee documents, and financial agreements. Based on this scrutiny, it is my observation that the present management and Board of Directors are exercising appropriate caution and prudence in arriving at financial assistance agreements and that the Corporation is likely to have better agreements because of it. Senator COHEN. This hearing is going to stand adjourned until Friday the 29th, at 9:30 a.m., and on Friday the hearing will be in room 628 of the Dirksen Senate Office Building. The subcommittee will now stand adjourned. Thank you. [Whereupon, at 3:30 p.m., the subcommittee was adjourned, to reconvene at 9:30 a.m., Friday, July 29, 1983.] 24-125 0-83-8 |