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Region 5's Billing and Collection of Accounts Receivable

CHAPTER 1

Introduction

PURPOSE

We performed an audit of Region 5's billing and collection activities for Superfund oversight accounts receivable. The purpose was to provide the Region with an evaluation of the current process and recommendations for improving their procedures. Our specific objectives were to determine if Region 5 was:

BACKGROUND

In 1980, Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund. The law established, in the Department of the Treasury, the "Hazardous Substance Response Trust Fund" (Superfund Trust Fund). Congress initially authorized funding for five years totaling $1.6 billion. Congress reauthorized the program for another five years in 1986 and provided an additional $8.5 billion of funding. In 1990, Congress, through the Omnibus Budget Reconciliation Act, extended the program for another five years and provided an additional $5.1 billion in authorized funding. Through appropriations, Congress establishes the amount of funds that the Environmental Protection Agency (EPA) may use. EPA withdraws monies from the trust fund as needed to cover disbursements.

The Superfund Trust Fund is primarily supported by taxes on crude and petroleum oil, on the sale or use of certain chemicals, and an environmental tax on corporations. Other sources of funding include cleanup costs recovered from responsible parties, interest, fines, and penalties paid by individuals and entities who violate the terms of the CERCLA provisions, and general revenues.

To ease pressure on the Federal budget, lawmakers have focused more efforts on collecting money already owed to the government. It is estimated that more than $50 billion in past due debts (not including taxes) is owed to the U.S. government. A portion of these receivables has been created by various EPA programs, Superfund being the most significant.

An important objective of the Superfund program is to recover funds that EPA spends cleaning up a Superfund site. Recovery may be accomplished through negotiation with or legal action against Responsible Parties (RPs). The costs EPA tries to recover may be for (1) past expenditures, (2) future work that EPA will do at the site, or (3) EPA overseeing cleanup work that the RP performs under contract at the site. These funds are used to replenish the Superfund Trust Fund.

EPA's enforcement responsibility does not end with establishing the debtor's financial obligation. EPA's financial, legal, and program personnel must work together to bill and collect the debts that have been established. Region 5 is responsible for billing and collecting accounts receivable resulting from oversight activity at sites it monitors.

SCOPE AND METHODOLOGY

Our audit focused on the billing and collection processes of Superfund oversight accounts receivable in Region 5. The audit objectives did not include determining the reliability of the Region's financial accounting system, billing statements, or amounts recovered.

Our first objective determined whether Region 5 timely issued annual Superfund oversight bills to responsible parties. We discussed with Regional personnel the billing process. We reviewed billing documents in a random sample of 24 Superfund site files, calculated the length of time taken to issue an initial billing statement, and identified reasons for delays.

Our second objective determined whether the Region had effectively pursued the collection of unpaid Superfund oversight bills. We discussed with Regional personnel the collection process. We reviewed dunning letters in a random sample of 24 Superfund site files, calculated the time interval between the initial billing and each dunning letter, and obtained explanations for delays or missing letters.

We conducted our fieldwork from December 1, 1995 to October 30, 1996. We discussed position papers with Region 5 Comptroller's Office (RCO) officials on October 23 and 29, 1996. Their comments were considered in developing the draft report.

On November 18, 1996, we issued our draft. The RCO requested an extension to formally responding. During January and February 1997, we held discussions with RCO about their proposed changes to the draft report. On February 26, 1997 we issued a revised draft report. We held an exit conference with the Region staff on March 25. The Region 5 Administrator provided a response on March 24, 1997. We made appropriate changes to the final report based on the exit conference and written response. The Regional Administrator's response is included as appendix 1.

We performed our audit in accordance with the Government Auditing Standards, 1994 Revision, issued by the Comptroller General of the United States.

PRIOR AUDIT COVERAGE

In January 1990, the Office of Inspector general (OIG) issued a report on Region 5's Superfund Cost Recovery Accounts Receivable Establishment and Collection (E1SJF9-05-0274-0100126). According to this report, the Region did not record all Superfund cost recovery amounts due on the Region's financial records and did not make timely collections.

In May 1996, the OIG issued a management letter to the Regional Comptroller on the Fiscal Year 95 Financial Statements. According to this letter, RCO did not have procedures to follow up on its requests to obtain judicial decrees from the Office of Regional Counsel (ORC).

CHAPTER 2

Superfund Oversight Costs

Were Not Timely Collected

Region 5 did not timely establish and collect accounts receivable for Superfund site oversight costs. RCO did not promptly (1) send initial billings or (2) follow-up on unpaid accounts. Thus, the Superfund Trust Fund was not timely replenished to support Superfund activities.

An important objective of the Superfund program is to recover funds that EPA spends in cleaning up a Superfund site. This includes costs which EPA incurs to oversee clean-up activities. Recovery is initiated through negotiation with or legal action against a Superfund RP. Judicial and non-judicial actions (orders) establish EPA's legal right to be reimbursed by the RP for oversight costs. Based on these orders, the RCO prepared oversight bills and established an accounts receivable.

EPA's Resources Management Directives on cash management include specific policies and procedures for follow-up on uncollected accounts receivable. If an RP does not make a timely payment after receiving the initial billing, the Region is required to make additional collection efforts. The RCO is required to send out 3 dunning letters(1) 30, 60, and 90 days after the initial billing. After 120 days, RCO must refer the bill to ORC for further collection actions.

OVERSIGHT RECEIVABLES WERE NOT TIMELY RECORDED OR BILLED

Region 5 often took months to establish receivables for costs and bill RPs. In some cases, even years after costs were incurred, Region 5 had not established a receivable or billed the RP. Of 24 cases reviewed, 17 had late billings(2) and 4 had oversight costs which had not been billed at all. Reliance on manual procedures - including tracking billing periods, accumulating oversight costs, and preparing bills - contributed to the length of time needed to issue a bill. Also, the regional Superfund Program Office (program office) and ORC did not promptly review bills prior to issuance.

Regional Comptroller Office Manually Generated Billings

RCO manually maintained a listing of billing periods for Superfund sites in the region. It used this information to determine which billings were due and to track the status of billings in process. However, competing priorities hindered RCO's timely completion of these determinations. Thus, delays occurred before the RCO determined that a billing was needed.

Once the RCO determined that a bill needed to be prepared, it (1) manually accumulated and reconciled costs from Region 5 accounting records and (2) prepared a draft bill. This was a labor intensive process which further lengthened the billing process. As a result, bills were prepared months, and sometimes years, after the end of the billing period.

For the 24 Superfund site files reviewed, 17 were billed late and four were not billed. For example:

The RCO often untimely initiated annual billings for oversight costs. The manual billing system and allocation of resources to higher priority activities delayed the process. This delayed the return of funds to the Superfund Trust Fund.

Program Office and ORC Reviews Delayed Billings

Routing bills through ORC and the program office, for review andand approval prior to issuance, added to the time required to bill RPs. Existing workloads and competing priorities prevented ORC and the program office from promptly reviewing and forwarding bills. Before sending bills to RPs, the RCO routes the bill and supporting documentation to the program office's Superfund Remedial Project Manager (RPM) and the assigned ORC attorney for review and approval. The RPM reviews the oversight costs for reasonableness. The ORC attorney reviews the bill for compliance with the terms of the order. If the RPM or ORC attorney identified errors, the billing was returned and the RCO prepared a revised billing. RPMs and ORC attorneys stated that reviewing a bill usually did not take more than a few hours. However, ORC officials stated that competing priorities often prevented immediate review. Thus, a billing may wait weeks before being reviewed.

FOLLOW-UP ON UNPAID RECEIVABLES WAS NOT EFFECTIVE

The Region's efforts to collect delinquent accounts receivable were untimely. The RCO efforts to collect unpaid account balances consisted of sending a series of dunning letters to the RP. Even when using dunning letters, the RCO often did not send them according to the prescribed schedule.

Dunning Letters Were Untimely

Dunning letters were not always sent 30, 60, and 90 days after the initial bill as prescribed by EPA guidance. For 24 cases reviewed, two percent (3/130) of the dunning letters were sent timely, thirty six percent (47/130) were late and sixty two percent (80/130) were not sent at all. These follow-up problems resulted from (1) a reliance on a manual process to identify, prepare, and send dunning letters and (2) an emphasis on initial billings.

The RCO's procedures for sending dunning letters on unpaid accounts were time consuming and labor intensive. RCO manually reviewed receivable reports to decide which accounts required dunning letters. Once identified, the RCO calculated the additional interest due and updated the receivable balance. The RCO manually prepared the dunning letter before sending it to the RP. Region 5's manual process delayed its collection and recovery efforts. Also, RCO staff time was directed first at preparation of initial billings. Remaining time was then available for preparation of dunning letters.

For the 24 Superfund site files reviewed, 98 percent of the scheduled dunning letters were either late or not sent. For example:

CTS WILL FACILITATE THE BILLING AND COLLECTION PROCESS

Region 5 recently developed the Cost Recovery Collection Tracking System (CTS) to provide comprehensive billing and tracking capabilities for EPA receivables. When fully implemented, CTS has the capability to improve the timely billing of accounts receivable. CTS can provide expanded billing and receivable functions which would streamline the current manual system. CTS also maintains information that would enhance reporting for regions and headquarters. Specifically, CTS has the capability to (1) determine when annual billings are due, (2) generate annual oversight billing statements, and (3) issue timely dunning letters.

Although CTS can speed the billing and collection process, it does not address delays resulting from (1) manually accumulating and reconciling oversight costs and (2) untimely review of billing documents. CTS also does not resolve the need for increased emphasis on the billing and collection of receivables and the need to increase personal interaction with RPs.

CONCLUSION

Region 5's billing and collection process for Superfund oversight costs is untimely. As a result, the Superfund Trust Fund was not timely replenished. The RCO must bill and send dunning letters promptly.

RECOMMENDATIONS AND AGENCT ACTIONS

We recommended and the Regional Administrator, Region 5, agreed that the RCO would:

2-1. Develop and implement specific timeframes for preparing and forwarding annual oversight bills to ORC, the program office, and RPs for payment. A Region 5 Superfund Cost Recovery Taskforce has started this work and expects to provide a new Memorandum of Understanding (MOU) by September 30, 1997.

2-2. Work with ORC and the program office to establish standard timeframes for reviewing proposed annual oversight billing before the RCO sends the RP the bill. The recommendations would be implemented as part of the Region's effort to update the MOU.

2-3. Emphasize timely issuance of dunning letters 30, 60, and 90 days following the issuance of the annual oversight billings. Changes will be implemented in CTS, effective April 1, 1997.

2-4 Record contacts with other Region 5 offices and RPs regarding collection efforts. Written instructions will be provided to all staff by March 31, 1997.

OIG EVALUATION

Region 5's actions, when completed, will address our findings and recommendations.

CHAPTER 3

Region 5 Did Not Bill Superfund Accounts

Receivable On A Cumulative Basis

Region 5's annual Superfund billings to RPs included only that year's charges; previously unpaid balances were excluded. Since collection of unpaid receivables and the related interest charges impact Agency financial records, cumulative billing is a sound and appropriate business practice. However, Resource Management Directives (RMDs) and the region's current billing process do not encourage the Region to send cumulative billings. Region 5's billing practice hindered collection and accounting efforts. Although EPA's new Collection Tracking System contains the necessary data, current plans do not include producing cumulative billing statements. Region 5's billings should reflect the total debt owed by an RP with enough detail to permit reconciliation to accounting records.

REGION 5's CURRENT PRACTICE DOES NOT INCLUDE CUMULATIVE BILLINGS

Region 5's billings did not include unpaid balances or the accumulated interest charges from site's prior billing cycles. Instead, the costs related to each billing cycle (usually annually) were accumulated, recorded, and tracked as separate, stand-alone activities. Region 5's current system does not encourage cumulative billing. Under the current system, developing a complete payment history for a specific site requires manually collecting and totaling previous billings and payments. Region 5 collection efforts focused on individual billing periods rather than the cumulative debt owed by an RP.

Orders establish the region's ability to recover and bill future oversight costs. The order also defines the annual billing period. RMDs, issued through EPA's Office of the Comptroller, provide EPA regions with instructions on how to establish and collect a receivable. The RMDs, however, are silent on the issue of cumulative billing. Cumulative billing, including related interest charges, emphasizes to the RP its total financial obligation to EPA. It also allows EPA to evaluate the entire debt when assessing future collection efforts.

After the completion of each billing period, RCO summarized the costs incurred in the billing period, prepared a billing statement, assigned a unique billing document (BD) number for identification, and mailed the statement to the RP. If the amount was not paid on time, the region was required to send 3 dunning letters at 30, 60, and 90 days. After the third dunning letter, RCO is required to refer the receivable to ORC for further action. Once a receivable was referred to ORC, RCO did not send any additional billings or dunning letters to the RP related to that billing period.

We reviewed Region 5's billing statements for 24 Superfund sites. In six cases, previously billed costs had not been paid in full before the next billing cycle was completed. In all six cases, however, the region did not include the unpaid amounts or related interest charges on the next year's billing statement.

Region 5's billing practice does not provide it or the RP with the magnitude of the entire unpaid balance. If cumulative billings were provided, ORC would have information to identify and pursue RPs with the highest total debt. This would provide ORC with a tool to prioritize resources to aid in the collection of unpaid balances.

CTS HAS THE CAPABILITY OF GENERATING CUMULATIVE BILLINGS

Region 5 developed CTS to provide comprehensive billing and tracking capabilities for EPA receivables, nation-wide. CTS provides expanded billing and receivable functions to streamline manual processes. CTS maintains information to enhance reporting for both the regions and headquarters. Specifically, CTS

CTS would facilitate inclusion of an unpaid amount in a current billing statement, since it is capable of identifying and bringing forward an unpaid balance from one billing period to the next. The tracking system would have to match a prior year BD number with the current year number. Unpaid balances could then be included in the current billing statement. The inclusion of the unpaid amount with the current bill would provide both the Region and the RP with a cumulative account receivable.

Region 5 is in the process of entering data for open accounts receivable, and plans to have all open accounts receivable in the system by the end of this calendar year. Once completed, this will give the Region a history of an RP's unpaid amounts. Currently, the planned modifications of the system do not include providing cumulative billings. In order to use CTS for cumulative billings, some system modifications would be necessary.

When CTS has been fully-developed, tested, and implemented, all EPA regions could have the capability to generate cumulative billings. As of August 1996, Region 5 has trained staff and installed this system in Regions 7 and 8. The system is currently available to all remaining regions. Some of the Regions plan to wait for additional modifications to be made. These changes should be in place by June 1997.

CONCLUSION

Region 5 did not include unpaid balances from the site's prior years in its annual billings to RPs. Cumulative billing is a sound and appropriate business practice, since unpaid receivables are interest producing assets. Region 5's manual billing process and RMDs did not encourage cumulative billings. As a result, EPA could not make management decisions based on a complete understanding of an RP's debt to the Agency. Also, RCO did not make further attempts to collect past due balances that remained on the accounting records for extended periods of time.

Region 5's billing statements should reflect the total financial obligation owed by the RP with sufficient detail to permit reconciliation to accounting records. Since EPA's new Collection Tracking System contains all the necessary data, it should be used to prepare cumulative billings.

RECOMMENDATIONS AND AGENCY ACTIONS

We recommended and the Regional Administrator, Region 5, agreed that the RCO would:

3-1. Modify CTS to prepare the site's annual billing and dunning letters to include unpaid balances. The new modification will be implemented is approximately six months.

OIG EVALUATION

Region 5's actions, when completed, will address our findings and recommendation.

CHAPTER 4

Payments Were Obtained For

Unrecorded Receivables

RCO received payments for accounts receivable which did not exist in its accounting records. This occurred because Region 5's ORC did not timely forward a number of judicial actions to the RCO. EPA's Resources Management Directives, make ORC responsible for forwarding all orders to the RCO. However, some ORC attorneys were not aware of this requirement. Also, appropriate follow-up was not conducted to resolve unrecorded receivables. As a result, Region 5's accounts receivable records were incomplete and the RCO was not able to match collections to the related receivable.

This issue was originally reported to Region 5 as a result of the OIG's Fiscal Year 95 Financial Statement Audit. The Regional Comptroller and the Regional Counsel responded that they would work together to resolve problems with accounts identified in that report. However, our review found that the ongoing procedural weaknesses persist.

ACCOUNTS RECEIVABLE WERE NOT RECORDED TIMELY

Region 5's procedure for recording receivables did not ensure that all receivables were established timely. ORC did not timely

Forward orders to the RCO, even when RCO staff made multiple requests. Some ORC attorneys were unfamiliar with the requirement to forward these documents to the RCO. Also, ORC did not track or follow-up on RCO document requests to ensure timely response. As a result, the Region's accounting records were incomplete and the RCO could not match some collections to the appropriate accounts receivable.

The Department of Justice (DOJ) litigated cases for EPA. In some instances, the resulting court order obligated an RP to pay the government for past costs, fines, and penalties. DOJ, under a Memorandum of Understanding, provided ORC with a copy of the court order and collected the monies owed. ORC is responsible for forwarding to the RCO a copy of all orders that establish a debt. When DOJ subsequently collected the money, it notified EPA Headquarters, who provided payment information to the RCO.

When the RCO received payment information that it could not match to an existing receivable, its liaison requested the supporting court documents through the designated ORC liaison. The ORC liaison contacted the ORC attorney responsible for the case and directed the attorney to provide a copy of the court order to the RCO. Our review identified 15 non-Superfund collections received since September 1995, for which the RCO had not established a receivable. Six of these cases had been reported in the OIG's FY 1995 Financial Statement Audit (January 1996), but were still unresolved. According to some ORC attorneys, they were not aware that they were required to forward the orders to the RCO.

The ORC liaison did not follow-up with attorneys to determine if requests from RCO had been answered. The ORC liaison expected that the ORC attorneys would respond to the RCO and resolve the problems. He was unaware there were still open requests for consent orders. If the RCO liaison did not receive the documentation, it continued to make requests, but she did not notify her supervisor of the problem. For 11 of the 15 cases in our review, the RCO made 4 or more requests to ORC for the information needed to create the account receivable (See Exhibit 1). As of August 1996, they were still unresolved. Subsequently, after our discussions with ORC attorneys, they provided the RCO with 8 of 15 cases. As a result, receivables were not entered timely in the accounting records and the RCO was not able to match collections to its accounts receivable records.

ORC has taken actions to improve the timeliness of forwarding orders to RCO. In April 1996 the Regional Counsel directed ORC attorneys to send the orders to RCO. Also, the Deputy Regional Counsel stated that he had assigned the liaison responsibility to respond to RCO's requests for orders to a specific individual. Also, he will personally follow-up on any RCO second requests for orders.

Region 5 convened a workgroup to standardize the Regional offices' responsibilities for reporting orders to RCO. In August 1996, the Office of Enforcement Compliance Assurance issued "Procedures for Enforcement Tracking" to all Regional enforcement personnel, including ORC attorneys. The procedures further enforced the importance of providing the orders to RCO.

CONCLUSION

Region 5 received payments against unrecorded accounts receivable because ORC did not timely forward the court documents that the RCO needed to create the receivable. Some ORC attorneys are not aware of their responsibility to forward debt related information to the RCO. Also, there is no follow-up system to ensure that RCO's requests for supporting documentation are timely answered. As a result, Region 5's accounts receivable records were incomplete and the RCO was not able to match collections to its accounts receivable records.

RECOMMENDATIONS AND AGENCY ACTIONS

We recommended and the Regional Administrator, Region 5, agreed that:

4-1. The Regional Comptroller would issue internal operating procedures for RCO staff to routinely notify management when repeated requests to ORC for the orders are not resolved. Written procedures will be issued by March 31, 1997.

4-2. ORC would locate and provide the RCO with the orders listed in Exhibit 1, so that the RCO can record the amounts in the Agency's financial accounting system.

4-3. ORC would implement improved procedures for its liaison to routinely follow-up with staff about the RCO's requests for documentation. The Region 5 Superfund Cost Recovery Taskforce will make recommendations to improve these procedures. Also, the Deputy Regional Counsel has been instructed to personally follow-up on any matter where ORC staff has been requested by RCO to staff to provide documents but has not done so for two reporting periods.


OIG EVALUATION

Region 5's actions, when completed, will address our findings and recommendations.

Exhibit 1

Page 1 of 1

Number of RCO Requests for Unrecorded

Receivable Documentation

CASE NAME AMOUNT NUMBER OF REQUESTS DATE OF FIRST REQUEST
Euclid City (1) (2) $ 3,500 4 09/23/95
Insulation & Environmental

MI Dept. of Corrections (1) (2)

 $ 1,000

$ 5,000

 4 09/23/95
Industrial Services Rust (1) (2) $ 12,420 4 09/23/95
Menominee Paper (1) (2) $ 340,000

$ 5,000

 4 09/23/95
Grosse Ile Township(1) $ 2,500 4 09/23/95
Willard Garwood (1) $ 282 4 09/23/95
Lenior Alvin $ 50 5 09/23/95
Graff Enterprises $ 12,500 4 09/23/95
Siddiqui Parvez $ 5,026 4 09/23/95
General Electric (2) $ 150,000 4 09/23/95
Lloyd Lagow Construction (2) $ 9,000 4 09/23/95
Paul Reger $ 25,000 2 03/05/96
PMC Specialities Group (2) $1,711,276 2 03/28/96
Slagle Gary $ 10,000 2 03/28/96
One Hundred Fifteeth St.Co (2) $1,645,000 1 05/24/96

(1) Previously identified in our 1995 Financial Statement Audit, Position Paper #4

(2) RCO received the orders as a result of audit efforts

Footnotes

1. Reminder notices.

2. We defined a late billing as 90 days after the end of the annual billing period.

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Created April 24, 1997

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