1. Purpose. The purpose of this tool kit is to furnish division office staff with the tools and procedures that should be used to implement the Financial Integrity Review and Evaluation (FIRE) Program. While division offices are free to supplement this tool kit with procedures that enhance the financial oversight program, the procedures, tools, and level of detail described in the tool kit are considered the minimum expectations for complying with the FIRE Program. This will ensure the minimum level of consistency across the Federal Highway Administration's (FHWA's) division offices that is necessary for the Agency's certification of its financial oversight program. It is recognized that certain processes, activities, or review guides included in the tool kit may not be applicable to a specific division office, in which case, the division office should document the basis for any deviation from the procedures in the tool kit.

2. Overview. The FIRE Program is authorized in FHWA Order 4560.1 and replaces the Financial Management Improvement Program required in the Federal-aid Policy Guide (FAPG) Non-Regulatory Non-Code of Federal Regulations (CFR)-Related Guidance, G 3015.2, Financial Management Improvement Program, Transmittal 9, dated March 31, 1994. The Quality Financial Management Initiative is also superseded.

3. Roles and Responsibilities

   1. The Director, Office of Budget and Finance is responsible for:

      1. (1) Providing nationwide leadership, goals, and direction relating to the FIRE Program.

      2. (2) Promoting consistent field financial management activities through the development of policies, procedures, and guidelines.

      3. (3) Serving in an advisory capacity in the overall direction of the FIRE program.

      4. (4) Interpreting and implementing laws and regulations that may impact the FIRE Program.

   2. The Administrative Service Teams are responsible for:

      1. (1) Serving in an advisory capacity to the field offices in the overall direction of the FIRE program.

      2. (2) Coordinating and disseminating best practices and other significant management improvements and techniques.

      3. (3) Providing financial management technical assistance to field offices.

   3. The Federal-aid division offices are responsible for administering the FIRE Program within their respective States, which includes:

      1. (1) Establishing a plan for carrying out the FIRE Program at the beginning of the fiscal year.

      2. (2) Ensuring that reviews are scheduled and performed during the year.

      3. (3) Assuring corrective actions or follow-ups are taken on a timely basis.

      4. (4) Reporting the results of the FIRE Program to the Office of Budget and Finance (HABF).

1. Purpose. The purpose of developing a plan is to identify the areas to be reviewed, develop a schedule for conducting the reviews, and determine the types of resources that will be needed to complete the program by September 30.

2. Method

   1. Each Federal-aid division office will develop a plan by October 31 describing its activities and schedule for carrying out the FIRE Program for the coming year. The division office will conduct risk assessments of each of the applicable key grant financial management processes described below to determine which process review will be performed. See Appendix A for the risk assessment tool.

   2. The key grant financial management processes identified in this directive are:

      1. (1) Project Authorization Process

      2. (2) Payroll Process

      3. (3) Construction Contractor Payments Process

      4. (4) Right-of-Way Payments Process

      5. (5) Utility/Railroad Payments Process

      6. (6) Equipment Costs Process

      7. (7) Subgrants Administration Process

      8. (8) Consultant Contract Payment Process

      9. (9) Process for Making Direct Payments to Local Public Agencies

      10. (10) Planning Program Payment Process

      11. (11) Research Program Payment Process

      12. (12) Bond Service Payment Process

      13. (13) Non-construction Contract (ITS, LTAP, etc.) Payment Process

      14. (14) Funds Management Process (Financial Plans, Advance Construction, Earmarks, etc.)

   3. A division office may include other key financial processes in its assessment. The plan will establish the schedule and identify the responsible official(s) for conducting the grant management process review, the Federal-aid billing transactions review, the review of inactive projects, and the administrative review. These activities must be completed in sufficient time for the Division Administrator to submit the annual certification to HABF by October 31.

   4. The plan will address any actions that will be taken during the year to respond to or resolve findings reported in the single audit report or a Federal audit report issued by the Office of Inspector General (OIG) or the Government Accountability Office (GAO). The plan should note when the next single audit report is due (nine months after the end of the State's fiscal year) and the timeframe for responding to any findings that may be reported.

3. Results

   1. The result of the planning phase of the FIRE Program will be a document that identifies the schedule and responsibilities for completing the program in sufficient time to issue the annual certification.

   2. The Division Administrator will approve the plan and provide a copy to the Director, HABF, by October 31.

   3. The following is a sample FIRE Program Plan.

FIRE PROGRAM REVIEW PLAN
YOUR DIVISION OFFICE
FISCAL YEAR 2006

1. Purpose

   1. The purpose of the grant financial management process review is to assess one key State process to determine that (1) the process complies with Federal requirements, (2) the process complies with generally accepted accounting principles and standards and internal controls, and (3) areas of opportunity are identified for process improvement.

   2. The following have been identified as key grant financial management processes. If a process is not applicable in a specific State, the division office should note in its risk assessment that the process is not used by the State for Federal-aid costs. A division office may add other processes that are key to Federal-aid and include those in the risk assessment. Also, the division office is not required to assess a process that was reviewed by the division office during the previous fiscal year and corrective actions are still underway.

      1. (1) Project Authorization Process

      2. (2) Payroll Process

      3. (3) Construction Contractor Payments Process

      4. (4) Right-of-Way Payments Process

      5. (5) Utility/Railroad Payments Process

      6. (6) Equipment Costs Process

      7. (7) Subgrants Administration Process

      8. (8) Consultant Contract Payment Process

      9. (9) Process for Making Direct Payments to Local Public Agencies

      10. (10) Planning Program Payment Process

      11. (11) Research Program Payment Process

      12. (12) Bond Service Payment Process

      13. (13) Non-construction Contract (ITS, LTAP, etc.) Payment Process

      14. (14) Funds Management Process (Financial Plans, Advance Construction, Earmarks, etc.)

2. Method

   1. The process to be evaluated will be determined using the risk assessment tool provided in Appendix A. It will be necessary to define the scope of the review. For example, when reviewing Right-of-Way Payments, the review may only include relocation payments in Districts 1, 3, and 5. After defining the scope, evaluate the process using the following techniques and tools, as appropriate. It is recognized that some of the following activities may not be necessary for each process review. Recommended review guides are provided in Appendix B.

   2. Study policies, procedures, and practices related to the process. The reviewer should be familiar with Federal and State written directives relating to the process. The reviewer will determine that the directives are adequate and that directives are being followed.

   3. Flowchart the process.

      1. (1) If the State has not developed a flowchart of the process, then the reviewer should work with the State to develop one. Flowcharts should be initially developed to reflect written policies and procedures. The resulting chart should be compared to what is actually happening, through interviews and observation, and modified accordingly. The chart can then be analyzed for possible areas of improvement.

      2. (2) Flowcharts highlight what is happening versus what should be happening in a process. They make it easy to identify duplicate or unnecessary steps and bottlenecks. They make it easier to determine if the steps are in the most efficient order and if documents/reports/ information is flowing to the right people. Flowcharts make it easier to determine whether internal controls are in place.

   4. Interview key personnel. Identify people who are knowledgeable about the process to be interviewed. Carefully record the information provided by the person and clarify the information with the person at the end of the interview. The interview can determine if a person's understanding of the process is consistent with established policy and can be used to validate the flowchart.

   5. Conduct surveys and/or questionnaires. Surveys and questionnaires are also tools that can be used to seek information. These tools are useful when feedback is needed from a number of people at various locations. However, if these tools are not well developed, responses can be difficult to interpret.

   6. Explain how the process can be improved. The reviewer should (1) analyze the flowchart for steps that can be combined, eliminated, or automated and modify the flowchart to show the improved process; (2) analyze the staff interviews to determine if there were any suggested improvements; (3) review the directives to determine if any changes are needed based on this analysis; (4) review to ensure transactions are properly authorized by appropriate officials; (5) determine if there is appropriate separation of key duties and responsibilities; (6) evaluate system edits to ensure adequate funds control; and (7) ensure that supporting documentation is available.

   7. Develop work papers. The reviewer should develop a record of the work performed that documents the information obtained or developed in support of the conclusions reached and recommended improvements. The record of work performed may include items such as the following:

      1. (1) References to or copies of relevant regulations, policies, and procedures;

      2. (2) Copies of flowcharts and organization charts;

      3. (3) Correspondence relating to the process;

      4. (4) Records of interviews and surveys;

      5. (5) Personal observations relevant to the process;

      6. (6) Tests performed and samples selected; and

      7. (7) Any other information that supports the findings, conclusions, and recommendations.

3. Results

   1. The reviewer should prepare a formal report that documents the results of the review, including the identification of strengths and weaknesses of the process and the impact if the weaknesses are not resolved, and improvements proposed or completed. It is suggested that a report be prepared that describes WHY the review was performed (why it had the highest risk rating), HOW the work was accomplished, WHO performed the work, and WHAT was accomplished.

   2. The report provides a reference document of the work performed and objectives accomplished for future use by others. The results of the report will be an element in conducting future risk assessments of the process.

   3. Some key elements of a report include:

      1. (1) Purpose or Objectives. Explain why the review was performed and what the reviewer hoped to accomplish.

      2. (2) Background. Discuss pertinent circumstances or conditions having a bearing on the performance of the process.

      3. (3) Scope. Identify the coverage of the review such as type of costs, programs, or districts to be reviewed. This may differ somewhat from the planned scope, as the coverage of a project may change due to unforeseen circumstances.

      4. (4) Approach or Methodology. Describe how the work was performed, such as what tests were performed, reports reviewed, staff interviewed, etc.

      5. (5) Responsibility. Identify the people conducting the review.

      6. (6) Findings. Identify areas that lacked appropriate/sufficient controls or where improvements could be made. Conditions that the reviewer believes should be corrected should identify the criteria, cause, effect, and recommendation.

      7. (7) Suggested Improvements. Present any suggestions for improvements explaining why changes are needed. Try to identify the root cause of the problem and the impact that the improvement would have on the operation. The report will contain the formal response of State management to the findings and recommendations of the report, along with a plan of action to implement agreed upon recommendations.

1. Purpose. The purpose of a Federal-aid billing transactions review is to determine that specific items billed to FHWA represent eligible costs. A transaction review differs from a process review (described in Chapter 3) in that no specific process is evaluated. The transaction review targets specific items charged to the project for which the State has requested reimbursement and ensures there is sufficient documentation to support the billing item and amount.

2. Method

   1. The Federal-aid billing transaction review will be planned and performed annually as part of the division office FIRE plan. The reviewer will select a number of transactions for review based on overall Federal-aid program size for the State (e.g., 15 transactions for a small program, 25 for a medium program, and 50 for a large program). Small programs are defined as annual apportionments less than $300 million, medium programs are apportionments from $300 million to $600 million, and large programs are apportionments exceeding $600 million.

   2. The transactions review must cover a sample of the types of costs charged to projects (see the following page under Payment Processing and Recording for a list of transaction types). The review also needs to cover transactions from at least 5 or more Federal-aid billings to determine that the costs are billed in accordance with Federal requirements throughout the year.

   3. The primary objective of this review is to establish the eligibility and accuracy of costs billed to FHWA. The reviewer will ensure that each transaction complies with Federal requirements and determine the level of reliance that can be placed on the State's internal controls to submit bills with sufficient supporting documentation. Primary emphasis will be on determining the adequacy and completeness of the following:

      1. (1) Management controls

      2. (2) Documentation

      3. (3) Reporting

   4. Key questions to be answered with the review would include:

      1. (1) Is the cost item charged to the correct project?

      2. (2) Is the item eligible for Federal participation?

      3. (3) Was the cost incurred subsequent to the date of FHWA project approval?

      4. (4) Was the correct Federal share applied?

      5. (5) Was the item authorized and approved by the appropriate State/local official?

      6. (6) Is there adequate source documentation to support the transaction (e.g. progress estimates, time records, expense vouchers, invoices, contractor/vendor payments)?

3. Internal Controls

   1. Observe the processing of a payment voucher/invoice from billing through payment, for the State payment system and the State Treasury payment system. Compare this process to the written procedures. Are control processes and procedures in place and functioning as described?

   2. Observe the processing of a credit/adjusting transaction or refund through the State financial management system, including project accounting, to the Rapid Approval and State Payment System (RASPS) and the Fiscal Management Information System (FMIS) agreement file. Was the credit posted correctly and timely?

4. Payment Processing and Recording

   1. Select for review transactions from the following types of costs that are applicable to State billings:

      1. (1) construction and consultant contractors,

      2. (2) acquisition of right-of-way,

      3. (3) relocation payments,

      4. (4) salaries and wages,

      5. (5) administrative and legal settlements,

      6. (6) property management,

      7. (7) claims,

      8. (8) rental income,

      9. (9) payments to others (Local Public Agencies (LPAs), Metropolitan Planning Organizations (MPOs), researchers),

      10. (10) travel, and

      11. (11) capital expenditures.

   2. For contractor and consultant payments and payments to other third parties, i.e. local governments and right-of-way, trace each sample transaction to supporting documentation, such as payment vouchers, vendor claims for payment, and the engineer's estimate of work completed, which justifies payment authorization.

   3. For each sample transaction, review the state voucher/invoice to determine the presence of required authorizations and approvals.

   4. Verify that the appropriate support documentation is included with the State voucher/invoice. This may include vendor bills, contract documents, etc. The division office should maintain in the review file the supporting documentation, including invoices, certifications, policies, etc. that support the results of the review. It may be necessary to provide copies of this documentation to OIG or to financial statement auditors.

   5. Verify that the amount authorized and approved does not exceed the vendor's claim and is in agreement with State support documentation, including financial terms and conditions of the contract or agreement, etc.

   6. Trace the payment to the State and State Treasury payment systems to assure the transaction was properly executed and payment was issued.

   7. Verify that the amount invoiced to RASPS is limited to the Federal share of participating costs.

   8. Verify that non-participating cost elements have been correctly calculated and adjusted against the Federal share of costs.

   9. Trace the invoice payment amount to the State project accounting ledger and compare life-to-date Federal cost to FMIS Federal-aid agreement file. Review and analyze any discrepancy. Where more than one Federal-aid program code is funding a highway project, verify that the Federal share of cost has been properly allocated and posted to the participating agreements.

   10. Determine that salary and labor burden costs (fringe benefits, leave time, and indirect cost) are applied in accordance with plans approved by the Federal government.

5. Errors and Discrepancies

   1. Document, analyze, and resolve any errors or discrepancies detected in the sample transactions with the State transportation department.

   2. If any errors or discrepancies discovered could have a significant effect on the Federal-aid program, expand the sample by selecting a supplemental sample of transactions and specifically test for repeated error conditions.

   3. Errors and discrepancies that could have a significant impact on the Federal-aid program are to be included as a finding in the report.

6. Results. The division office will maintain documentation on the transactions reviewed. The division office will: (1) follow up on any findings of noncompliance with Federal requirements or internal control weaknesses, (2) ensure that the transactions are corrected, and (3) document all actions taken.

1. Purpose. The purpose of reviewing inactive Federal-aid projects is to assure that (1) Federal funds are properly obligated, (2) Federal funds are being used effectively, and (3) unused funds are properly safeguarded and/or de-obligated to eliminate misuse.

2. Method

   1. Division offices will periodically review inactive projects with outstanding balances of $500,000 or more using the FMISQ24A (pdf) or FMISQ24E (downloadable) report. Inactive projects are defined as having no billing activity for the past 12 months.

   2. The division office will work closely with the State to determine the validity of the amount obligated for each project. It is important that the division office obtain sufficient documentation, review project records, and take other actions that provide a reasonable conclusion that the obligation amount is valid (for example, the project is delayed by litigation or contractor claim, but the unexpended obligation is consistent with the remaining estimated costs).

   3. If excess obligations are identified, the State should take action to promptly de-obligate the funds and the division office should ensure that this is done timely.

3. Results. The division office will prepare a report on the results of the review. The report will be submitted to HABF with the annual certification. The report should identify the individual projects reviewed, the amount available for de-obligation, the results of discussions with the State on each project, and the status of de-obligations and project closures that the State agreed to process. The following is a sample report format.

INACTIVE PROJECT REVIEW
YOUR DIVISION
FY 2006

TOTAL AMT TO BE DE-OBLIGATED _________________

1. Purpose. The purpose of the administrative review is to achieve the objectives of the Federal Managers' Financial Integrity Act (FMFIA), meet the reporting needs of the Department, and provide documented assurance to FHWA for tracking and monitoring the performance in achieving these objectives.

2. Method

   1. This review applies to the following administrative areas under the responsibility of the Division Administrator:

      1. (1) Fund authority – monthly reconciliations of general operating expenses and any program allotments.

      2. (2) Purchase orders and administrative contracts.

      3. (3) Travel-related transactions.

      4. (4) Credit cards and convenience checks.

      5. (5) Property inventories and capitalized assets.

      6. (6) Collections (cash/check receipts) and sensitive/controlled documents.

   2. The major concerns apply to the provisions for safeguarding and protecting Government resources, to include reducing the risk of error, waste, or wrongful acts or reducing the risk of wrongful acts going undetected. It is important that the person conducting the review not be involved in performing the function to ensure an independent evaluation of the process. The following questions should be applied, as practicable, to all financial areas.

      1. (1) Ensure the existence of effective checks and balances:

         1. (a) Are the duties of authorizing, approving, and recording transactions assigned to different individuals?

         2. (b) Are the duties of authorizing, issuing, receiving, and making payments for capital assets assigned to different individuals?

         3. (c) Are the duties of creating, reviewing, verifying, and auditing transactions assigned to different individuals?

      2. (2) Ensure adequate procedures and instructions are provided to the accounting staff:

         1. (a) Are adequate desk procedures available and instructions adequate to meet the needs of the accounting staff?

         2. (b) Has the accounting staff attended training (formal or informal)?

         3. (c) Have the key duties and responsibilities been assigned to specific accounting staff members?

   3. The following components within the division offices may have a potential for waste, loss, unauthorized use, or misappropriation of Federal government resources. Division Administrators should assess internal controls and safeguards in each of these areas by reviewing at least five transactions in each area.

      1. (1) Fund authority – conducting monthly reconciliations of general operating expenses and any program allotments,

      2. (2) Purchase orders and administrative contracts,

      3. (3) Travel-related transactions,

      4. (4) Credit cards and convenience checks,

      5. (5) Property inventories and capitalized assets, and

      6. (6) Collections (cash/check receipts) and sensitive/controlled documents.

   4. Documentation should be maintained to support all activities. Suggested documentation includes, but is not limited to, documents to support that reconciliations are performed, purchase orders are tracked, supporting documents submitted with vouchers, credit card and convenience check purchases are properly authorized and paid, physical inventories are performed and documented, and supervisor reviews are periodically performed. The supervisor should specifically monitor the use of convenience checks.

   5. Division offices may use the Sample Administrative Review Guides (see Appendix C) to assess internal controls for these administrative transactions.

3. Results

   1. Areas of non-conformance identified by the review process should be documented and reported in the annual certification.

   2. Material non-conformance deficiencies are defined as any issues deserving the attention of the Executive Office of the President and the relevant Congressional oversight committee. Refer to the Department of Transportation (DOT) FMFIA Policy to determine if the weakness or non-conformance qualifies as a material item. Additional information must be provided to prepare an executive summary to track and report the resolution of each item reported.

   3. Items of non-conformance (both material and non-material) should be documented using the format in Chapter 9, Certifying the Results of the FIRE Program. Actual material weaknesses and material non-conformance will need to be sent forward with the annual assurance letter from the Administrator to the Secretary. Material weaknesses and financial systems material non-conformances will need to be documented with a description and corrective actions.

1. Purpose. The Single Audit Act requires each State and local government receiving a specified amount of Federal funds to conduct an audit of its operations. The purpose of this review is to focus on the results of the single audit performed by the State covering the State transportation department. Most States perform statewide audits covering all Federal programs in a single report. Hawaii, Michigan, New Mexico, and Puerto Rico perform a single audit that covers only the transportation department. All States perform an annual audit except for Michigan, Montana, and North Dakota.

2. Method

   1. The division office's first responsibility is to determine when the audit is due and if the audit is completed on time. The State is required to submit the audit report to the Federal Audit Clearinghouse within nine months after the State's fiscal year (in accordance with §320(a)) of Office of Management and Budget (OMB) Circular A-133). The status can be checked at the Federal Audit Clearinghouse Home Page. If the audit is not submitted timely, the division office should obtain confirmation that an extension has been granted by the cognizant agency. The Department of Health and Human Services (HHS) is the cognizant Agency for all statewide audits, and the DOT OIG is the cognizant Agency for State transportation department audits.

   2. The division office will (1) obtain a copy of the single audit report when it is issued (the portion of the report relating to transportation would be sufficient), (2) identify findings relating to FHWA programs, (3) work with the State to develop a plan to resolve the findings, and (4) follow up to determine that the findings were properly resolved. While OMB Circular A-133 requires Federal agencies to issue a management decision on audit findings within six months after receipt of the audit report, division offices should strive to resolve findings as quickly as possible.

3. Results. The division office will maintain records documenting the management decision and resolution actions on each finding.

1. Purpose. The purpose of this section is to establish a process that ensures prompt and adequate resolution of findings reported by the DOT OIG and the GAO.

2. Method

   1. Division offices will be notified when findings are issued that impact their divisions or States.

   2. The division offices will prepare a management decision on each finding in accordance with the requirements and timeframes established in DOT Order 8000.1C, Office of Inspector General Audit and Investigation Report Findings, Recommendations, and Follow-up Action.

3. Results. The division office will maintain a record of each management decision and actions taken to resolve audit findings.

1. Purpose. The purpose of this chapter is to describe the process for annually certifying the results of the division office reviews conducted as part of the FIRE Program.

2. Method. The division office will summarize the results of the FIRE Program and report weaknesses identified in its reviews.

3. Results

   1. The results of the FIRE Program will be reported using the format in the following sample memorandum. The certification will satisfy the financial and accounting requirements of the FMFIA, Sections 2 and 4. The certification will identify all instances of non-conformance with Federal requirements and effective internal controls. The division office will attach copies of the following documents to the certification:

      1. (1) Instances of non-conformance.

      2. (2) The risk assessment of grant financial management processes.

      3. (3) Grant financial management process review report.

      4. (4) The list of the Federal-aid billing transactions reviewed identifying the transactions that were questioned.

      5. (5) The list of the inactive projects reviewed identifying those where funds are released.

      6. (6) The list of administrative transactions reviewed identifying those in noncompliance and describing any internal control weaknesses.

      7. (7) Management decisions issued as a result of single audit or Federal audit reports.

   2. The division office should not submit source documents or other data that are obtained to support the findings and conclusions of the various reviews. This information should be retained in the division office and be readily available if requested by the HABF or the auditors. It is expected that the documents submitted with the annual certification would be in electronic format and can be submitted by email. A sample certification memorandum is shown on the following page.

Memorandum

U.S. Department
of Transportation
Federal Highway
Administration

- SAMPLE -

As Division Administrator for the XXXX Division, I am pleased to report that the management controls and financial management systems, taken as a whole, that were in effect during Fiscal Year 2005, provide reasonable assurance that we are meeting the management, financial, and accounting objectives of Section 2 and Section 4 of the FMFIA [or] I am reporting that serious weaknesses were identified in the management controls and financial management systems that were in effect during Fiscal Year 2005 resulting in a lack of assurance that we are meeting the objectives of Section 2 and Section 4 of the FMFIA. In general:

• financial and other resources are safeguarded from unauthorized use or disposition,
• transactions are executed in accordance with authorizations,
• records and reports are reliable,
• applicable laws, regulations, and policies are observed, and
• resources are efficiently and effectively managed.

In making the above determination, I have relied upon the following:

• We conducted all reviews required by FHWA Order 4560.1 and found no instances of non-conformance [or, for example] found two instances of non-conformance that are identified in Attachment 1.
• We have conducted monthly reconciliations of our general operating budget and program budgets.
• We have current written procedures documenting office policies and procedures regarding internal and financial controls.
• We have reviewed and acted on the recommendations contained in the single audit report that was completed (month/year) in compliance with OMB Circular A-133.

Attachments (7)

1. Instances of non-conformance.
2. The risk assessment of grant financial management processes.
3. Grant financial management process review report.
4. The list of the Federal-aid billing transactions reviewed identifying the transactions that were questioned.
5. The list of the inactive projects reviewed identifying those where funds are released.
6. The list of administrative transactions reviewed identifying those in noncompliance and describing any internal control weaknesses.
7. Management decisions issued as a result of single audit or Federal audit reports.

Attachment 1

FEDERAL HIGHWAY ADMINISTRATION
MANAGEMENT CONTROLS AND ACCOUNTING
INSTANCES OF NON-CONFORMANCE
FY 2005

OFFICE: _______________________________

* Enter the source of determination (e.g., Process Review, OIG Report, Administrative Review)

1. Implementation

   1. Just conducting a review and writing a report does not result in improvements. Implementation is the payoff for the entire process of performing a process review. The following are some key points to consider in preparing the implementation plan:

      1. (1) Involve State officials in the review process to avoid surprises.

      2. (2) Break down recommendations into separate, achievable items.

      3. (3) Develop a viable implementation strategy and timetable.

      4. (4) Emphasize why the changes need to be made and the benefits that will accrue.

      5. (5) Consider the manpower and resource impacts and time constraints.

   2. The plan should include a list of recommendations with the following information given for each:

      1. (1) A description of actions necessary for implementation.

      2. (2) Identification of the responsible office and/or person.

      3. (3) The date each action should be completed.

   3. Leave space on the implementation plan for comments on the action that is taken (i.e., adopted with modifications, or not adopted). These comments are the record of agreement and, as a whole, will serve as a basis for monitoring the results of improvements through the follow-up phase.

2. Follow-up

   1. Follow-up should be performed in a timely manner to determine if the process has been implemented and the desired results have been achieved. The follow-up can be accomplished by an independent party or group such as the State's internal audit staff or as part of next year's division office review.

   2. The FIRE Program should not be considered complete until all actions have been taken which produce improvements or correct identified deficiencies. Results of the follow-up should be documented and management should be informed of the timeliness and quality of the resolution actions.

1. Purpose. The purpose of the risk assessment is to identify the grant financial management payment process to be reviewed by comparing the relative risk of each of the identified processes each year. While there are many risk assessment tools, this appendix includes a specific tool to be used for the FIRE Program. The HABF may modify the risk assessment tool to comply with any FHWA policies or practices relating to risk assessments. The intent is for all division offices to use the same risk assessment tool for both financial and program oversight to allow for better training in the use of the tool resulting in more consistency in assessing risk. The following discusses how to use the risk assessment tool that is included at the end of this appendix.

2. Directions

   1. Complete a risk assessment of each of the grant financial management processes identified in Chapter 3, as modified to meet division office needs.

   2. Use the frequency criteria separate from the severity criteria. Place the score in each box then add up the column of scores. Apply the adjustment factor, if necessary, and add that to the total from above. Combine the frequency score and the severity score to determine the total risk for this process.

3. Scoring Range. Use the whole scoring range, 1 through 5, to shade between the bottom, middle, and the top end of the scale. Provide a brief explanation in the last column as to how the score was determined for each criterion.

4. Frequency Criteria

   1. Staffing Level - The number of staff at the DOT or the Division assigned to the process.

   2. Staffing Experience - The staff's knowledge and understanding of the process.

   3. Staffing Ability - The staff's skill and willingness to complete the work associated with the process.

   4. Operational Procedures - The existence and relevance of the procedures.

   5. Guidance - The existence and relevance of the guidance.

   6. Problem History - The number of problems experienced in the past including audit findings.

   7. New Process, Phase, or Component – The time that the process or some key component has been in implementation.

   8. Potential for waste, fraud and abuse - The opportunity for these items to occur in the process.

   9. Work Force Development and Training - The organization's program and commitment to maintain its staff's knowledge and abilities.

   10. FHWA Involvement - The level of effort the division office staff typically assigns to the process.

   11. Consultant Use - The amount of work performed by consultants on behalf of the State.

   12. Other - Identify any other frequency criteria that is included in the assessment.

5. Severity Criteria

   1. Federal Interest - The amount of attention from other Federal organizations, such as Congress, the OIG, or the GAO.

   2. Stakeholder Interest - The amount of attention from the parties involved.

   3. Exposure - The amount of potential media coverage or public/political interest.

   4. Funding Level - The amount of funds involved in the process.

   5. Goals - The difficulty in achieving the objectives of the process.

   6. Controversy or Lawsuits - The known or expected level of problems or litigation.

   7. Complexity - The intricacy inherent in the process.

   8. Outside Control - The input or roadblocks that parties outside of FHWA could create.

   9. Emerging Initiatives - The expectation that new ideas, policies, or twists will be involved.

   10. Effect on Safety, Congestion, the Environment, or Quality - The process'level of influence in these areas.

   11. Other - Identify any other severity criteria that is included in the assessment.

6. Adjustment Factor - provides flexibility to add additional score or weight to any one criterion if there is an overwhelming factor involved (for example, if exposure were rated a 5 and it is felt by the assessor that a 5 was not enough, then an additional value could be added.) The adjustment factor should not exceed 5 points per criterion.

Frequency and Severity Risk Assessment

Process: ___________________________________________________

TOTAL RISK ASSESSMENT SCORE __________

1. This Appendix contains sample review guides for the grant financial management processes identified in this directive. Division offices may revise the review guide to suit the scope specific review. The reviewer should rely upon evaluations and analyses performed by others, such as State auditors, OIG, etc.

2. The following review programs are currently provided. Additional review guides will be included as they are developed.

   1. Project Authorization Process

   2. Construction Contractor Payments Process

Project Authorization Process
Review Guide

1. Scope. This process consists of activities and controls related to the proper authorization of Federal-aid highway projects to ensure that Federal funds are obligated in accordance with Federal requirements. As determined appropriate, work performed by others may be relied upon and incorporated into the review. The process should include an examination of project accounting related documents, cost estimates, availability of proposed Federal, State/local funding, and appropriate State or Federal approvals.

2. FHWA Policy

   1. 23 United States Code (USC) 102, 106, 118, 120, 320.

   2. 23 Code of Federal Regulations (CFR) 1, 630.

   3. 49 CFR 18.

   4. OMB Circular A-87.

3. Guidance

   1. Grant Anticipation Revenue Vehicle (GARVEE) Bond Guidance, dated March 25, 2004.

   2. Tapered Match on Federal-aid Projects, dated July 7, 1999.

4. Review Plan

   1. Are the State and Division operating according to the Oversight and Stewardship Agreement? Does it clearly define State and FHWA responsibility in executing the Federal-aid highway program?

   2. Is the project included on the Statewide Transportation Improvement Program (STIP)?

   3. Are all required certifications (such as right-of-way certification) on file?

   4. Examine the procedures for authorizing Federal-aid for full oversight projects and State administered projects? Are critical roles and responsibilities clearly defined?

   5. What controls provide assurance that costs are incurred after authorization? Test a project sample size to determine if costs were incurred prior to authorization? Is FHWA provided notice of all costs incurred prior to authorization?

   6. How does the State and FHWA ensure that the full oversight and State administered projects are in the STIP and funded accordingly?

   7. Verify that costs are billed at the appropriate Federal share? What levels exist to validate project is eligible for proposed funding category?

   8. Examine State organization and delegations of authority to determine if authority of State approving officials is appropriately located in the State organization?

   9. How does the State and Division assure copies of the authorizing documents are available? Verify that State procedures for records retention meet or exceed FHWA requirements.

   10. Will the proposed project activity or undertaking meet the requirements needed for the actual construction of the highway that is eligible for assistance or reimbursement? If a single agreement is executed for all phases, are the costs set up to be controlled by phase?

   11. What assurances or controls are in place to verify that a project agreement is prepared for each Federal-aid project? Is there a different process for approval of project agreement modifications?

   12. Examine the procedures that establish/convert debt-financed (GARVEE) projects. Does the State include a debt service schedule in the project agreement when a debt service project is authorized? Is the estimated Federal share of debt-service costs included in the STIP?

   13. If tapered match is authorized, was justification provided by the State? Is the authorization noted in the project agreement?

   14. Is FHWA advised of funds needed for a final accounting of the project when it is substantially complete or open-to-traffic? What impact are these needs given by the State and FHWA in funding other projects?

Construction Contractor Payments Process
Review Guide

1. Scope. This process includes activities for evaluating and testing the controls that are related to the financial aspects of construction contractor payments. As determined appropriate, work performed by others may be relied upon and incorporated into the review. The process should include any aspect that involves the preparation of the project estimate, the approval of and payment of estimates, the processing of change orders, and the completion and final acceptance of the work.

2. FHWA Policy

   1. 23 U.S.C. 106, 112, 114, 120, 121.

   2. 23 CFR 1, 630, 635.

   3. 49 CFR 18.

   4. OMB Circular A-87.

3. Review Plan

   1. What is the process for assuring contract award is by competitive versus another approved method?

   2. What is the process for assuring that the plans, specifications, and estimates have been approved prior to the State requesting project authorization to obligate funds?

   3. What controls are in place to assure contract quantities are processed according to the approved contract line items? Can project quantities exceed the line item levels? Examine how adjustments or other changes are handled.

   4. Evaluate the preparation and maintenance of project field records that are the basis for submitting quantities for payment. Evaluate the procedures for final payments. Is there an independent review or audit and at what stage?

   5. Verify the project diaries adequately support all time charges, work progress, time extensions, etc. When are they subjected to further review and approval?

   6. How do you determine if required certifications are accepted/approved and maintained?

   7. How is the State's responsibility for project supervision determined, and is prior Division approval required? What is the State procedure for project supervision?

   8. Verify the documentation related to materials, etc., received by the inspectors. How are rejected items handled?

   9. Verify that field records provide the correct units of measurement and are documented in accordance with the State specifications.

   10. In what areas do change orders occur most frequently? Are change orders approved at the project or central office level? What constitutes a change order versus a design error?

   11. Evaluate the process of awarding the contract and acceptance to preparing the project agreement. Does the project agreement contain provisions for State funds?

The following review questions are provided as general guidance for use in conducting the administrative review.

1. Fund Authority - Conducting Monthly Reconciliations of General Operating Expenses and Any Program Allotments. Purpose: To avoid violations of the Anti-Deficiency Act in over-obligation of funds.

   1. What method is used to monitor funds allocated to your office/program?

   2. Is status of funds verified periodically by senior management?

   3. Are reconciliations of obligations and expenditures performed each month using the Status of Funds Report?

2. Purchase Orders and Administrative Contracts. Purpose: To determine if procedures are in place for processing and monitoring purchase orders and administrative contracts.

   1. Are purchase orders used by your office?

   2. Do you have procedures in place to track and monitor these documents?

   3. Are they recorded timely into the accounting system?

   4. Do you have standard operating procedures in place for processing these documents?

3. Travel-related Transactions. Purpose: To determine if travel is authorized in accordance with the Federal Travel Regulation (FTR) and FHWA Travel Policy (see The FHWA Travel Home Page).

   1. Is travel authorized and approved in accordance with the FTR and FHWA Delegations of Authority?

   2. Are travel authorizations recorded timely and correctly in the accounting system?

   3. Are government credit cards used for official travel in accordance with the FTR?

   4. Are travel advances issued and repaid in accordance with travel regulations and policy?

   5. Is the use of non-contract carriers approved by the appropriate authorizing official?

   6. Are vouchers submitted timely with all supporting documentation attached?

   7. Are vouchers approved timely?

   8. Are blanket travel authorizations closed in accordance with the FTR?

4. Credit Cards and Convenience Checks. Purpose: To ensure credit card purchases are properly authorized and paid in accordance with the Department's Small Purchase Credit Card Policy and guidelines.

   1. Are credit card purchases properly authorized and paid?

   2. Does the approving official receive and review the statements?

   3. Are the amounts on the cardholder's statement reconciled on a regular basis?

   4. Has training been provided to cardholders?

   5. Is supporting documentation retained?

   6. If the office uses convenience checks, are the checks kept in a secured location?

5. Property Inventories and Capitalized Assets. Purpose: To determine if accountable property (i.e. furniture, equipment, and other sensitive items) are properly recorded and inventoried, and that capital assets (property valued over $25,000) are properly recorded.

   1. Are regular physical inventories conducted?

   2. Are the property inventories properly adjusted for loss, disposal, transfer, etc.?

   3. Are non-expendable property inventory reports (Form FHWA-162) submitted to the Finance Division (HABF-20)?

   4. Are capitalized items properly recorded?

6. Collections (Cash/Check Receipts) and Sensitive/Controlled Documents. Purpose: To ensure cash/check receipts are deposited and recorded promptly and accurately, and to maintain physical security and safeguards over cash/check receipts.

   1. Does your office use this process?

   2. Are cash/check receipts recorded, secured, and deposited immediately upon receipt?

   3. Is a cash receipts log regularly reconciled to match the deposit tickets?

   4. Are the locks, combinations, keys periodically changed to avoid potential losses?

   5. Is the physical security for each of the above-mentioned items maintained from receipt to disposition?