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December 11, 2019

FAA Needs To Improve Oversight and Enhance Transparency in Its Franchise Fund

Mandated by the FAA Reauthorization Act of 2018
Project ID: 
FI2020012
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What We Looked At
The Federal Aviation Administration (FAA) Administrative Services Franchise Fund is a Government-run, fee-for-service organization that aims to foster competition, increase efficiency, and reduce costs across the Federal Government. The Fund has six service organizations and reported $480 million in annual revenues in 2018. As required by the FAA Reauthorization Act of 2018, our office initiated an audit to assess FAA’s management and oversight of the Fund’s operations and activities. Specifically, we looked at the Fund’s history, intended purpose, and objectives; conformance to generally accepted accounting principles; and conformance to Federal policies and other guidelines.
 
What We Found
The Fund’s six service organizations serve multiple types of customers; by law, they are required to receive payment in advance. While the Fund’s annual revenues reflect increases in its services and customers, we found weaknesses in its internal controls. For example, the Fund does not track inventory age; as such, we could not determine if the inventory value, reported to be $656 million in 2018, had been overstated. Fund officials also do not conduct adequate oversight of the financial operations. For example, we found $2.6 million in unexpended funds that should have been returned to customers; we project the total unreturned amount to be $26 million of $338 million in unexpended funds. In addition, if they are not paid in advance, some service organizations use operating reserves to pay for the costs of providing services, contrary to law. Most of them do not fully comply with requirements for capital reserve plans—increasing the risk that funds could be mismanaged. Still, FAA is changing the Fund’s governance structure, which might allow it to measure whether the Fund is receiving adequate oversight and stability. However, FAA could do more to address customer concerns regarding transparency and to avoid the risk of improperly obligating funds. Enhancing financial-related internal controls is key to ensuring the Franchise Fund functions as Congress intended.
 
Our Recommendations
We made 13 recommendations to help FAA strengthen its management and oversight of the Franchise Fund. FAA fully concurred with recommendations 3 through 13, but did not concur with recommendations 1 and 2. We have asked the Agency to reconsider its position.

Recommendations

Open

Closed

Closed on 07.27.2020
No. 1 to FAA

Engage an auditor to perform an independent audit of the Franchise Fund's financial statements in accordance with generally accepted Government auditing standards and the Government Accountability Office's Financial Audit Manual and that includes an opinion on the Fund's internal controls.

Closed on 11.19.2021
No. 2 to FAA

Develop and implement a process directing the Logistics Center to maintain detailed records of the age and costs of inventory items as a way to identify obsolete items and prevent unnecessary storage and maintenance costs or purchase of assets already on hand.

Closed on 08.03.2020
No. 3 to FAA

Revise the accounting treatment for imputed costs to avoid the appearance of overstating losses.

Closed on 03.16.2020
No. 4 to FAA

Assign the unassigned balance of $6.9 million in unfilled customer orders identified in this report to the appropriate Franchise Fund service organization(s).

Closed on 03.16.2020
No. 5 to FAA

Review the $2.6 million in unused unfilled customer orders identified in this report, and return the unexpended balances as appropriate.

Closed on 08.25.2020
$26,000,000
No. 6 to FAA

Develop and implement a plan to improve oversight of the Franchise Fund's unfilled customer orders balance, such as tracking performance to ensure unexpended funds are returned timely as required. Implementing this recommendation could potentially put $26 million in funds to better use.

Closed on 08.26.2020
$39,000,000
No. 7 to FAA

Revise the Franchise Fund's policies on agreements to include dealing with delinquent agreements, and require service organizations to adhere to applicable DOT and FAA policies. Implementing this recommendation could potentially put $39 million in funds to better use.

Closed on 06.30.2021
No. 8 to FAA

Implement the requirement that service organizations collect advance payments before they provide products or services, in accordance with Public Law 104-205.

Closed on 05.29.2020
No. 9 to FAA

Develop and implement a process that requires Franchise Fund service organizations to respond promptly to customer questions about agreements and price changes before the period of performance begins.

Closed on 07.07.2020
No. 10 to FAA

Develop and implement formal, documented procedures that require service organizations to include a business case when they submit a capital reserve project to the Franchise Fund Management Council for approval to ensure the project represents the best value.

Closed on 07.29.2020
No. 11 to FAA

Implement the Major Business Investment and Expenditures Policy requirement to document formal approval of capital reserve projects.

Closed on 07.29.2020
No. 12 to FAA

Develop a plan that clearly describes the Franchise Fund Management Council's vision, goals and expected outcomes for the services provided to its customers. The plan should include what initiatives or specificactions the Council will take to provide the additional oversight and transparency needed.

Closed on 04.21.2020
No. 13 to FAA

Develop Franchise Fund process and procedures that require (a) customers to document bona fide needs for new projects before agreements are written and funds obligated and advanced and (b) service organizations to accept year-end funding only for projects that clearly represent a bona fide need.