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Performance and Accountability Report Fiscal Year 2006
Management's Discussion and Analysis

Management ASSURANCES and Compliance With Laws and Regulations

This section provides information on the USPTO’s compliance with the following legislative mandates:

Federal Managers' Financial Integrity Act
Federal Financial Management Improvement Act (FFMIA)
Federal Information Security Management Act
Inspector General (IG) Act Amendments
OMB Financial Management Indicators
Prompt Payment Act
Civil Monetary Penalty Act
Debt Collection Improvement Act
Biennial Review of Fees
Improper Payments Information Act of 2002

MANAGEMENT ASSURANCES

Federal Managers’ Financial Integrity Act

The FMFIA requires federal agencies to provide an annual statement of assurance regarding management controls and financial systems. The USPTO management is responsible for establishing and maintaining effective internal control and financial management systems that meet the objectives of the FMFIA. The objectives of internal control, as defined by the Government Accountability Office (GAO), are to ensure:

Effectiveness and efficiency of operations;
Reliability of financial reporting; and
Compliance with laws and regulations.

The statement of assurance is provided below, which includes one Section 2 material weakness for IT security discussed in further detail in the Federal Information Security Management Act section below. This statement was based on the review and consideration of a wide variety of evaluations, control assessments, internal analyses, reconciliations, reports, and other information, including the DOC OIG audits, and the independent public accountants’ opinion on the USPTO’s financial statements and their reports on internal control and compliance with laws and regulations. In addition, USPTO is not identified on the GAO’s High Risk List related to controls governing various areas.

On the basis of the USPTO’s comprehensive internal control program during FY 2006, the USPTO can provide reasonable assurance that its internal control over the effectiveness and efficiency of operations and compliance with applicable laws and regulations as of September 30, 2006, was operating effectively, except for the one material weakness identified. Accordingly, I am pleased to certify with reasonable assurance, except for the one Federal Information Security Management Act material weakness regarding information technology security, that our agency’s systems of internal control, taken as a whole, comply with Section 2 of the Federal Managers’ Financial Integrity Act of 1982. Our agency also is in substantial compliance with applicable federal accounting standards and the U.S. Standard General Ledger at the transaction level and with federal financial system requirements. Accordingly, our agency fully complies with Section 4 of the Federal Managers’ Financial Integrity Act of 1982, with no material non-conformances.

In addition, the USPTO conducted its assessment of the effectiveness of our agency’s internal control over financial reporting, which includes safeguarding of assets and compliance with applicable laws and regulations, in accordance with OMB Circular A-123, Management’s Responsibility for Internal Control. Based on the results of this evaluation, the USPTO provides reasonable assurance that its internal control over financial reporting as of June 30, 2006 was operating effectively and no material weaknesses were found in the design or operation of the internal control over financial reporting. In addition, no material weaknesses related to internal control over financial reporting were identified between July 1, 2006 and September 30, 2006.

Signature of Jon W. Dudas

Jon W. Dudas
Under Secretary of Commerce for Intellectual Property and
Director of the United States Patent and Trademark Office
November 6, 2006

Federal Financial Management Improvement Act

The FFMIA requires Federal agencies to report on agency substantial compliance with Federal financial management system requirements, standards promulgated by the Federal Accounting Standards Advisory Board, and the U.S. Standard General Ledger at the transaction level. The USPTO complied substantially with the FFMIA for FY 2006.

OTHER COMPLIANCE WITH LAWS AND REGULATIONS

Federal Information Security Management Act

The USPTO continues to stay vigilant in reviewing administrative controls over information systems and is always seeking methods of improving our secure configuration. All mission and business systems are fully certified and accredited, with full authority to operate since September 2004, with the exception of the Network Perimeter, which has interim authority to operate. In conjunction with the DOC’s continued emphasis on improving the certification and accreditation (C&A) process, the USPTO submitted the C&A package for the Network Perimeter, along with C&A packages for two contractor master systems new to the C&A process this fiscal year, to the DOC during the fourth quarter of FY 2006. The DOC did not consider the C&A packages to be of sufficient quality to be provided to the OIG. As a result, the USPTO has declared a material weakness for IT Security in recognition of the need for compliance with Government guidance on IT Security and to reconfirm its commitment to the protection of our Nation’s intellectual capital information systems.

While the USPTO IT Security Program has made significant strides within the past year, there remain several security areas that require improvement. Specific areas that require improvement include C&A of contractor systems, continuous monitoring of IT systems, and improvement of C&A packages for federal systems.

The USPTO implemented processes and procedures in the later part of FY 2006 and has taken immediate steps to remediate these weaknesses. The USPTO expects significant improvement in the near future. During FY 2007, the USPTO will continue to improve upon the C&A packages for the Network Perimeter, as well as for the contractor master systems. In addition, C&A activities for the remaining five contractor master systems new to the C&A process this fiscal year are scheduled for completion during FY 2007.

Inspector General Act Amendments

The Inspector General Act, as amended, requires semi-annual reporting on IG audits and related activities, as well as any requisite agency follow-up. The report is required to provide information on the overall progress on audit follow-up and internal management controls, statistics on audit reports with disallowed costs, and statistics on audit reports with funds put to better use. The USPTO did not have audit reports with disallowed costs or funds put to better use.

The USPTO’s follow-up actions on audit findings and recommendations are essential to improving the effectiveness and efficiency of our programs and operations. As of September 30, 2006, management had two recommendations outstanding from a report issued in FY 2004 (USPTO-BTD-16432-4-0001: “USPTO Needs Strong Office of Human Resources Management Capable of Addressing Current and Future Challenges”). No new reports had been issued during FY 2006. A summary of audit findings and recommendations follows.

Status of IG Act Amendments Audit Recommendations
*as of September 30, 2006*
Report for Fiscal Year	Status	Recommendation	Action Plan	Completion Date
FY 2004	Open	Ensure that the USPTO works with Commerce and OPM to officially obtain delegated examining authority.	The USPTO has coordinated with OPM to grant us formal delegated examining authority status. The final decision is pending contingent on a follow-up audit scheduled for September 2006.	Estimated March 2007
FY 2004	Open	Ensure that the USPTO develops Office of Human Resources (OHR) organizational descriptions, policies, and procedures, in accordance with the intent of DOO 10-14.	The USPTO is continuing to work on the development of Agency Administrative Orders, policies, and Standard Operating Procedures. These documents cover all of the human resources functions and effectively establish a set of rules and procedures for providing OHR services.	Estimated October 2007
The estimated date of completion for the delegated examining authority was moved from last year to allow time to make corrections in response to a recent OPM audit. The estimated date of completion for the organizational policies was moved from last year to allow time for development and approval of all agency administrative orders, policies, and standard operating procedures.

OMB Financial Management Indicators

The OMB prescribes the use of quantitative indicators to monitor improvements in financial management. The USPTO tracks other financial performance measures as well. The table below shows the USPTO’s performance during FY 2006 against performance targets established internally and by OMB and the government-wide Metric Tracking System (MTS):

USPTO FY 2006 Financial Performance Measures
Financial Performance Measure	FY 2006 Target	FY 2006 Performance
Percentage of Timely Vendor Payments (MTS)	98%	97%
Percentage of Payroll by Electronic Transfer(OMB)	90%	99%
Percentage of Treasury Agency Locations Fully Reconciled (OMB)	95%	100%
Timely Reports to Central Agencies (OMB)	95%	100%
Audit Opinion on FY 2006 Financial Statements OMB)	Unqualified	Unqualified
Material Weaknesses Reported by OIG (OMB)	None	None
Timely Posting of Inter-Agency Charges (USPTO)	30 days	29 days
Average Processing Time for Travel Payments (USPTO)	8 days	12 days

Prompt Payment Act

The Prompt Payment Act requires Federal agencies to report on their efforts to make timely payments to vendors, including interest penalties for late payments. In FY 2006, the USPTO did not pay interest penalties on 97.2 percent of the 9,071 vendor invoices processed, representing payments of approximately $514.0 million. Of the 496 invoices that were not processed in a timely manner, the USPTO was required to pay interest penalties on 254 invoices, and was not required to pay interest penalties on 242 invoices, where the interest was calculated at less than $1. The USPTO paid only $60 in interest penalties for every million dollars disbursed in FY 2006. Virtually all recurring payments were processed by EFT in accordance with the EFT provisions of the Debt Collection Improvement Act of 1996.

Civil Monetary Penalty Act

There were no Civil Monetary Penalties assessed by the USPTO during FY 2006.

Debt Collection Improvement Act

The Debt Collection Improvement Act prescribes standards for the administrative collection, compromise, suspension, and termination of Federal agency collection actions, and referral to the proper agency for litigation. Although the Act has no material effect on the USPTO since it operates with minimal delinquent debt, all debt more than 180 days old has been transferred to the U.S. Department of the Treasury for cross-servicing.

Biennial Review of Fees

The Chief Financial Officers Act of 1990 requires a biennial review of agency fees, rents, and other charges imposed for services and things of value it provides to specific beneficiaries as opposed to the American public in general. The objective of the review is to identify such activities and to begin charging fees, where permitted by law, and to periodically adjust existing fees to reflect current costs or market value so as to minimize general taxpayer subsidy of specialized services or things of value (such as rights or privileges) provided directly to identifiable non-Federal beneficiaries. The USPTO is a fully fee-funded agency without subsidy of general taxpayer revenue. For non-legislative fees, it uses ABC accounting to evaluate the costs of activities and determine if fees are set appropriately. When necessary, fees are adjusted to be consistent with the program and with the legislative requirement to recover full cost of the goods or services provided to the public.

Improper Payments Information Act OF 2002

During FY 2006, the USPTO did not have any erroneous payments that exceeded the ten million dollar threshold. While our erroneous payments were only 0.06 percent of total disbursements and primarily related to inaccurate banking information, we plan to further reduce this percentage through our use of a government-wide Central Contractor Registration database maintained by the Department of Defense, which requires all government contractors to maintain current contact and banking information. The USPTO identifies overpayments and erroneous payments by reviewing (1) credit memos and refund checks issued by vendors or customers and (2) undelivered electronic payments returned by financial institutions.

Improper Payment Reduction Outlook *(Dollars in millions)*
Program	FY 2005 Outlays	FY 2005 Improper Payment Percent	FY 2005 Improper Payment Dollars	FY 2006 Outlays	FY 2006 Improper Payment Percent	FY 2006 Improper Payment Dollars	FY 2007 Estimated Outlays	FY 2007 Improper Payment Percent	FY 2008 Estimated Outlays	FY 2008 Improper Payment Percent	FY 2009 Estimated Outlays	FY 2009 Improper Payment Percent
Patent	$1,247	0.18%	$2.21	$1,335	0.06%	$0.82	$1,593	0.00%	$1,642	0.00%	$1,692	0.00%
Trademark	155	0.19%	0.30	179	0.06%	0.11	213	0.00%	220	0.00%	227	0.00%
Total	$1,402	0.18%	$2.51	$1,514	0.06%	$0.93	$1,806	0.00%	$1,862	0.00%	$1,919	0.00%

Summary of Recovery Audit Effort
*(Dollars in millions)*
Amount subject to review	$159.4
Number of invoices subject to review	4,433
Actual amount reviewed	$107.3
Actual number of invoices reviewed	985

During FY 2005, the USPTO entered into an agreement with the DOC to use an existing contract for recovery audit services. The audit was limited to closed obligations greater than $0.1 million. Further excluded were grants, travel payments, purchase card transactions, inter-agency agreements, government bills of lading, and gift and bequest transactions.

The audit was completed in FY 2006 and resulted in three invoices that were identified as recoverable improper payments, which are insignificant. The improper payments identified of $0.1 million were recovered during FY 2006.

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