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Performance and Accountability Report Fiscal Year 2007
Management's Discussion and Analysis

Table of Contents | Management | Financial | Auditor | IG | Other

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 (FMFIA)
  • 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 at right, 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.

Federal Financial Management Improvement Act

The FFMIA requires Federal agencies to report on agency substantial compliance with Federal financial management system requirements, Federal accounting standards, and the U.S. Standard General Ledger at the transaction level. The USPTO complied substantially with the FFMIA for FY 2007.

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. In addition, during FY 2007, all ten contractor systems were certified and accredited, receiving full authority to operate.

During FY 2007, the USPTO made significant progress, including improved processes and documentation. However, since some weaknesses remain, we are continuing to report the material weakness in 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.

On the basis of the USPTO’s comprehensive internal control program during FY 2007, 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, 2007, 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, 2007 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, 2007 and September 30, 2007.


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, 2007

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 have been improved upon during FY 2007 include the C&A process of contractor systems, continuous monitoring of IT systems, and improvement of C&A packages for Federal systems. In addition, upon issuance of the authority to operate for the Patent Automation Program, the OMB removed the USPTO from their Management Watch List.

During FY 2008, the USPTO will continue to improve upon the remaining weaknesses.

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, 2007, 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 2007. A summary of audit findings and recommendations follows.

Status of IG Act Amendments Audit Recommendations
as of September 30, 2007
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. USPTO's delegated examining authority is pending the results of the next OPM audit, which is scheduled for December 2007. Per OPM, some aspects of the USPTO delegated examining operations were improved; however, OPM provided some recommended and some required actions for the USPTO to take before delegated examining authority is granted. Estimated February 2008
FY 2004 Open Ensure that the USPTO develops OHR organizational descriptions, policies, and procedures, in accordance with the intent of Departmental Organization Order (DOO) 10-14. The USPTO has developed policies on prohibited personnel practices and merit systems principles training to executives and supervisors. The Office of Human Resources (OHR) is working on the development of established high quality agency administrative orders (AAO), policies, and standard operating procedures. These documents cover all OHR functions and effectively establish a set of rules and procedures for providing OHR services. As of September 30, 2007, three AAOs and several policies have been completed. Estimated December 2007
  • The estimated date of completion for the delegated examining authority was moved from last year pending an OPM decision on USPTO's request for delegated examining authority. OPM will not render a decision on the USPTO's delegated examining authority until the results of the next OPM audit, which is scheduled for December 2007.
  • The estimated date of completion for the organizational policies was moved from last year to allow time for development and approval of all AAOs, policies, and standard operating procedures.

OMB Financial Management Indicators

The Office of Management and Budget (OMB) prescribes the use of quantitative indicators to monitor improvements in financial management. The USPTO tracks other financial performance measures as well. The table above shows the USPTO’s performance during FY 2007 against performance targets established internally and by OMB and the government-wide Metric Tracking System (MTS).

USPTO FY 2007 Financial Performance Measures
Financial Performance Measure FY 2007 Target FY 2007 Performance
Percentage of Timely Vendor Payments (MTS) 98% 96%
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 2007 Financial Statements OMB) Unqualified Unqualified
Material Weaknesses Reported by OIG (OMB) None None
Timely Posting of Inter-Agency Charges (USPTO) 30 days 34 days
Average Processing Time for Travel Payments (USPTO) 8 days 13 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 2007, the USPTO did not pay interest penalties on 98.0 percent of the 8,740 vendor invoices processed, representing payments of approximately $629.9 million. Of the 270 invoices that were not processed in a timely manner, the USPTO was required to pay interest penalties on 176 invoices, and was not required to pay interest penalties on 94 invoices, where the interest was calculated at less than $1. The USPTO paid only $30 in interest penalties for every million dollars disbursed in FY 2007. Virtually all recurring payments were processed by electronic funds transfer in accordance with the electronic funds transfer 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 2007.

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.

In September 2007, the USPTO implemented a patent fee increase commensurate with the last 12 months’ increase in the Consumer Price Index. A large scale fee restructuring is underway, comparing fees to costs at the fee code level. This study is on-going and is expected to continue through FY 2008.

Improper Payments Information Act of 2002

During FY 2007, the USPTO did not have any erroneous payments that exceeded the ten million dollar threshold. While our erroneous payments were only 0.04 percent of total disbursements and primarily related to inaccurate banking information, we plan to further reduce this percentage through our use of the 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 2006 Outlays FY 2006 Improper Payment Percent FY 2006 Improper Payment Dollars FY 2007 Outlays FY 2007 Improper Payment Percent FY 2007 Improper Payment Dollars FY 2008 Estimated Outlays FY 2008 Improper Payment Percent FY 2009 Estimated Outlays FY 2009 Improper Payment Percent FY 2010 Estimated Outlays FY 2010 Improper Payment Percent
Patent $1,335 0.06% $0.82 $1,544 0.04% $0.59 $1,604 0.00% $1,686 0.00% $1,789 0.00%
Trademark    179 0.06%  0.11    255 0.04%  0.09    250 0.00%    263 0.00%    279 0.00%
Total $1,514 0.06% $0.93 $1,799 0.04% $0.68 $1,854 0.00% $1,949 0.00% $2,068 0.00%

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.

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
Amount selected for review and not reviewed  $24.7
Actual number of invoices selected for review and not reviewed     86

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. No additional actions were taken in FY 2007.

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