Financial Statements of the Federal Prison Industries, Inc., Terre Haute, Indiana

Published by the Government Accountability Office on 1971-11-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

,;OP                          REGIONAL OFFICE
                           8112 FEDERAL OFFICE BUILDING
                             FIFTH AND MAIN STREETS
                           CINCINNATI, OHIO     45202

                                                          NOV 2 4 1971

Mr. W. S. Curley, Superintendent
Federal Prison Industries, Inc.
Department of Justice
Terre Haute, Indiana 47808

Dear Mr. Curley:

     We have completed an examination of thefinancial statements
of the Federal Prison Industries, Inc.   +    Terre Haute, Indiana
for the fiscal year ended June 30, 1971. The examination was mad
pursuant to the Government Corporation Control Act (31 U.S.C. 841).

      Our review, which was completed October 1, 1971, was made in
 accordance with generally accepted auditing standards and included
 such tests of accounting records and financial transactions as we
 considered necessary in view of the nature and volume of transactions
 and the effectiveness of internal controls.

      We observed that there was a need to revise certain accounting
 and other practices which are within your authority ard responsibility.
 These matters are discussed below.


     At the time of our review inadequate control over inventories
was pronounced. We found that (1) standard procedures set out in
the FPI Accounting Manual were not followed when material was
requisitioned from the stockroom; (2) obsolete or excess materials
and supplies were charged to production a little at a time rather
than reported as excess property; (3) the moving average value of
materials and supplies was not always computed after receipt of
additional quantities; (4) the inventory contained many inactive
items; and (5) variances existed for 30 of 42 items of materials or
supplies included in our test counts.

                    50TH ANNIVERSARY 1921-1971            ag
                              - 2-

    Requisition procedures

     The FPI Accounting Manual states that raw materials and supplies
shall be issued only upon receipt of a storeroom requisition, properly
drawn, originating with the officer having authority to requisition
such materials. A memorandum requisition may be used pending the
submission of the storeroom requisition for raw materials or supplies
and all items shall be receipted for, on the form, at the time of
receipt by the person receiving the materials from the storeroom.

     We were informed by the storeroom clerk that he prepared most
requisitions, and this statement was supported by FPI employees. In
addition, the clerk prepared some requisitions to enable him to make
adjustments for differences noted between the storeroom bin cards and
actual count. In these instances the procedure used was: (1) when a
stock shortage was discovered a requisition was prepared to charge out
the difference to production, and (2) when a stock overage was
discovered the stock was issued to production without a requisition.

     Obsolete or excess inventory

     We noted seven items of obsolete or excess inventory, originally
costing about $28,000, -vhich were charged to production a little at a
tVme rAther than renorted to the Washington office as excess to local
needs or written off as worthless inventory. Some of the inventory
items were discarded and others remained in the storage warehouse at
the time of our review. Examples noted included:

     1. Tybon Resin #5657, Glass Binder (PTR-1) - Nine drums valued
at $933.59 spoiled and were charged to production, one bad drum with
each good drum issued.

     2. Steel wire inserts (PI-3) - Inserts valued at $2,331.67 were
being charged to fiscal year 1972 production costs although they were
no longer required to manufacture the sales product which was plastic

     3. Adapters, reversible (CS-26) - Type II duffel bag adapters,
80,000 units, valued at $10,776, were charged to type I duffel bag
production during fiscal year 1971. Also, 86,580 units, valued at
$11,675 were charged to type I duffel bag production during fiscal
year 1972. These adapters were being stored in a warehouse at the
time of our review.

     Moving average valuation

     Standard procedure for using a moving average inventory valuation
requires recomputation of the unit price after each receipt of material.
We found that the unit price was not always computed after receipt of
material and in some instances the computation of the moving average
was incorrect. The moving averages were computed intermittently;
however, by not recomputing the unit prices after each receipt, the
value of material charged to production was incorrectly stated.

     Inactive items

     We noted many items of materials or supplies which were
inactive. Many of these items may be obsolete or excess to local
needs and therefore, inflate the inventory valuation. Examples
noted included:

                                                 Quantity        Dollar
Item and stock number           Last issue       on hand         Value
Grommets, type 3 (CS-9)         June 1967         4,530         $10,240
Nylon mesh, style 22 (CS-20) April 1969           1,606 yds.        964
Tape, textile (CS-6)            March 1969          220 rolls       275
Chrome, blue black (7-D-511) December 1968       68,875 lbs.        868
Spindle oil (3-0-20)            November 1969       165 gal.         89
Ties, wire (3-T-166)            September 1966   25,000              72

     Test counts

     We made test counts of 42 items of materials or supplies valued
at about $150,000. We noted differences on 30 of the 42 items.
Overages discovered amounted to about $7,500 and shortages amounted to
about $10,000. We noted that an inventory count was difficult and
time consuming because (1) the stock for all three factories was
mixed together, (2) some items were in more than one location, and
(3) often only the warehouse personnel could locate the stock.
                            - 4 -


     In our opinion the poor control over inventories was due primarily
to improper supervision since the FPI Accounting Manual sets out
adequate control procedures from receipt through storage and issue.
We suggest that the responsibility of each supervisor be emphasized
to ensure that (1) proper requisition procedures are followed,
(2) only required materials or supplies are charged to production,
(3) inventory values are properly computed, and (4) inactive inventory
items are identified and reported as excess to local needs on a
timely basis.

     We further suggest that the inventory of each factory be segregated,
locator cards prepared, and where possible the stock number recorded
on the boxes or drums to assist in taking of physical inventories and
to improve control over receipts and issues.


     We made a test count of 58 items of equipment shown on the fixed
asset equipment cards of the woolen mill. We found two items of
equipment which were being carried on the accounts at salvage value
that had been cannibalized and junked. We also found that two new
equipment items which had not been completely installed were being
depreciated. The FPI accounting manual states that monthly
depreciation charges should begin on the first day of the month
following the month in which the item(s) are placed in use.

      We also noted that between January 1967 and April 1970 the
industries acquired 12 forklift trucks from Government surplus.
Related transportation costs were $1,604.48 but none of these trucks
were capitalized at the time of receipt. The repair expense associated
with these trucks indicates that they may have been beyond the
economical repair point when acquired. During fiscal year 1971 and
the first quarter of fiscal year 1972 the industries repaired and/or
overhauled seven trucks at a cost of $8,388. The industries capitalized
$5,841 and expensed $2,547. The repairs were made by a commercial

     At the time of our audit three of the trucks repaired during the
15-month period were in the vocational training garage for additional
repairs. Three others were in poor mechanical condition.

     The vocational training supervisor, after reviewing the work
statement/invoices from the commercial firm, stated the work could
have been done at the industries vocational training garage with the
possible exception of the conversions to an L.P. gas system. There
would have been no charge, except for the parts, for which the
commercial firm charged $2,204. Wie noted that the salary of the
supervisor and other expenses of the vocational training garage are
paid by FPI.

     We suggest that a complete inventory of machinery and equipment
be made to identify all obsolete, unrepairable, or excess items and
the accounting records adjusted accordingly. We also believe that
economical repair points should be established for all machinery
and equipment to prevent excess repair bills on overage equipment.


      Section 1311 of Public Law 663, August 26, 1954, requires the FPI
to submit a certified report to the Congress showing funds unobligated
or unexpended as of June 30 of each fiscal year. The Terre Haute
industries reported $881,801 as unliquidated obligations at June 30,
     We found that 45 of 151 undelivered purchase orders included in
the report had actually been received and paid or received and
included in accounts payable. The 45 orders totaled about $14,000.
We scanned the July 1971 receiving reports and found 13 instances
where materials or supplies purchased on fiscal year 1971 purchase
orders were not included in the report. The 13 orders totaled
$10,418. We also noted a mathematical error on the report of $8,199.

     We were informed by your staff that the report was prepared by
inmate personnel and that they could not explain the errors. We
believe that the special interest of the Congress in accurate reports
of obligations should be kept in mind at all times and that adequate
supervisory review should be provided during preparation of the


     The following items came to our attention during the audit:

     1. The Terre Haute industries sold grommets valued at $1,293.82
to the Atlanta FPI without obtaining approval of the Washington office
as required by the accounting manual. Loss on the sale totaled
     2. An $800 royalty payment made to Herman Miller, Inc., was
unearned because the chairs were manufactured without the patented
interlocking units.

     3. Tests of the industries civilian payroll disclosed two leave
service computation date errors and errors on four retirement records

     We would appreciate your comments as to the final disposition of
the matters discussed above. We wish to thank you for the cooperation
and assistance provided our representatives during the examination.

     Copies of this letter are being sent to tile Assistalnt Attorney
General for Administration, the Commissioner of Industries, and the
Warden, U. S. Penitentiary, Terre Haute, Indiana.

                                         Sincerely yours,

                                         David P. Sorando
                                         Regional Manager

cc/ Assistant Attorney General
      for Administration
    The Commissioner of Industries
    Warden, U. S. Penitentiary,
      Terre Haute, Indiana