Financial Statements, Federal Prison Industries, Inc., Federal Correctional Institution, Texarkana, Texas

Published by the Government Accountability Office on 1971-10-19.

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

                       DALLAS REGIONAL OFFICE
                       ROOM iO.   1512 COMMERCE STRT
                          DALLAS, TEXAS      75201

                                                           OCT 1 197

Mr. Hal R. Hopkins
Federal Prison Industries, Inc.
Federal Correctional Institution
Texarkana, Texas 75501

Dear Mr. Hopkins:

     We have completed an examination of the financial statements
of Federal Prison Industries, Inc. (FPI), Texarkana, Texas, for the
fiscal year ended June 30, 1971. The examination was made pursuant
to the Government Corporation Control Act (31 U.S.C. 841).

     Our review, which was completed in September 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. Since internal auditors
had not made a review since November 1969, we gave special attention
to the internal controls exercised by FPI, Texarkana.

     Our findings included several deficiencies which we believe
indicate a need for improvement by FPI in the administration and
review of its accounting functions. We were unable to ascertain the
accuracy and reliability of the June 30, 1971, Inventory Certificates
because of the numerous deficiencies we found in the accounting for
inventories. The inventories were reported to be $95,692. The
deficiencies were discussea with you and institution officials at the
conclusion of our review. Details are presented below for your con-
sideration and appropriate action.
Need for improvement in accounting for
and internal control over inventories

     Our examination of fiscal year 1971 inventory records for the
tire reconditioning factory and furniture factory and discussions
with FPI employees disclosed deficiencies in the procedures for

      X   ~1         i~J ANNIVERSARY 1921-1971
                     50TH                              I

taking annual physical inventories, writing off variances found
between inventory records and the physical inventories, and making
adjustment to inventory control accounts in the general ledger.
At the time of our review, signficiant variances between the inven-
tory records and the physical inventory existed for several items
of raw materials and supplies. In addition, we found a lack of
internal control over the receipt and storage of materials. In our
opinion these deficiencies, discussed further below, indicate a need
for improvement by FPI in its accounting for and internal control
over inventories.

     Based on our review and discussions with FPI employees, we found
that physical inventories were taken, but, contrary to acceptable
procedures for taking physical inventories, receipts and issues of
materials were continued without proper controls and employees
responsible for taking the physical inventories had access to
balances shown on stock records. In order to provide proper control
and assure accurate counts, we believe that physical inventories
should be taken when receipts and issues can be properly controlled
and, ideally, when production is at a minimum, and by employees who
do not have access to stock record balances.

     Variances between physical inventory counts and stock record
balances were written off without adequate verification of the inven-
tory counts and a determination that all receipts and issues had been
posted. For example,' over $1,800 was written off the stock record
balance of finished goods for the tire reconditioning factory to make
it agree with the results of the physical inventory. FPI employees
advised us that no further verification of the finished goods inventory
was made in this instance. We were also advised that because of the
lack of time, only two or three items of raw materials and supplies
were recounted to verify the accuracy of the physical inventories.

     The write-off of variances between inventory counts and stock
records is an acceptable procedure for making inventory adjustments.
However, we believe that items showing substantial variances should
be recounted and a determination made that all receipts and issues
have been posted prior to adjustment to assure the accuracy of the
inventory records.

     The general ledger control account for the tire reconditioning
factory finished goods was further reduced by more than $1,100 in
order to make the ledger agree to the total of individual stock record
balances. FPI employees advised us that the reasons for the differences
between the general ledger and the stock record balances were not deter-
mined prior to the write-off. We believe that inventory adjustments

should not be made until the reasons for the differences have been
determined, to the extent practicable, and that such adjustments should
be properly supported.

     We found that variances between the inventory records and the
physical inventory existed for 15 of 22, or 68 percent, of the items
included in our test count of raw materials and supplies. The defi-
ciencies cited above could be a contributing factor to some of the
differences we found. In addition, the FPI business manager advised
us that some of these variances existed because inmates (1) failed
to record issues from the storerooms, (2) recorded some issues incor-
rectly, or (3) did not record items returned to the storerooms. In
our opinion the warehouse should be more closely controlled, and
stock record clerks should be more carefully supervised in order
to assure accurate recording of inventory transactions.

     In our review of internal controls we noted that the storekeeper
who was responsible for the receipt of materials had access to pur-
chase orders showing quantities ordered, unit prices, and total costs,
at the time material was received. Good internal control requires
that independent counts be made of merchandise received. We suggest
that quantities be omitted from the storekeeper's copy of the purchase
order to help assure that such counts are made.

     Our review disclosed that several raw material items were stored
in open spaces in the factories where proper control could not be
exercised by the storekeeper. We also found that lockable storerooms
were not always locked in the absence of the storekeeper. These
practices indicate a further lack of internal control and should be

     In our opinion, the deficiencies discussed above do not represent
sound accounting practices or good internal control and warrant
special consideration.

     We suggested that a complete physical inventory, taken in accord-
ance with acceptable inventory procedures, be performed in the near
future in order to establish the accuracy of inventory records. We
further suggested that adequate internal controls be instituted
over the inventories to prevent a recurrence of the deficiencies
discussed. You concurred with these suggestions and promised to
take corrective action. We would appreciate your comments and a
report on the results of the physical inventory.

Inadequate basis for distribution of manufacturing
costs to jobs in the furniture factory

     Our examination of cost of sales for the furniture factory
disclosed that the basis of allocating labor costs to individual jobs
on monthly job analyses was inadequate. Monthly labor variances,
which resulted from differences between standard and actual labor
costs, were allocated on an equal basis to each unit produced by
the various jobs. Because labor costs are not the same for different
type items, this basis of allocating the labor variance could signifi-
cantly distort the charges to the various jobs. Furthermore, overhead
costs are distributed to the individual jobs as a percentage of labor
costs. Therefore any misstatements of labor costs for the jobs will
result in additional misstatements of job costs. Misstatements of
overhead costs could be substantial. For example, overhead rates
averaged 496 percent of labor costs during the last 6 months of fiscal
year 1971.

     If the costs allocated to the individual jobs are inaccurate,
then the value of job analyses as a production management tool is
essentially lost. We believe that to assure accurate costs for
individual jobs, any distribution of labor variance should be pro-
portionate to the standard labor costs established for each type of
furniture, or by any other equitable basis which FPI can establish.

     At the conclusion of our review, you acknowledged this deficiency
and agreed to establish an acceptable basis for distributing labor
and overhead costs to the jobs produced by the furniture factory.

Compliance with FPI Washington instructions

     FPI treated the cost for relocation of the tire reconditioning
factory as a capital improvement; whereas instructions by the FPI
Washington office required that the cost be accumulated as a deferred
charge and amortized over 24 months. This treatment resulted in a
minor overstatement of the buildings and improvements account and
an understatement of the expenses charged for the period.

Overstatement of accounts payable and
unliquidated obligations

     Our examination disclosed that accounts payable at June 30, 1971,
were overstated by $2,637 because of errors in computing contingent
annual leave payable. Increases and decreases in contingent annual
leave payable for employees who transferred from FPI during the year
were not considered when making the computation. In addition,
incorrect balances for the beginning of the year were used on com-
puting the increase in contingent annual leave payable for fiscal
year 1971.

     The FPI business manager promised to correct these errors and
to establish a procedure which will provide for accurate computations
of contingent annual leave payable.

     Unliquidated obligations were overstated by $5,413 because of
errors in reporting open FPI purchase orders.

     As corrective action has already been taken or promised concern-
ing these matters, we are making no recommendations at this time.

Other deficiencies noted

     Our review disclosed several other deficiencies which we believe
further indicate a need for improvement by FPI in the administration
and review of its accounting functions. These matters are summarized
briefly below.

     --We found several instances where inmates made incorrect postings
       to the general ledger or misclassified expenditures. These
       errors were not detected by accounting personnel in the busi-
       ness office.

     --In two instances, accounts payable by FPI were allowed to
       remain outstanding for 2 and 6 months after the vendors'
       invoices had been received.

     --Incorrect posting of accruals for the month of June 1971, to
       the Reserve For Transportation account resulted in an
       overstatement of that account and an understatement of the
       Accrued Accounts Payable account amounting to $4,263. The
       Transportation Register was not reconciled to the general
       ledger, therefore this error was not detected. Because
       both of these accounts are subsidiary to the overall Accounts
       Payable account the error does not affect the total of the
       account. However, it does illustrate the need to reconcile
       subsidiary records to the general ledger.

    --Errors made in the preparation of Standard Form 225, Report
      on Obligations, resulted in an understatement on that report
      of net unpaid obligations amounting to $43,309.

    --Although not occurring during the period covered by our
      review, we were informed that during the months of July
      and August 1971, that due to deficient filing procedures
      established by the business office for the tire recondition-
      ing factory, all documents related to an unknown number of
      orders were lost after the completed reconditioned tires
      were shipped to FPI customers. FPI followed a practice of
      accumulating all copies of all documents in a single folder
      until the tires were shipped, at which time the folder was
      forwarded to the business office for recording and billing.
      Some of these folders disappeared before any documents
      could be removed. As a result, FPI does not know who to
      invoice, or the value involved. We do not know the value
      of the tires, but were informed by the Shop Foreman that he
      believed it to be substantial.

     We wish to acknowledge the courtesies and cooperation shown our
representatives during the review. We would appreciate your comments
and advice as to any further action taken on the matters discussed

     Copies of this letter are being sent to the Assistant Attorney
General for Administration, Department of Justice; the Commissioner
of Industries, Federal Prison Industries, Inc.; and the Warden,
Federal Correctional' Institution, Texarkana, Texas.

                                        Sincerely yours,

                                        W. H. Sheley/..
                                        Regional Mafr er