Opportunity To Revise Some Accounting Practices and Recover Full Costs of Service

Published by the Government Accountability Office on 1971-12-09.

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

  "4: ,:~o7                       WASHINGTON, D.C. 20548


             Dear Dr. Brown:

                  We reviewed the accounting system of the Bureau of the Census
             (Bureau), Department of Commerce, to ascertain whether the system
             in operation, as approved by the Comptroller General on May 4, 1966,
             continues to be an effective and efficient accounting system. Our
             review was made on a test basis primarily at Bureau headquarters in     t'

             Suitland, Maryland.

                  We are pleased to advise that with the exception of the matters
             presented below and discussed more fully in the attachment, the
             accounting procedures and controls used by the Bureau generally com-
             ply with the departmental accounting principles and standards, and
             the standards of accounting established by the Comptroller General.

                  We are bringing these matters to your attention to enable you
             to initiate corrective measures. One matter involves the Government
             Overhead rate established by the Bureau which is not providing recov-
             ery of the full costs of furnishing special services to Bureau cus-
             tomers. The second matter discussed in the attachment concerns the
             method used to account for depreciation on mechanical assets. The
             Associate Director for Administration agreed to initiate corrective
             action on the latter point. However, as of November 30, 1971, correc-
             tive action had not been taken.

                  Our review did not include a determination of the usefulness
             of the Bureau's financial reports because the Bureau was conducting
             such a study in response to a request from the Office of Management
             and Budget.

                  We wish to acknowledge the courtesies and cooperation extended
             to our representatives during the review.

                  We shall appreciate your comments and advice as to any action
             taken or planned on the matters discussed in the attachment.

                                 50TH AINNIVERSARY 1921    _   971   97
     Copies of this letter with attachment are being sent to
Assistant Secretary for Administration, the Assistant Secretary
for Economic Affairs, and the Director, Office of Audits.

                                     Sincerely yours,

                                 /.'Max A. Neuwirth
                                C,   Associate Director


The Honorable Dr. George Hay Brown
Director, Bureau of the Census
                    ,Gt oo20o

                                                            - 2-



                        FULL COSTS OF SERVICES

     The Bureau has an opportunity to recover full costs for services
rendered customers by revising its methods of recording and allocat-
ing certain expenses to its reimbursable work. We found that the
Bureau is not using correct accounting methods with respect to depre-
ciation on its mechanical assets and is not allocating a proportion-
ate share of either these depreciation expenses or its building space
usage expenses to its reimbursable work. By erroneously depreciat-
ing its mechanical assets, the Bureau is not fully recognizing all
its expenses. Furthermore, due to the Bureau's failure to allocate
a proportionate share of tnis additional depreciation and space
usage expenses to reimbursable work performed for non-Federal cus-
tomers, we estimate that the Bureau is failing to recover nearly
$100,000 a year.


     The Office of Management and Budget Circular A-25 and Depart-
ment of Commerce Administrative Order 203-5, dated September 7,
1961, contain guidelines for the recovery of costs of providing
special services. These documents define full costs as includ-
ing a proportionate share of the fair market value of the building
space used in performing work for non-Federal customers.-,

     We found that the Bureau's computation of the value of build-
ing space usage is significantly less than the fair market value of
the building space usage. Thus, the Bureau is not allocating to
its non-Federal customers a proportionate share of the fair market
value of building space in accordance with Office of Management
and Budget and Department of Commerce guidelines.

     The Bureau established a Government Overhead rate of 5 percent
in 1960 to recover space usage costs. The Government Overhead rate
was intended to equal the aggregate of (1) the space use (which
includes building costs, maintenance, and utilities) of the Bureau's
permanent buildings at Suitland, Maryland; Pittsburg, Kansas; and
the 12 regional offices (3.74 percent); (2) the Bureau's portion
of the expense of the Office of the Secretary (0.5 percent); and
(3) a portion of the overhead of certain other Government agencies
(0.76 percent). During 1966, the 5 percent rate was split into
Government Overhead (3.5 percent) and Space Rental and Maintenance
        (1.5 percent). The split was made because the General Services
        Administration bills the Bureau for maintenance and utility costs
        of the Bureau's remaining buildings which are located in Jefferson-
        ville, Indiana, and the space rental and maintenance rate was intended
        to equal the cost of maintenance and utilities of the buildings in
        Jeffersonville. The split of the 5 percent rate, however, reduced
        space usage rate from 3.74 percent to 2.24 percent.

             We evaluated the Government Overhead rate related to the space
        usage of the Bureau's permanent buildings (2.24 percent). Bureau
        personnel were not able to provide us with the basis for this rate.
        Therefore, we made a computation using actual square footage of
        Bureau buildings and the space usage rates shown in the most recent
        Department of Commerce guidelines, Administrative Order 203-5,
        dated September 7, 1961.  We believe that our method of computing
        the space usage rate as shown below is acceptable; however, other
        methods of computing the space usage rate may also be appropriate.

                             Current total     Annual unit cost       Total annual
Building                       space in         of space usage      space usage costs
location                    square feet (1)   per square foot (2)      (1) x (2)

Suitland, Maryland
  Building 3                    367,770             $4.75             $1,746,908
  Building 4                    102,387              4.75                486,338

Regional offices                 59,046            various               271,441

Jeffersonville, Indiana         557,445              1 .25 a             696,806

Pittsburg, Kansas                 36,823             4.75                174,909

                               1,123 471                              $3.376,402

aBuilding   costs

Total annual space usage costs for fiscal year 1970              $ 3,376,402 = 5.7 percent
Average annual Bureau obligations for the period 1961-1970       $59,203,900

                On the basis of our evaluations, we estimate the present space
           usage rate is understated by 3.46 percent (5.7 minus 2.24). Had the
           5.7 percent rate been used in fiscal year 1970, the Bureau would have
           recovered an estimated additional $88,000 from its non-Federal cus-

                                                                        - 2-
     The Office of Management and Budget Circular A-25 and the
Department of Commerce Administrative Order 203-5 also require that
the cost of providing special services should be reviewed at least
annually; however, we noted that the Government Overhead rate estab-
lished at 5 percent in 1960 was initially based on 1959 Department
guidelines. Bureau officials advised us that this rate was subse-
quently reviewed by the Bureau in 1961 using 1961 Department guide-
lines but that the changes in these guidelines did not require a
change in the rate.

     Bureau officials also advised us that there had been no review
of the Government Overhead rate since 1961 because the rate was
based in part on the 1961 Department guidelines that have not been
revised since that date.


     The Bureau's mechanical equipment is depreciated over a 10-year
life and the nonmechanical equipment is depreciated over a 20-year
life. The depreciation expenses related to this equipment are allo-
cated to Bureau organizational units and to all work projects based
on a percentage of personal services costs.

     During 1970, the Bureau recognized that its method of accumulat-
ing depreciation expense on its mechanical asset accounts were result-
ing in an understatement of asset book value. However, the Bureau
did not realize that this problem was due, at least in part, to its
erroneous writeoff procedures (as discussed on page 4), but rether
its officials assumed only that the depreciation expense was too
high, resulting in the overdepreciation of these assets. After per-
forming an analysis of the account balances, the Bureau decreased
the mechanical asset depreciation rates from 10 percent per year
to rates averaging 3.8 percent. In effect, the new rates extended
the useful life of these assets to an average of 26 years, even
though in adjusting these rates, the Bureau did not determine the
actual useful life of its mechanical assets. The Internal Revenue
Service's guidance shows a 10-year useful life for this type of
asset and we believe a 10-year useful life is reasonable until the
actual useful life of the Bureau's property is determined.

     The understated rates of depreciation has resulted in the
Bureau's not recording and allocating to its customers the full
amount of depreciation expense applicable to its mechanical equip-
ment. We noted that the depreciation expense for mechanical equip-
ment was $28,839 for the last month under the old rate based on a
10-year useful life. The expense for the first month under the new
rates was only $11,582, a decline of $17,257. Projected over 12 months,

depreciation expenses for mechanical assets will be understated by
about $207,000. We estimate that of that amount the Bureau will
not recover about $46,000 from other Federal Agencies and about
$11,000 from non-Federal customers annually.

     Our review showed that overstated accumulated depreciation
balances were due to an erroneous writeoff of accumulated depre-
ciation at time of asset disposal. This matter is discussed below.

Group method of depreciation

     The Bureau depreciates its nonexpendable equipment by using a
group method by type of asset. Generally accepted accounting prin-
ciples provide that the group method of depreciating assets is an
acceptable method. The group method of depreciation assumes that
depreciation and related accumulated depreciation are not associated
with any particular asset within the group. Therefore, the deprecia-
tion expense rate is applied against the gross cost of the asset
account balance. Those assets which are used less than the average
time will have, in effect, less than 100 percent depreciation recorded
on them, and the assets lasting longer than the average will have
more than 100 percent depreciation associated with them. However,
on the average and under normal conditions, the assets taken as a
group will be depreciated at 100 percent of cost within the average
useful life period. Under the group method of depreciation, an
individual asset will be considered to be depreciated at 100 percent
of cost at the time of its disposal. Therefore, when an asset is
disposed of, the cost of that asset should be removed from the asset
account and the cost less salvage should be removed from the related
accumulated depreciation account, and no loss or gain is recognized.

     We found that the Bureau is not following tne generally accepted
procedure for adjusting accumulated depreciation at the time of asset
disposal. We were informed by Bureau officials that the Bureau deter-
mines the amount to be deducted from accumulated depreciation by using
the following formula:

    Accumulated depreciation for account X Ct       f idiidual asset
    Gross value of asset account

By using this formula, the accumulated depreciation balance is not
reduced by the full cost of the asset as required by generally
accepted accounting principles. Therefore, after an asset is retired,
the associated accumulated depreciation account is overstated by the
difference between the cost of the asset and the amount deducted from
accumulated depreciation as determined by use of the above formula.

     Bureau officials   advised us that this policy for disposal of
fixed assets has been   in effect at least since November 1966, We
estimated that during   these 4 years the accumulated depreciation
for mechanical assets   has been overstated by approximately $460,000.

     We found that the Bureau was using an appropriate depreciation
rate for its nonmechanical assets; however, it was using the same
procedure to write off its accumulated depreciation that it was using
in connection with its mechanical assets. We estimate that during
the same 4 years, the accumulated depreciation for nonmechanical
assets has been overstated by about $250,000.

     We brought these matters to the attention of appropriate Bureau
officials on May 10, 1971. The Bureau's Associate Director for Admin-
istration agreed that there is a need to revise the Government Over-
head rate and the mechanical equipment depreciation rates. In regard
to the Government Overhead rate, he adivsed us that the Bureau would
delay making a revision until current cost information and guidance
is received from the Department of Commerce.

     The Associate Director also informed us that the Bureau will
evaluate the actual useful life of its mechanical equipment and
that the depreciation rate will be revised accordingly. Further-
more, he adivsed us that the Bureau has revised its procedures for
writing off accumulated depreciation so that this writeoff is now
made in accordance with generally accepted accounting principles.

     We believe the actions planned by the Bureau in connection
with its mechanical assets are appropriate and will improve its
financial management system and better assure recovery of these
costs from its reimbursable customers. However, as of November 30,
1971, the Bureau had not revised its mechanical equipment deprecia-
tion rate.


      We recommend that, upon receipt of the revised guidance from
the Secretary of Commerce, the Director, Bureau of the Census require
his staff to reevaluate its space usage rates with a view towards
determining the most feasible method of accounting for and of recover-
ing applicable costs. We recommend also that the Director require
his staff to (1) determine the actual useful life of its mechanical
equipment and to revise the depreciation rate accordingly and (2)
establish procedures that will assure that these rates are reviewed
annually in accordance with Office of Management and Budget Circular