oversight

Need To Strengthen and Improve the Accounting for Program Activities, Urban Mass Transportation Administration

Published by the Government Accountability Office on 1971-01-27.

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

Dear Mrr Villarreal:

        We have examined selected financial    transactions    of the Urban
Mass Transportation     Fund covering the period July 1, 1968, through
December 31, 1969. Responsibility       for the administration      of the
Fund was transferred      to the Urban Mass Transportation     Administration
(UMTA) from the Department of Housing and Urban Development (HUD)
effective    July 1, X968, pursuant to Reorganization       Plan' No. 2 of
1.968 0 Through December 31, 1969, about $815 million         has been ap-
propriated by the Congress to the Fund for grants and loans.             Of
this amount about $336 million      had been expended for such program
activities,      Our examination was made in accordance with generally
accepted auditing     standards and procedures and included such tests
of the accounting records as we considered necessary in the circum-
stances,

      Accounting support services for the Fund, including  the operation
and maintenance of the accounting system, have been provided bv the
Office of the Secretary COST) on a reimbursable basis since October 1,
1969, Prior to this time accounting activities    for the Fund were pro-
vided by !:he Department of Housing and Urban Development also on a
rcimbursabl.s basis0

       During our review, we noted    several areas where improvements are
needed in the accounting control      and reporting  on the Fund's activities.
We believe that these weaknesses,      summarized in the attachment, demon-
strate the need to establish,    in   manual form, appropriate    procedural
instructions   for the guidance of    personnel responsible   for accounting
operations.

       Cognizant UMTA and 0% cfficials,         with whom we discussed these
matters generaLLy agreed with our findings           and proposals for cor-
rective action0       OST officials    advised us that a project had been
established    which would fnclude a review and evaluation         of the FundPs
existing    accounting procedures, practices,        and financial  reporting
requirements and that our findings          would receive appropriate    consid-
eration during the revie:~.         They stated that June 30, 1971, had been
established    as a target date for completing the project and docu-
menting in the form of handbooks, a revised and improved accounting
system for the Fund.
.

          We wish to acknowledge the courtesy and cooperation given to
    our representatives    during tha examination. We would appreciate your
    advice as to any further actioil taken or planned on the matters dis-
    cussed in this letter.

         A copjl of this   letter is being furnished to the Assistant   Secretary'
    for Administration,    Department of Transportation.

                                            Sincerely   yours,




                                            Assistant   Director



    The Honorable Carlos C. Villarreal
    Administrator,   Urban Mass Transportation
      Administration


    Attachment
      ‘s:       ,
                                                                                                               ATTACHMENT
die         .                                                                                                  Page 1


                                                        DEFICIENCI~:S     IN RECORDING AND
                                                       REPORTING     FINANCIAL
                                                                --P-l.-         ACTIVITIES
                                                       URBAN IQASS;~'RANSPORTATION  --- FUND


                 INTERAGENCY AGREEMENTS
                ly--
                            Interagency         agreements        entered   into     between     UMTA and other         Government
                    agencjes       were not accounted             for properly       in UMTAxs books of account.                  These
                    agreements        usually      involved       the joint     funding     of approved        projects     and,pro-
                    vided     that     either     UMTA or the other         agency award a grant             or contract        to a
                    project       sponsor      and administer          the contract       or perform      the required        project
                    services       in-house.         The administering          agency receives         the other       agencyss
                    share of the estimated                project      cost through       a transfer      of funds.        At
                    December 31, 1969, UMTA had entered                     into     27 interagency         agreements      that
                    provided       about      $13 million       of Federal      financial      assistance       for the approved
                    projects,

                             Funds transferred         by UMTA to administering            agencies       under interagency
                    agreements        had been recorded        as an expense          to UMTA when the funds were
                    transferred         even though     no work had been performed               in-house     by the receiving
                    agency or under the contract               administered         by the receiving         agency.,   The GAO
                    Policy      and Procedures        Manual for Guidance           of Federal      Agencies      (2 GAO 12.6)
                    provides       that    such transfers      of funds      constitute      an advance       to the partici-
                    pating      agency and should         be recorded       as an asset      rather     than as an expense.
                    TLC asset account           should    be reduced      on the basis       of reports       from the
                    administering          agency showing      UMTAEs proportionate            share of accrued        cxpendi-
                    tures     incurred      under the agreement.

                              In cases where UMTA had awarded              and was administering           a grant       or con-
                    tract       under an interagency        agreement      and had received       an advance          payment
                    from the participating            agency,    the accounting        office   had recorded           the
                    advance received          as reimbursable        earnings     upon receipt      of funds,          Pursuar;t
                    to 2 GAO J-3, such advance             payments     should    have been recorded         initially        as
                    a liability         to UMTA and progressively           reduced    on the basis        of the project
                    SPOIXOK’S        accr-ued expenditures       with UMTA concurrently           notifying        the partici-
                    pating       agency of its proportionate            share of the costs        incurred.

                         In cases where TJMTA had not received            an advance    payment     from the
                participating         agency but had made payments         under its contract         with the pro-
                _ject sponsor,        such payments      had been recorded      as an expense     in UMTA%s books
                of accotint,        In these instances        2 GAO 12.4,   provides    that   an account
                receivable       should    be establishnd      for the participating       agencyfs.&are      of
                the cost incurred.           Thrj. receivable     should  be reduced   when funds'are
                received      from the participating          agency.
    :,       d4                                                                                                           ATTACIJFlENT
    !                                                                                                                     Page 2
    i                 .


                                   It idas the practice             of the accounting            office       to consider       that    an
                          obligation         had occurred         on the date that            the Administrator            signed     an
                          interagency          agreement,        and an obligation            was recorded        in the books of
                          account       as of that date,              This practice         is not in accord           with     section
                          1311(a)       of the Supplemental              Appropriation          Act,     1955 (31 U.S,C.          200).
                          Under the provisions                of 7 GAO 16.3,          the date the agreement               is executed
                          by both lIarties             should    be the date of obligation                  in those     cases where
                          the services          will      be performed       in-house       by the participating              agency or
                          where the execution                date of the third           party     contract      precedes       the
                          execution        date of the interagency                agreement.           If the date of the third
                          party      contract        is after     the date of execution                of the interagency            agree-
                          ment then such later                date should        be considered           the date of obligation.

                                 l’n this     connection,      copies      of all third    party  contracts     awarded
 >                        and administered         by a participating          agency were not kept on file          by the
1
i                         accounting      office     for UMTA. We believe.that             copies   of these contracts                         .
:        .
                          should     be kept on file         to facilitate       the recording    of transactions       such
                          as those discussed           above,

                          LIABILITIES

                                  The accounts      payable      balance      of approximately             $479197,000       shown on
                          the June 30, 1969, financial                statements         included       $11,078,000      which we
                          believe     did not represent          bona-fide       liabilities.            The principles          and
                          standnl:ds      to be observed       in accounting           for liabilities           is found      in
                          2 GAO 13.2.        We found that        UMTA had accepted              at face value         and recorded
                          as a liability,       the amounts         reported       by project         sponsors      as the cost of
                          unpaid     work performed       for 219 of 279 approved                  projects.        Our review
                          showed that,       in several      instances,         UMTA had liquidated              the liability       or
                          was not actually        liable     for part       of the cost of unpaid                work performed.

                                A total    of about    $5,814,000    was reported    as the cost of unpaid
                          work performed      and recorded      as a liability    to UMTA even though   grant
                          payments   covering    the cost of this       work had been made prior     to June                             30,
                          1969.

                                  An amount of $1,409,000                 represented         the cost of unpaid            work perfonned
<                         in excess of 50 percent                 of the net project              cost for capital          grants      awarded
                          under      the emergency        provisions         cf the Urban Mass Transportation                       Act of 1964,
                          as anlcnclcd.        According       to these provisions,                a Federal       grant    may not exceed
                          one-half       of net project           cost unless          the planning        requirements         specified        in
1                         section       4(a) of the act are fully                  met within         a 3-year     period     after     the
                  ,       execution        of the grant        agreement.            Whenever       these requirements            are met, an
                          additional        grant    may be made to the project                     sponsor     equal     to one-sixth         of
                          the net. project         cost,       In accordance             with 2 GAO 13,3,          such amounts,          which
                          may or may not become an actual                      liability        in consequence          of a future         event,
                          represent        a contingent         liability        that     should      be disclosed        in a footnote          to
                          UNIApS financial           Statements.
                                                                                          ATTACHME hT
                                                                                           Page   3




       An amount of $1,236,000         represented      the cost of unpaid     work performed
in excess of 66 2/3 percent          of the net project        cost for capital      grants
awarded   under the regular       provisions       of the act,    UMTA has neither      an
actual   nor contingent   liability         to pay any amount in excess         of this     statu-
tory maximum.

       A total         of $2,6194000      included       in   the accounts   payable    balance
represented          clerical    scheduling       errors      and adding   machine   mistakes.

         In addition    to the above,     there   was no recognition       of any cost of
unpaid     work performed       that may have been applicable        to the 60 nonreporting
projects     at June 30, 1969,         UMTA had not established        any follow-up      proce-
dures for obtaining          the missing    grant  status    reports   nor had it established
any alternative        method for estimating       the liability     applicable      to the non-
reporting      project    sponsors.

        Except     for     an adjustment   unrelated      to the grant  status     reporting
procedures,        the     June 30, 1969, and December 31, 1969, accounts              payable
figures     reported        on bXTA*s financial      statements    were identical.

         Our cursory       review      of UMTA*s June 30, 1970, financial                statements
indicated       that    rhe June 30, 1970, accounts              payable      figure    may not be any
more reliable         than the June 30, and December                31 3 1969, figures           because
it was developed           f.rom financial       statements      submitted        by sponsors       without
considering        whether       the sponsors8      statements      were prepared        in accordance
with     the cost sharing           arrangements      of the grant       contracts,      and whether
amounts      reported      as the cost of unpaid            work performed         by the project
sponsors       might    actually       have been paid prior         to June 30, 1970.              Also no
alternative        method had been established               for estimating          the liability         for
nonreporting         project       sponsors    as of June 30, 1970.

BUDGETARY STATEMENTS
             -_I_

         The Report    of Selected           Ealances      for Stating      Budget    Resuits     on the
Accwal      Basis)   Appropriation            and Fund Accounts          (Fcrm BA-6727)        as of
December 3i,       1969, was not prepared                in accordance       with the Treasury          Fiscal
Requirements       Manual,     Transmittal          Letter      No, 18, dated June 20, 1968, which
requires      that accrued       liabilities          be deducted      from undisbursed         contracts
to arrive       at undelivered         orders,        As a result,       undelivered      orders     of about
$289.1    million     as shown in the report                 were overstated        by about     $47.2 million
and the amount of funds              shown as unoblSgated             was understated         by a like      amount.

       Furt!ler,      i.n preparing        the report    only month-end      nccou~~ts payable      and
scconnts      receivable         balances     were considered      in determining      expenditures
and revenues,         rather      than the monthly       changes     in these accounts,       as required
by the Treasury           Fiscal     Requirements     Manual.,     As a result,     the net expendi-
tures    amount of over $102 million               T!as ovo;stated      by more than $46.6 million.
                                                                                                ATTACHXEN~
                                                                                                Page 4


’   .

                 In addition,     formal     written  procedures          have not been established               for
        reconciling        the amounts      shown in the report           to the books of account             pr:ior
        to submitting         the report      to the Department         of the Treasury.

        HA.NDL%NG OF LOAN REPAYMENTS'
        ----..

               Loan repayments         amounting      to $iOO,OOO for the period               July    1, 1969,
        to December 31, 1969, were. not shown in LNTAss internal                            statement        of
        sources      and application      of funds for the period               ended December 31, 1969,
        as funds derived          from operations.           The repayments         were reflected         in the
        statement       as a part of the change in working                 capital.        For purposes         of
        this    statement,      loan repayments         represent      a source       of funds and should
        be so treated        in accordance       with     the instructions          in Treasury       Circular
        966 relating       to the submission          of business-type          financial       statements.