Review of Accounting System in Operation for Excess Property Revolving Fund

Published by the Government Accountability Office on 1971-08-31.

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

                                                                           11111  III1

                    Review Of Accoirnting System
                    In Operation For
                    Excess Property Revolving Fund

                    Agency for international   Development
                    Department  of State

        -       -

                    UNITED STATES
                    GENERAL ACCOUNTING                  OFFICE
                                                       WASHINGYON,   D.C.   20548

    iNTERNATIONAL        DlVlSfON      *:   _

.                   B-158381

                    Dear Dr.        Hannah:

                          We recently     completed a reviewII. .._of- the
                                                                        -. _._accounting
                                                                              _._,..."1-.- -I system in operation      --,I)
                    for the Agency for Internatio~Development~s                         (AID's)   E&&s &o$erty         7/
                    Revolving Fund. We are apprising            you of our findings             to enable you to
                    take appropriate      corrective     action within     a reasonable           time so that
                    consideration     will not have to be given to withdrawing                    our prior approval
                    of the system design.          We noted also that AID has violated                 Section 3679,
                    Revised Statutes,      31 U.S.C. 665, which requires                 that specific     action be
                    taken whenever a violation         occurs.

                           We have swmnariaed our findings             in the attachment       to this letter
                    entitled    Accounting      System Weaknesses-- Excess Property            Revolving Fund,
                    dated August 1971. The findings             have been described         in the sumnary as
                     (1) unreliable     reporting     of rehabilitation       costs,     (2) delayed reporting
                    of income, (3) need for resolution              of unbilled     costs,    (L) expenditures
                    in excess of apportioned          funds, and (5) other control           weaknesses.

                          F&h section      in the attached   summary specifies       the corrective          action
                    that is needed.      Most of the needed corrective        action    relates      to
                    implementation     of the approved accounting       system design, but in the
                    first   section,   covering unreliable    reporting     of rehabilitation          costs,
                    we have advocated a change in the design.             The need for additional            action
                    to comply with 31 U.S.C. 665 is explained           in the fourth       section,     covering
                    expenditures     in excess of apportioned     funds.

                           We believe that the identified         weaknesses have resulted     in the
                    issuance of financial        statements   that have not adequately     presented  the
                    financial   condition    and the operating      results  of the Revolving Fund.
                    For reference     purposes,     we have included in the attachment      current
                    financial    statements     of the Fund.

                             Some of the weaknesses also have important        implications     with respect
                    to operational       controls.   We believe    that those related     to inventories,
                    including     the rehabilitation    and issuance of the inventory        items, have
                    especially      hampered the exercise     of needed controls     over day-to-day
                    activities      in the excess property     program.

                                                    50TH ANNIVERSARY
      We 'have therefore concluded that the Revolving Fund's existing
accounting system does not adequately meet management needs. Accordingly,
we recommend that action be taken to change and implement the approved
system design, as specified in the attached summary, so that the excess
property program can be managed more effectively.    We recommend further
that action be taken with respect to the over expenditure of apportioned
funds, as specified in 31 U.S.C. 665(i).
       Section 236 of the Legislative Reorganization Act of 1970 requires
that written statements of the action taken with respect to the above
recommendations be sent to the House and Senate Committees on Government '/pi T.53
Operations and to the Cormnittees on Appropriations.   We would appreciate     2-t.?
receiving copies of the statements furnished to such committees.
     Copies of this letter and the attachment are being sent to the above
committees, the Subcommittee on Foreign Assistance and Related Programs
of the Senate Comnittee on Appropriations, the Subcommittee on Foreign   ,',, 303?-?+
Operations and Government Information of the House Committee on Govern- pc,: 1j
ment Operations, and the Director, Office of Management and Budget.
       We wish to acknowledge the cooperation extended to our representa-
tives during the review. As a part of the review, we discussed our
findings with AID officials    of the Accounting Division, Office of the
Controller,   and the Logistics Service Center, and we will be available
to answer any questions or render any assistance that you may require
concerning the matters discussed in this report.
                                     Sincerely   yours,


The Honorable John A. Hannah, Administrator
Agency for International Development             $7
Department of State


                           ACCOUNTING SYSTEM WEAKNESSES
                          EXCESS PROPERTY REVOLVING FUND
                                   AUGUST 1971
                                       Contents                    Page

.   INTRODUCTION                                                     1

      Unsuitable   Cost Accounting  Technique
        Corrective   action needed
      Unrecorded Rehabilitation    Costs
        Corrective   action needed

        Corrective action needed

       Corrective action needed                                      9’
    MPENUITURES IN Ex1=ESSOF APFORTIONES) FUNDS                     10
      Selected Expenditures  Ezluded  for Control Purposes          10
        Corrective action needed                                    12
     Discrepancies  in Budgetary Accounts                           12
        Corrective action needed                                    13
    OTHER CONTROL WEAKNESSES                                        14
      Delayed Recording of Cash                                     I.4
        Corrective     action needed                                15
      Noncompliance with Prescribed     Inventory
        Control    Procedures                                       15
        Corrective     action needed                                17
    FINANCIAL STATEXZKCS                                            18
      Agency for International      Development kess
         Property   Revolving Fund Statement of Financial
         Condition   as of March 31, 1971                           19
       Excess Property    Revolving Fund Statement of
         Operations   July 1, 1970 through March 31, 1971           20

      The accounting        system weaknesses summarized below were identified             by
GAOin a review of the accounting           system in operation     for AID's Excess
Property     Revolving find.      The review was conducted during the period
January to April      1971, at AID offices       in Washington, D.C. and at the
Logistics     Service Center in New Cumberland, Pennsylvania.
      This review has been our first         opportunity    to test the Revolving
l%.uxi's accounting       system in operation.    We previously    approved the design
of the accounting         system on December 31, 1968, subject to the adoption
of certain     revisions.      On March 20, 1970, we informed AID that we were
satisfied     that the accounting manusl, as revised,         included   the revisions
referred     to in our approval letter      of December 31, 1968.
      We have included in this         summary the Revolving Fund's Statement of
Financial     Condition     as of March 31, 1971, and Statement of Operations for
July 1, 1970, through March 31, 1971.            These statements are included          for
reference     purposes only.      As stated in the letter     to which this    summary
is attached,     we believe     that the accounting     system weaknesses identified
below have resulted         in the issuance of financial     statements that have not
adequately presented the financial          condition    and the operating    results     of
the Revolving find.

.   .

                  We found that              the Revolving               Fund's        financial         reports         were unreliable

        with      respect       to their         stated         costs        of rehabilitating               exness property

        acquisitions.                The unreliability                  has been caused by the use of an

        unsuitable          technique           to account             for     the cost          of issued        property          and

        by failure          to record           all     the costs            as they were incurred.

                  Of the two causes cited                        above,        the use of an unsuitable                      cost

        accounting          technique           has had overriding                     effects       because        it    has distorted

        reported        costs        even when all               the appropriate                 costs     had been recorded.

        The principal               effect      of unrecorded                costs      has been to understate                      reported

        liabilities           for     rehabilitation               costs        incurred           but not paid.

        Unsuitable          Cost Accounting                   Technique

                  The prescribed               technique          of accounting                for   rehabilitation            costs

        applicable          to issued           property,          which        was adopted              in 1968,        is based on

        averages.           While       we originally              approved            this      method,     we believe             that   the

        technique           is no longer              suitable         for     the excess property                  program.

                  The prescribed               technique          calls        for     accumulating          the actual

        rehabilitation               costs      for     all      rehabilitated                property       (deferred        rehabil-

        itation       costs)         until      property          is issued,             at which         time     a computed         portion

        is removed from the deferred                             costs        and reported           as an operating                expense.

        The portion           removed and reported                       as an expense is computed                        by applying

        an average           cost      ratio      to the original                    acquisition          value     of the issued

        property,            The average              cost     ratio         is periodically              determined         by comparing

        deferred        costs        with      the original              acquisition             value     of all        ready-for-issue

        property        on hand.

                   The data below                  illustrates         how the use of an average                           cost     ratio        has

          distorted            reported           costs.         The data covers               property       representing               about

          90 percent             of the rehabilitation                      costs      reported        for    property            issued       from

          all    field         offices          during     January          1971:
                              Value of                                cost of                                        Over (under)
                          Issued Property                          Rehabilitation                                       Reported
                                                                  Reported        Actual                         Amount          Percent
Field Offices:
   &St                            $ 41,076                        $ 6,572              $12,904               $(6,332)
   Central                               9,808                       1,569                1,901                ( x3:)
   Tooele                              16,404                        2,625                2,384

                   The above data                   shows that        $81,688 of a reported                      $98,877, or 82.6
  percent,             was an overstatement                      of the reported             cost      of rehabilitating                   the

  issued         property.               This      overstatement             resulted          from the application                     of an

  average         cost         ratio      of 16 percent              to the original                acquisition          value          of all

  issued         property,             whereas        the actual            cost     of rehabilitating              the issued

  property             shown above fluctuated                       from 31 percent               at field        office          East to

  nothing         at field             office       Okinawa.

                  Accordingly,                  the use of an average                   cost      ratio      to compute            the

  rehabilitation                  cost      of issued            property          caused distortion              not      only     in the

  total         cost      reported          for     the month but also                  in the distribution                  of costs            to

  the various                 field      offices,          The portion              attributed         to field         office       Okinawa

  was especially                  misleading             because Okinawa               earned no income during                      January

  to offset             its      share of the computed                      rehabilitation            costs.        The property                 showr 1

  as issued             by Okinawa consisted                      of a transfer            of two aircraft,                 initially

  acquired         as excess property                      in a ready-for-issue                     condition,          to the property

  disposal             office.

         We noted        that,      during       the seven months                   ending with            January        1971,

rehabilitation            costs       totaling       $273,779              were reported             as an expense of the

program       for     property        transferred            to Property             Disposal.             We examined            into

most of these            transfers          and found            that,      of a total             of $2%,OOO in reported

rehabilitation            costs,        only about           $80,000         had actually              been incurred.                The

remaining           $174,000       represented            cost      distortion            caused by using                an average

cost     ratio.

         Some or all             of the cost        distortion              described         above could              have been

offset      by reverse            distortion        in costs             applicable          to other           issued     property,

but we were unable                 to determine            the total             effect      of all        the distortion

during      the period.              The total           distortion          could         not be determined               because

some of the actual                 rehabilitation                costs      applicable             to property           on hand

at the beginning                 and the end of the period                        were not          readily         available,

and consequently                 the recorded        balances              of deferred             rehabilitation            costs

could      not be compared with                  the actual              costs      to identify            prior       distortion,

         Thus,       the reported           amounts         of deferred             rehabilitation               costs     were also

unreliable           because       they consisted                merely      of the balances                  remaining          after

unreliable           amounts       had been removed for                     association             with      issued      property.

         When adopted             in 1968,       the use of an average                       cost      ratio,        although        not

exact,      was believed             to be a reasonably                    satisfactory             method of determining

the cost          of issued        property.             This belief             was held          because         the original

acquisition           value       of issued       property               averaged         about     $2 million           a month

and the average               rehabilitation              costs          were estimated             at 9 percent           of the

original          acquisition         value.        It     was believed              that         the relatively           large

volume of issued                 property      would dilute                the effect             of any distortion               that

might      be caused by unusual                  costs       incurred            to rehabilitate                selected         property.

         During     the first              seven months          of fiscal           year    1971,     however,        the

original        acquisition           value          of issued        property        averaged        only about

$383,000        a month and, as previously                           indicated,        average        rehabilitation

costs      had substantially                  increased.             In our opinion,           the combination               of

these      two changes,             plus     the fact         that     rehabilitation            costs      now vary

widely       among the field                offices,        make the use of an average                      cost    ratio

an unsuitable            technique            of accounting            for     the cost       of issued         property.

         Corrective          action         needed

         We believe          that     the prescribed                 technique        of accounting          for    the cost

of issued         property          should        be changed.            The new technique               should     consist

of accumulating              the rehabilitation                  costs        of each item           of rehabilitated

property        and reporting               the actual         costs         as an expense of the program                     as

each item         of property              is issued.          In this         connection,        we noted         that      the

actual       rehabilitation                cost      of property         issued       to Nigeria         was identified

and reported            during       April        1971,     because Nigeria             had agreed          to pay for            the

property        on the basis               of actual        costs      rather        than    on the basis          of a

predetermined            percentage            of acquisition                value    (see next        section,        beginning

on page 7).             We believe            that     the Nigerian            transaction        demonstrates             both

the desirability              and the practicability                         of reporting        on the basis             of actual

costs,       and that        the same method should                      be used to determine                the cost         of

issued       property        even when no special                     reimbursement           agreement         has been


         We believe          also      that       provision          should       be made for         reviewing        the

rehabilitation            cost       accounts          and making any adjustments                       found      to be needed,

This       should     include        periodic          verifications              of the recorded           balance

representing            deferred           rehabilitation             costs.
Unrecorded Rehabilitation        Costs
     Rehabilitation       costs have not been recorded as they were incurred
because adequate procedures were not established                  for recording     them
promptly.     The Revolving Fund's accounting           system callsfor         recording

costs as contractor       invoices    are received and for accruing             at the end
of the month unbilled        costs represented       by work in process.          Wefound,
however, that many of the billed           costs were not recorded until            payment
was made, and that none of the unbilled              costs on domestic work orders
was being accrued.
      As of December 31, 1970, we identified             rehabilitation         costs for
which bills     had been received,       totaling    $131,990,     that had not been
recorded as unpaid costs.            As a consequence, accounts payable reported
at December 31, 1970, were understated              by that amount, and these costs
were not considered in arriving           at the average cost ratio            for computing
the cost of property        issued in January.
      The principal      reason for delayed recording            of billed     costs was
that contractor       invoices   were being submitted       to the Logistics         Service
Center, where they were processed for approval prior                   to submission to
the Central Accounts Branch for recording              and payment.          The Central
Accounts Branch then added to the delay by not recording                      them as accounts
payable until     they had been paid.

             Similarly,          the unrecorded             accruals        for     work in process               at December                 31,
    1970,     caused an understatement                      of the Revolving               Fund's        recorded         liabili-

    ties     as well       as the rehabilitation                   costs      considered            in arriving           at the

    average      cost      ratio     for     computing           the cost         of property           issued     in January.

    The amount by which               accrued          rehabilitation              costs     were understated                  at

    December 31, 1970, was not readily                             determinable.                  The maximum amount was

    about     $417,000,          the estimated            cost      of work authorized                by work orders

    outstanding           on that      date.

             Corrective          action      needed

             In our opinion,               the recording            of costs        as they are incurred                      is a

    fundamental           requirement          for     adequate        accounting,                We believe       that         it     will

    be especially           important          to record          costs      promptly        if     the actual           cost         of

    issued      property         is to be identified                  in monthly           statements        of operation,

    as previously           advocated.

             To properly           consider          rehabilitation           costs,        adequate       procedures                 should

    be developed           for     recording          the costs        as they       are incurred.


             We found       that     the reporting               of income in the Revolving                       Fund's

    financial       reports         has been delayed,                  Substantial           income was earned,

    for     example,       during     February           and arch           1971, when property                  was shipped

    to Nigeria,           but the income was not recorded                           as earned in these                   months.

    Delays      in reporting           smaller         amounts        of income have occurred                     with        respect

    to the sale           of property          by the property               disposal        officer.

             In the case of the Nigerian                         project,         the normal         procedure           of billing

    the customer           and recording              income simultaneously                  with       the shipment                 was

    not followed           because Nigeria               had agreed          to pay the actual               cost        of

    .   .   .   providing      the equipment and, at the time of the shipments,                    the necessary

                data for developing actual costs had not been accumulated.                            Such data
                became available,           and the transaction       was billed      and recorded,      during
                April      1971.
                        The amount of income derived from the Nigerian                    sale was over $1
                million,      consisting       of $647,000 for rehabilitation            costs,   $144,000 for
                overhead, and $210,000 for transportation                    costs.     By not recording     the

                income promptly,        accounts receivable          and gross income were understated
                and the deferred           rehabilitation     cost account was overstated             in the Feb-
                ruary and Ikch         financial       reports,   the reported net operating            losses for
                the months of February and March were overstated,                       and the reported     net
                operating      gain for April        was overstated.
                        In the case of income derived from sales by the property                        disposal
                officer,      we noted that the practice            has been to record such income when
                payment was received            rather than when the sale was made.               This practice
                has resulted       in delayed reporting           of income because payment was usually
                not received       in the month of the sale.
                        Corrective     action      needed
                        We believe     that proper accounting          requires       the recording     of income
                at the time the income is earned.                 We recognize that in some cases exact
                data will      not always be available            for this    purpose.     We believe,     however,
                that reasonable        estimates can be made in those cases to permit prompt
                recording      of income , and that necessary adjustments                 to the estimates can
e               be made subsequently.
                        Accordingly,        appropriate     procedures       should be developed to ensure
                that all      income is recorded when the income is earned.


         We found      that         the Revolving         Fund's       Statement          of Financial            Condition

has for         some time       included        an accrued          liability          of $377,000          for     unbilled

costs     incurred       by the Army for                shipments          of material           from Frankfurt              to

Tokyo prior          to fiscal         year     1970.        We were informed              by responsible                 offi-

cials     at the Logistics               Service       Center       that     the Army was unable                   to bill

for     these     shipments          because     the shipments              were not coded in a manner which

would allow          the Army to differentiate                      excess property               program         shipments

from other         shipments          made at the same time.                    It     therefore       appears            that

the Army has paid from                   its    appropriated           funds,         without      providing          for

reimbursement,           legitimate            costs     of the excess property                    program.

         Corrective          action     needed

         We believe          that     the Army's         failure       to obtain          reimbursement             for      costs

paid     on behalf       of the excess property                     program          had the effect           of being            a

contribution          of capital          to the Revolving                 F'und.      To correct       for        this

unintended         result,          immediate       action      should       be taken           to resolve         the issue,

with     the intention              of either       releasing        the funds          to the Army or returning

the funds         to the United            States       Treasury.

:   .

                 We found            that      accrued      expenditures           during        the first          nine      months of

        fiscal       year      1971 exceeded               the apportioned              funds     authorized           for      expenditure

        during       that      period.           The funds       were over-expended                  because AID had

        determined           that      all      accrued      expenditures              need not be charged                   against

        apportioned            funds         when the expenditures                  occured.         This         determination

        ignored         the system of fund                  control       prescribed            by the Revolving                find's

        approved         accounting             system.

                 The Revolving                Fund's       accounting          system provides              for     controlling            funds

        through         a complete             set of budgetary               accounts.          Among other           things,           the

        accounts         are designed              to permit          periodic         comparisons          between          the amounts

        apportioned            for     expenditure           and the amounts that                  have been either                     expended

        or obligated             for        expenditure.         The system provides                  for         charging       all      accrued

        expenditures             to apportioned              funds      as the expenditures                  occur.

                 By the end of December 1970,                           the budgetary             accounts          had been main-

        tained       only      for     fiscal       year     1970 transactions.                   Responsible              officials,

        therefore,           were not necessarily                    aware of the true               status         of apportioned

        funds     for       fiscal      year      1971 activities.                 We informed         them at that                time        that,

        based on readily                    available       records,          almost      all    the apportioned               funds       had
        been either            expended          or obligated           for      expenditure.

        Selected        Expenditures              Excluded       for     Control         Purposes

                 AID officials                requested       additional           apportioned         funds         during        February

        1971,     but the request                 was obviously               not intended         to cover          all     accrued

        expenditures.                By March 31, 1971, based on recorded                              transactions,                   apportioned

                                                                                                                                   . 10 -
    funds were over-expended by $425,717             and the additional           funds that had
    been requested in February (subsequently             authorized      in April)      were in-
    sufficient     to cover the deficit      already incurred,         outstanding      obligations
    at March 31, 1971, and estimated administrative              expenditures          for the
    balance of the year.          Thus, the indication     was that apportioned              funds
    would continue to be over-expended at June 30, 1971, even if no new
    program activities         occured during the final      quarter     of the year.
            Our determination      of the status of apportioned          funds as of March 31,
    1971,    including   projected    transactions     for the balance of the year, is
    summarized below:
    Apportioned Funds
      Administrative  expenditures (3 quarterly a portionments)                         #     736,185
      Program expenditures (annual apportionment P                                       2,39?,370
        Total funds to March 31, 1971                                                   $391339555
    Accrued expenditures
      Operating expenses (including prior year adjustments)
      Increase in deferred rehabilitation      costs
         and inventories                                           19541,721
          Total expenditures to March 31, 1971                                              3,559,272
             Deficit incurred                                                           $     u.25,717~
    Projected transactions
      Deficit incurred (above)
    gOutstanding     obligations at March 31, 1971                      ;f:92;9
      Estimated administrative     expenditures for
         4th quarter                                                  222,936
            Minimum fund requirements                              1,163,916
      Additional funds authorized in April
         (including 4th quarter administrative
          expenditures)                                            1,043,090
         Projected minimum deficit                                                      J    (120,826)

    flrior    experience had indicated that these obligations                     would result       in
        accrued expenditures by June 30, 19'71.
            Of the accrued expenditures       shown above, only the operating                 expenses,
    totaling     $2,017,551,     were considered by AID to be the expenditures                   charge-

                                                                                              - 11 -
able to apportioned          funds.      The additional         expenditures    for deferred           re-
habilitation       costs and inventory          acquisitions,       totaling    $l,54l,'El,         were
intended to be regarded as expenditures                   of apportioned       funds when they
were subsequently          recognized as operating          expenses of the program.                AID
officials       have described this          concept as the "applied"          method of determining

expenditures       chargeable to apportioned            funds.
         Corrective     action      needed
         We are not aware of any valid              basis for excluding        selected       accrued
expenditures       to determine the status of apportionments                   made on the accrual
basis.       We believe,     in fact,     that no meaningful method of controlling
expenditures       is possible        through the apportionment          process by utilizing
AID's llapplied"        concept.
         To properly     control      apportioned     funds, AID should discontinue              its
practice       of subjecting        apportionments     to the "applied"        concept,       and
implement in its place the system of fund control                       prescribed      by the
Revolving Fund's approved accounting                  system.
         Action is also needed to comply with the provisions                       of Section 3679,
Revised Statutes,          31 U.S.C. 665.        This legislation        requires     that funds be
apportioned       except in cases where an exemption has been obtained,                         pro-
hibits      expenditures     in excess of apportioned             funds, and prescribes          the
action to be taken whenever apportioned                   funds are exceeded.           Because the
Revolving Fund had not been exempted from the apportionment                           process, a
legal requirement          exists     for taking the prescribed          action.
Discrepancies         in Budgetary Accounts
         We noted that the budgetary accounts,               which contained entries             only

                                                                                                - 12 -
for     fiscal       year     1970,      did not properly          show the status                 of the Revolving

Fund at June 30, 1970.                     Part     of the discrepancy               in the accounts              was

caused by not recording                     budgetary        transactions        prior       to fiscal           year     1970.

The balance              of the discrepancy           was caused by recording                      erroneous       data

during      fiscal         year     1970 in both           the budgetary        and the proprietary                     accounts,

and then making the needed adjustments                             in only       the proprietary                 accounts.

         The overall              discrepancy       in the budgetary            accounts           at June 30, 1970,

consisted           of a difference              between     the total       funds     available          for     expend-

iture        on an accrued              basis,     as reflected          in the proprietary               accounts,           and

the total           of the budgetary              account     balances       in account            950,   Unapportioned

Funds,       and account            965, Unliquidated            Obligations.             This      difference           is   shown


Proprietary       accounts
   Revolving Fund net worth at June 30, 1970                                                         $5,700,14o
  Less:      portion     in deferred  rehab costs and
                inventories                                                                              917,496
                   Available    for expenditure                                                      $4,7$2,644
Budgetary accounts
   Account 950, Unapportioned         Funds, June 30, 1970                                            4,243,gg2
   Account 965, UriLiquidated        Obligations, June 30, 1970                                          209,283
     Available       for expenditure

         Of the difference                 shown above,        $185&.3        was applicable              to trans-

actions          prior      to fiscal       year    1970 that      were not recorded                 in the budgetary

accounts,           and $144,036          was applicable          to erroneous            and uncorrected                trans-

actions          recorded         in the budgetary           accounts       during       fiscal      year       1970.

         Corrective           action       needed

         TO obtain           meaningful          budgetary     account       balances,            the accounts           should

                                                                                                                        - 13 -
be corrected             for      the net effect          of all          prior             errors,          procedures          should         be

strengthened             to ensure          the recording              of needed adjustments                            to the budget-

ary accounts             as those          adjustments          are made to the proprietary                                    accounts,         and

the appropriate                 budgetary       account         balances              should          be periodically                  recon-

ciled     with      proprietary             account      balances.


         The Revolving               Fund's     accounting             system provides                       for     other      controls

which     have not been maintained.                            These consist                   of controls              prescribed

for     cash and inventory                  transactions.

Delayed        Recording           of Cash

         We noted         that, the Central              Accounts             Branch was not promptly                            recording

cash receipts             and disbursements               in the cash journals.                                    Instead,      supporting

documentation             was held          in a suspense              file         until       the end of the month,                       at

which     time      the documentation                 was totaled              and posted                   to the appropriate

accounts.           As of April             20, 19'71, unrecorded                      cash disbursements                       totaled

$214,000         and unrecorded               cash receipts             totaled              $8,778.

         The Controller               General's        principles              and standards                       provide      that

procedures          adopted          by federal        agencies           to account                  for     and assist           in

providing         effective           control        of cash should                  be designed                   to attain       complete,

honest        and accurate            acccunting         for     all      cash receipts,                      disbursements,               and

balances         on hand or otherwise                  available              for      use.           In order          to meet these

objectives,          the principles                 and standards              provide            that:

         1.      Al.1 receipts             should     be deposited                  promptly           and appropriate

                 records          of all      cash received             should              be made immediately

                 after         receipt.

                                                                                                                                       - 14 -
          2.      Disbursements                 should           be recorded           promptly          on the basis             of paid

                  vouchers.               However,          if     disbursing           is performed              by another            agency

                  it     may be recorded                 on an approved                 voucher          basis.

          The Revolving                 Fund's       prescribed              procedures           require         the recording

and footing               of all        receipts         and disbursements                  of cash on a daily                     basis.
We believe              that      daily        recording           of cash transactions                     is desirable            and

that      no valid             basis      exists      for         delaying       it.

          Corrective              action        needed

          Steps         should         be taken        to ensure             compliance           with      the prescribed

procedures              for     recording          cash transactions.

Noncompliance with                      Prescribed               Inventory
Control Procedures

          We noted             that     the prescribed                internal          control          procedures         for     pro-

cessing          and recording                 inventory           acquisitions            and issues             had not been

implemented.                   The procedures               call      for     independent           maintenance             of logistic

and financial                  accountability               records,          with      periodic          reconciliations                of

the two to ensure                      their      validity.            In actual          practice,            however,           the

financial              accountability              records           have been maintained                    on the basis               of

results          derived          from the logistic                   accountability               records.          As a consequence,

the inventory                  controls         prescribed            by the accounting                   system did not exist.

          To control              inventory          acquisitions,               the approved               accounting            system

provides          that         the Logistics             Service            Center      (LSC) should              prepare         a single

line      item         release         report      document           and transmit           it     to the appropriate                       GSA

or DOD holding                  agency.           On the basis               of this      document,            the item           is shipped

to the designated                      location       where the document                    is receipted,                One receipted
copy of the document                       is to be returned                   to LSC for           logistic          accountability,

                                                                                                                                   - 1.5 -
and one receipted          copy is to be transmitted            to the Central Accounts
Branch (CAB) for financial              accountability.         At the end of each month,
LSC is to prepare a machine listing                  of all    inventory    acquired during the
month, sending a copy to CAB for reconciliation                       with financial     account-
ability      records.
          We found that LSC instructed             the transferring        agencies to send
both copies of the release report                  to LSC. CAB, therefore,          has been
receiving      its     copy attached to the monthly machine listing                 of inventory
acquisitions         prepared by LSC. Since CAB has not been receiving                    a copy
of the release report              from the releasing         agency, CAB has had no assur-
ance that all          inventory     items acquired during the month were included                    on

the monthly listing.
          To control     inventory     issues,     the accounting      system provides      that
the holding depot annotates two copies of the document directing                           the
disposition.           One annotated copy is to be returned                to LSC for logistic

accountability          purposes     and one annotated copy is to be transmitted                 to
CAB for financial          accountability         purposes.      Upon receipt     of the shipping
document, CAB should promptly issue a bill                      to the ordering     agency.
          The accounting manual also provides                 that at the end of each month
LSC should prepare a machine listing                  of issues and forward it to CAB.
CAB is to reconcile           these reported        issues with the shipping           documents
received      from the holding         depots.
          We found     that CAB was not receiving             issue documentation directly
from the holding depots.               Instead,     CAB received      the annotated issue

                                                                                           - 16 -
reports   from LSC as an attachment to the monthly machine listing               of issues,
similar   to the procedure used for acquisitions.
      Accordingly,     CAB has had no assurance that all          the issues were included
on the listing.       In addition,     the modified    procedures have delayed the sub-
mission of bills      to recipients     of the property   until    the monthly listings
were forwarded b LSC at the end of the month.
      Corrective     action needed
      The prescribed     controls     over inventory    should be implemented.

                                                                                 - 17 -

                       - 18 -
                                 Agency for International      Development
                                    Excess Property    Revolving Fund
                                   Statement of Financial      Condition
                                          As of March 31, 1971

      Funds with U.S. Treasury                                ~3,;;,;;;
      Accounts receivable
      Travel advances                                                 '300
      Inventory-purchased     parts & supplies                 1,06'7,619
      Deferred rehabilitation      costs                       1,391,59%
         Total assets                                                              $5,934,907

       Accounts payable                                            469,427
       Accrued expenses payable                                    695,676
         Total liabilities                                                           1~65,103

      Original   investment                                     5,000,000
      Cum&,ative net gain from operations
        as of 6/30/?0                                              700,140
      Operating gain (loss) FY 1971 to date                       (930.336)
         Total net worth as of 3/31/V                                               4,769,%04
      Total liabilities     and net worth                                          @,934,90?

    Note:   (I)   Non-funded U.S.       Government personal property    for which the
                  Excess Property       Revolving  Fund is accountable,    has an original
                  acquisition   cost      value of $20,505,873  as of March 31, 1971 and
                  is not included       in this statement.

    Note:   (2)   During the months of February and March, excess property                          having
                  an original       acquisition      cost of $1,206,276,          was shipped under
                  special rehabilitation            standards.        Inventory    accountability       has
                  been appropriately          adjusted    to reflect       these issues.        This
                  financial      statement,      however, gives no effect           to income accruing
                  as a result       of the shipments.           Direct costs related        to the special
                  rehabilitation       are currently        included in inventory-purchased              parts
                  & supplies and deferred            rehabilitation        costs.
    GAO Note:     The above statement,  including  the notes, was prepared by AID.
                  We believe that the statement   does not adequately  present the
                  financial  condition of the Revolving Fund at March 31, 19'71.

                                                                                                -   19 -
                             Ekcess Property Revolving F'und
                                Statement of Operations
                         July 1, 1970, through March 31, 1971

   Service charges- l/
   Accessorial  charges
   Other sale,&
     Total                                                                         $1,087,215

Current    FY expenses:
  Applied rehab. costs                                    757 2&'
   Reimbursable costs                                     136:158
  Freight    costs                                        189,262
  Delivery     costs                                      232,787
   Personnel cost                                         553,033
   Travel & related costs                                  40,709
  Administrative     costs                                 43,9w
     Total - FY expenses                                                            1,953,141
Net results    of current   FY
  operations     for the Fund                                                         (865,946)
Additional   gain (loss) prior FY
  adjustment                                                                          (64,390)
      Net operating    gain (loss)                                                  3TT3Tm

Notes:      (1)     Service charges represent  a percentage  rate applied to the
                    original  acquisition cost or standard unit price of the item
                    issued, to recover the expenses incurred    in the operation
                    of the program.

            (2)     Proceeds    from sale   of property     disposed     of by PDO.

            (3) Includes        FY 1971 State Administrative           Support     costs   for
                    Frankfurt    ($19,350) and Tokyo ($133).,

            (4) Includes        $276,496 applied costs for "ready            for     issue11
                    inventory    transferred   to Property Disposal          for     FY to date.

GAO Note:         The above statement,    including   the notes, was prepared by AID.
                  We believe that the statement     does not adequately   present the
                  operating  results   of the Revolving F'und for the period.

                                                                                           - 20 -