Examination of the Financial Statements of Federal Prison Industries, Inc.

Published by the Government Accountability Office on 1971-04-14.

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



              Dear Mr.     Carlson:

                      Our examination        of the financial          statements      of Federal-         -7 cr'
        I     Prison    Ind?ZXYYZ~~"~iic‘~        (FPI),      for fiscal     year 1970 included             "
              examinations         at the central        office     in Washington,       D.C.,    and
              at five     institutions       located      at Danbury,       Connecticut;       McNeil
              Island,    Washington;        Seagoville,         Texas; Tallahassee,         Florida;
              and Terminal          Island,  California.

                        We observed        certain     practices    which required      the atten-
              tion of local          officials.         These practices      were brought     to their
              attention,          and copies       of our letters      to these officials      were
              made available           to you.        In addition,     we found that there was a
               -- -.._  to revise
                     -._.._            certain      accounting,     procurement,    and other      prac-
              --_...      requiring      corrective       action   by  the  central   office.      These
              matters        are discussed         below.


                      During     fiscal     year 1970 the central               office     entered   into
              two negotiated          contracts        for services         to be performed        at the
              Federal     Reformatory        for Women at Alderson,                 West Virginia.        On
              August 4, 1969, the central                   office    negotiated        a $50,000 con-
              tract    with Keyboard Training,                  Inc.   (KTI),     to teach 100 inmates
              at Alderson        keypunch      skills,       office     routtnes,       and interviewing
              techniques.           In the following            month the ccntract          was increased
              to about $66,000 to provide                   for the rental,          shipping,     and re-
              lated    costs of 14 keypunch machines.                       Cn March 9, 1970, the
              central     office      negotiated         a contract       in. the amount of $6,840
              with Urban Resources,              Inc.      (URI),    to perform        an evaluation      of
              the impact of the training                  received      under the KTI contract.

                     The FPI manual provides          that Federal      Procurement     Regula-
              tions   be applicable     to FPI.       The regu1atAon.s      provide   that no
              procurement      in excess of $2,500 shall          be male by negotiation
              if the use of formal        advertising       is feasible     and practicable
              under the existing       conditions.        In our opinion       the contracts
              with KTI and URI should have been awarded o                                      or-
              ma1 advertising.

                                      -     50TH ANNIVERSARY         1927 - 1971
.       4

    *         ?


                    In addition,         the central      office    administratively           deter-
            mined      that  the costs       of the two contracts           were to be charged
            to central       office      accounts:       80 percent     to account         63, Other
            Expense ; and 20 percent               to account    61, Vocational          Expense.
            We believe       that     80 percent      of the costs      should       have been re-
            corded       as a cost     of operating       the ADP industry           at Alderson      and
            that    20 percent        should     have been recorded         as part      of Alderson’s
            vocational       training       expense.

                     We recommend        that   you take       the action         necessary      to ensure
            that     Federal    Procurement        Regulations         are complied         with   and that
            the need for        entering      into   negotiated          contracts       is fully     jus-
            tified.        We recommend       also    that     central      office      employees     be
            instructed       to transfer        the costs        of the KTI and URI contracts
            to the proper        accounts       at Alderson.

            DELAYED      UNTIL FOLLOWING FISCAL               YEAR

                     The electronics        industry      at McNeil       Island       furnished         prod-
            ucts     having      a sale  value      of about     $229,000       to the U.S.           Army
            Mobility        Equipment    Command in April           and May of 1970.                Fourteen
            days after         the first    shipment      was made in April              1970,      the Army
            requested        that    it not be billed        for     the products          until      July     1,
            1970 D A marketing           specialist       in the central           office        approved
            the Army’s         request,    and the electronics            industry         delayed       bill-
            ing the Army until           the following         fiscal     year.

                    It appears       that     the Army used fiscal               year      1971 funds        to
            purchase     products        received       in fiscal       year     1970.        In our opin-
            ion this     action      circumvented           congressional          control      over      funds
            appropriated        for    fiscal      year     1970.      FPI’s     agreement        to delay
            the billing       does not appear             to have been         in the best          interest
            of the Government            or to have been an aid                in congressional              con-
            trol    over   appropriated          funds.

                   We recommend      that         you take     the action    necessary             to ensure
            that   billings      are not        delayed    for    the convenience      of          FPI’s
            customers       or at their         request.





                   The FPI manual        requires     special               authorizations              by the
          central     office    for    the construction,                    alteration,            improvement,
          addition,       and replacement         of buildings,                   except       for    items    of
          a minor     routine     nature.

                   In October      1969 the central       office      approved       a special
          authorization         in the amount      of $18,550       to purchase          transform-
          ers)    electrical       cable,   and related       equipment      and to pay for
          the cost        of labor    to install     the transformers          for    increasing
          the electric         power    for  the sign    shop at McNeil          Island.

                   In December           1969 an official                  from  the Bureau          of Prisons
          inspected          the overall           electrical            system    of the furniture               fac-
          tory     building,          which      also     housed         the sign      shop,     and determined
          that     the electrical              wiring        in the building            was very         hazardous
          and had been installed                     in violation             of the National            Electrical
          Code.        It was his opinion                  that      the wiring        should      be corrected
          and installed             in accordance              with      the code requirements,                   A
          local      FPI official             estimated          that      the overall        electrical          im-
          provements           would     cost      about       $200,000.         At the time           of our re-
          view,      about      $11,000        had been expended                on the original             program
          for    increasing           electric         power,        including       about      $2,000      for     items
          purchased          but not usable             under        the rewiring         program.

  \               We recommend        that     you issue       instructions          to revise                 the
          FPI manual        to include        a provision        requiring       that,      before               spe-
          cial    authorizations          for   major     construction,          alterations,                    and
          additions       are approved,          central     office       employees       discuss                the
          proposed      project(s)       with      the Construction           and Mechanical
          Branch,     Bureau       of Prisons,        to obtain       advice     and guidance.

          PREMATURE         PURCHASE        OF A CAMERA

                 In March   1970 the central         office     authorized                         the purchase
          of a process    camera     for    the sign     shop at McNeil                          ‘sland.     The
          camera 9 purchased     for     about  $5,400,      was received                          on June 16,
          1970 *



            At the time   of our review        in September       1970,      the camera
     had not been unpacked      and was stored          in a warehouse          because
     space was not available        to install      the camera.          FPI at McNeil
     Island   planned   to move its    business       office    to the warehouse
     area and to install     the camera        in the former        business       office
     area o   Officials   at McNeil    Island     estimated       that    it    would     be
     from   6 to 12 months   before    the camera         could   be installed.

              The go-day         portion      of the         warranty        on the camera,      pro-
     viding       for    repair      or replacement              of defective        parts  at no
     cost,      expired       on September         14,       1970.       The remaining      portion
     of the warranty,              providing       for       repair      or replacement       at no
     cost     for     parts     but with      charges          for    labor,    service,    and trans-
     portation,          will    expire      on June         16, 1971.

              In our opinion      the camera   was purchased                     prematurely.              At
     the time     of our examination,        an installation                     date had not             been
     established.       As a result      FPI has lost        some,               and may lose             more,
     of the benefits       provided    by the warranty.


             Two of the         five   institutions      included        in our examination
     amortized      capital       improvements      over     a relatively        short  period
     of time,     although        the improvements         enhanced        the value   and ex-
     tended    the life         of the assets.

               Officials          at Tallahassee,           Florida,       on the basis           of   cen-
     tral      office       instructions,           charged      about     $23,000       to account           40,
     Deferred          and Prepaid        Expense,        and provided           for   amortization
     of the costs             over     a 4-year      period       for   FPI’s      share     of an     elec-
     trical        rehabilitation           project       at its      vocational         training        fa-
     cilities.            The rehabilitation              increased        the value         of the      build-
     ings      by additions            to the then-existing              electrical          system.

           The electronics               shop at McNeil         Island      repaired      a forklift.
     This  repair    increased            the forklift’s          value     and extended        its
     life.    On the basis             of central        office     approval,        the cost      of
     the repairs    of about             $2,400   was charged          to account        40 to be



    amortized         over  a 3-year          period,         rather     than     added      to   the
    value     of    the forklift.

              The basic        principle      to be observed         in accounting            for    an
    alteration,         replacement,          or other     improvement          to an existing
    asset       which   significantly           prolongs     its   useful       life     is to cap-
    italize        the costs         incurred     and to depreciate           the costs         over
    the remaining           life       of the asset.       Accordingly,            we recommend
    that      you issue        instructions        to incorporate         this       accounting
    principle         in the FPI manual.


            In our previous          years’    examinations      we found     that direct
    labor     and overhead        costs     had not been allocated         to the work-
    in-process      inventory        at year-ends.          It was our opinion     that
    the financial        position        of the corporation       would    have been
    more accurate        if these        costs   had been included       in the work-
    in-process      inventory        rather    than   in the finished        goods inven-

              During       our examinations               for   fiscal       year    1970,      we found        a
    substantial            improvement           in the compliance              with    our previous
    recommendations               that     related        labor     and overhead          be included
    in the work-in-process                     inventory.           In our latest           examination
    we found         that      only    the tire         and cable        factories        at Petersburg,
    Virginia,          and the furniture                factory       at Texarkana,           Texas,      had
    not included             these     costs       in their       work-in-process             inventory.
    We suggest           that     these      industries         be required          to include          such
    costs      in the work-in-process                     inventory        in accordance           with     the
    instructions             issued      in May 1970 by the central                     office.

           We shall     appreciate        being     advised      of any action      taken    or
    proposed    in connection         with     the foregoing        matters.      Also    we
    shall    be pleased      to discuss        these     matters    with     you and offi-
    cials    of FPI at your        convenience.           The courtesy        and


cooperation       given      to   our   representatives           during      our     examina-
tion   are    appreciated.

         A copy of this    letter      is being             sent  to the      Assistant
Attorney      General  for   Administration                 and to your       Associate

                                                Sincerely       yours,

                                                Director,       Civil      Division

The Honorable         Norman      A. Carlson
Commissioner,         Federal       Prison
   Industries,        Inc.
Department     of     Justice