oversight

Financial Management of Virgin Islands Government Needs Substantial Improvements

Published by the Government Accountability Office on 1971-03-02.

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

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REPORT TO THE CONGRESS




Financial Management Of
Virgin Islands Government
Needs Substantial Improvements
                           B-114808
Department   of the Interior




l3Y THE COMPTROLLER GENERAL                    ‘:
QF THE UNITED STATES
             COMPTROLLER     GENERAL     OF      THE    UNITED   STATES
                           WASHINGTON.    O.C.     200548




B- 114808




To the President   of the Senate and the
Speaker  of the House of Representatives

        This is our report      on substantial     improvements         needed
in the financial     management      of the Virgin      Islands    Government.     c I wf
Our review       was made at the request        of the Governor        of the
Virgin    Islands   who asked that any reporting            on the results    of   p- Iqw
our examination       be made in accordance          with the requirements
applicable     to our examinations      of the activities       of the Govern-
ment Comptroller        of the Virgin    Islands    (48 U.S.C. 1599(j)).

       Copies of this report    are being sent to the Director,      Of-
fice of Management     and Budget; the Secretary    of the Interior;
and the Governor    of the Virgin   Islands.




                                                 Comptroller          General
                                                 of the United        States




                   50TH ANNIVERSARY                    1921- 1971
                                                                                                        C‘f44f
COMPTROLLERGENERAL'S                          1 FINANCIAL MANAGEMENTOF VIRGIN ISLANDS
REPORTTO THE CONGRESS                           GOVERNMENTNEEDS SUBSTANTIAL IMPROVEMENTS
                                                Department of the Interior B-l 14808 32
                                          a

DIGEST
----__

WHYTHE REVIEWWASMADE
    3JThe Governor of the Virgin           Islands   requested the General Accounting            Of-
       fice (GAO) to appraise the adequacy of the accounting                  system and the
       related   financial       management controls     within    the Government of the Vir-
       gin Islands.        The Governor said that a substantial            Federal interest
       would be served by GAO's independent             appraisal     of those aspects of the
  i    system which GAO was in a position            to review.       GAO's review was con-
  1    cerned   primarily       with the controls    over   assets    and with certain     selected
  \ji financial     activities.


FINDINGS AND CONCLUSIONS
       Principal      Deficiencies
       The Virgin       Islands   Government's       control   over   its   assets    was inadequate.

             --Accounting   records did not provide reliable           information      on the
                amount of cash on deposit      in banks.     Errors made by the banks and
                by the government months, and even years, before had not been cor-
                rected.   Bank reconciliation     procedures     provided no assurance that
                all checks paid by the banks were recorded properly                in the records
                of the government.      (See p. 7.)

             --Accounts   receivable   records did not provide a reliable     record of
                the amounts owed to the government.        Many receivables remained un-
                paid for long periods,     and little effort   had been made to collect
                these receivables.     (See p. 13.)

             --No reliable  record existed  of the government's   investment    in land,
                buildings, and equipment because fixed asset records had not been
                maintained properly  and because the required   physical   inventories
                had not been taken.   (See p. 20.)

             --Similarly,  no reliable   records         existed of the aovernment's          invest-
                ment in materials   and supplies.           (See p. 25.) "

       Other Deficiencies
             --Some funds were overobligated;            some obligations      were not recorded;
                and some duplicate allotment          records were being       maintained.

Tear Sheet


                                                 I                MARCH              2x971
      --Many procurements    were madewithout  the benefit         of competition.
         Waiving of the requirement  for formal advertised          bids was question-
         able in some cases.

      --Internal    audit activities   were confined mainly       to accounting  and
         financial   matters,   and even in this area little        emphasis was given
          to making audits where major problems existed.


RECOMMENDATIONS
             OR SUGGESTIONS
    GAO is making various    recommendations     designed    to establish   and main-
    tain control   over the government's     assets (see     pp. 11, 18, 24, and 28),
    to improve the fund allotment     procedures     (see   p. 32), to improve procure-
    ment practices    (see pm 38), and to provide for        more effective   audit of
    government activities    (see pI 42).


AGENCYACTIONSAND UNRESOLVED
                          ISSUES
    A draft   of this report was sent to the Governor and to the Secretary'of
    the Interior     for comment on September 30, 1970.       GAO requested their
    comments on the draft within     30 days.     No comments have been received         so
    the report   is being issued without    their   comments.


MATTERSFOR CONSIDERATION
                       BY TlilE CONGRESS
    This report is being issued to the Congress because (1) the Virgin                Is-
    lands Government has inadequate      control    over its assets and (2) the
    Governor,    in his letter   asking GAO to undertake     this assignment,     re-
    quested that the report on the results        of the examination     be handled in
    accordance with the requirements      applicable    to GAO examinations     of the
    activities     of the Government Comptroller     of the Virgin   Islands. GAO
    reports    on the activities   of the Government Comptroller      are required      to
    be sent to the Congress.
                         Contents
                                                                   Page

DIGEST                                                               1

CHAPTER

  1       INTRODUCTION                                               3

  2       IMPROVEMENTS    NEEDEDIN CONTROLOVERASSETS                 7
              Need to improve controls         over cash             7
                   Recormendations to the Governor                  11
              Need for strengthening         controls   over ac-
                counts receivable                                   13
                   Lack of reliable       record of amounts
                      due                                           14
                   Inadequate collection        practices           15
                   Basic authority      for writing     off un-
                      collectible    accounts needs revi-
                      sion                                          16
                   Recommendations to the Governor                  18
              Deficiencies      in control    over fixed as-
                sets                                                20
                   Recommendations to the Governor                  24
              Need for strengthening         controls   over ma-
                terials     and supplies                            25
                   Recommendations to the Governor                  28

  3       NEED TO IMPROVEFUND ACCOUNTINGPROCEDURES                  29
             Allotment accounting                                   29
             Budgetary control over the obligation
                and expenditure  of funds                           31
             Recommendations to the Governor                        32

   4      IMPROVEMENT  NEEDEDIN PROCUREMENT  AND PAY-'
          MENT PRACTICES                                            33
              Procurement practices                                 33
              Late payment of bills by GVI                          37
              Issuance of numerous checks                           38
              Recommendation to the Governor                        38

   5      NEED FOR STRENGTHENING INTERNAL AUDIT                     40
             Recommendation to the Governor                         42
                                                                    Page

CHAPTER

      6    THE VIRGIN ISLANDS PORT AUTHORITY                         43
               Recommendation to the Governor                        47

      7    SCOPEOF REVIEW                                            4%

APPENDIX
      I    Letter dated February 20, 1970, from the
              Governor of the Virgin Islands to the
             Comptroller  General of the United States               51

  II       Principal     officials    responsible     for the ad-
              ministration       of activities    discussed in
              this report                                            53

                              ABBREVIATIONS

GAO        General Accounting      Office

GVI        Government of the Virgin          Islands

TBA        Treasurer's    Bank Account

VINB       Virgin   Islands   National      Bank
COMPTROLLERGEN@?AL'S                       FINANCIAL MANAGEMENTOF VIRGIN ISLANDS
REPORTTO THE CONGRESS                      GOVERNMENTNEEDS SUBSTANTIALIMPROVEMENTS
                                           Department of the Interior B-114808


DIGEST
---me-

WHYTHE REVIEWWASMADE
    The Governor of the Virgin          Islands requested the General Accounting Of-
    fice (GAO) to appraise the adequacy of the accounting                system and the
    related   financial       management controls     within  the Government of the Vir-
    gin Islands.        The Governor said that a substantial          Federal interest
    would be served by GAO's independent            appraisal    of those aspects of the
    system which GAO was in a position            to review.     GAO's review was con-
    cerned primarily         with the controls    over assets and with certain        selected
    financial    activities.


FINDINGS AND CONCLUSIONS
    PrinoipaZ     Deficiencies
    The Virgin      Islands Government's        control   over   its   assets   was inadequate.

         --Accounting   records did not provide reliable          information      on the
            amount of cash on deposit     in banks.     Errors made by the banks and
            by the government months, and even years,          before had not been cor-
            rected.   Bank reconciliation    procedures     provided no assurance that
            all checks paid by the banks were recorded properly               in the records
            of the government.      (See p. 7.1

         --Accounts   receivable   records did not provide a reliable     record of
            the amounts owed to the government.        Many receivables remained un-
            paid for long Periods,     and little effort   had been made to collect
            these receivables.     (See p. 13.)

         --No reliable  record existed  of the government's   investment    in land,
            buildings, and equipment because fixed asset records had not been
            maintained properly  and because the required   physical   inventories
            had not been taken.   (See p. 20.)

         --Similarly,  no reliable   records        existed  of the government's        invest-
            ment in materials   and supplies.          (See p. 25.)

    Other Deficiencies
         --Some funds were overobligated;            some obligations      were not recorded;
            and some duplicate allotment          records were being       maintained.



                                            1
       --Many procurements    were made without  the benefit         of competition.
          Waiving of the requirement   for formal advertised           bids was question-
          able in some cases.

      --Internal   audit activities    were confined mainly         to accounting  and
         financial  matters,,and    even in this area little          emphasis was given
         to making audits where major problems existed.


RECOMMENDATIONS
             OR SUGGESTIONS
    GAO is making various    recommendations    desi ned to establish   and main-
    tain control   over the government's     assets 4see pp. 11, 18, 24, and 28),
    to improve the fund allotment    procedures     (see p. 32), to improve procure-
    ment practices    (see p. 38), and to provide for more effective      audit of
    government activities    (see p, 42).


AGENCYACTIONSAND UNRESOLVED
                          ISSUES
    A draft of this report was sent to the Governor and to the Secretary       of
    the Interior for commenton September 30, 1970.         GAO requested their
    comments on the draft within   30 days.    No comments have been received so
    the report  is being issued without  their   comments.


MATTERSFOR CONSIDERATION
                       BY THE CONGRESS
    This report      is being issued to the Congress because (1) the Virgin             Is-
    lands Government has inadequate        control    over its assets and (2) the
    Governor,    in his letter    asking GAO to undertake      this assignment,     re-
    quested that the report       on the results    of the examination     be handled in
    accordance with the requirements        applicable    to GAO examinations     of the
    activities     of the Government Comptroller       of the Virgin   Islands. GAO
    reports    on the activities    of the Government Comptroller       are required      to
    be sent to the Congress.
                               CHAPTER1

                             INTRODUCTION

       In response to a request dated February 20, 1970, from
the Governor of the Virgin Islands (see app. I), the General
Accounting Office has examined into certain aspects of the
financial     management system of the Government of the Virgin
Islands (GVI).        Our review was concerned primarily          with the
internal     controls    and accounting operations       relating    to se-
lected financial       accounts and activities       and did not in-
clude an overall       evaluation     of the financial    management sys-
tem.     The  scope   of  our  review   is  on page  48.

       The Virgin Islands are about 40 miles east of Puerto
Rico and some 1,400 miles southeast of New York City.       Al-
though there are approximately    50 islands and cays, the
islands of significance--  in terms of population    and commerce--
are St, Thomas, St, John, and St. Croix.     The capital   and
seat of government is located at Charlotte     Amalie on
St. Thomas.

      According to the U.S. Bureau of the Census, the popu-
lation of the Virgin Islands asof April 1, 1960, the date
of the last published census, was 32,099--consisting     of
16,201 on St. Thomas, 14,973 on St. Croix, and 925 on
St. John.    More recent figures published by the Virgin
Islands Bureau of Vital Statistics     showed that the popula-
tion of the Virgin Islands had increased to about 74,000 as
of December 31, 1969, consisting   of about 37,000 on
St. Thomas, 35,000 on St. Croix, and 2,000 on St. John.

       The Virgin Islands,      which were purchased from Denmark             .
in 1917 for $25 million,        are an unincorporated   territory
of the United States.        The powers of the present insular
government are set forth in the Revised Organic Act of the
Virgin Islands,       as amended (48 U.S.C. 1541).     Distinct   exec-
utive,   legislative,     and judicial   branches of government
have been established.        The present Governor was initially
appointed by the President         of the United States with the
advice and consent of the Senate.           Pursuant to the Organic
Act, however, as revised in August 1968, he was elected in
November 1970 for a 4-year term beginning on the first


                                      3
Monday in January 1971.       General elections     for Governor and
Lieutenant Governor will      hereafter  be held    every 4 years,

     The unicameral legislature     consists of 15 senators,
each elected for a 2-year term. Regular annual sessions are
held for a period fixed by the legislature.      The Governor,
however, can call special-sessions.
        At the time of our review, the Governor, in exercising
his responsibilities        as chief executive,     was assisted by a
Government Secretary,        commissioners of the executive depart-
ments, and organizational        units and personnel in his execu-
tive offices,       There   were  13 executive departments,      as fol-
lows : Agriculture,        Commerce, Conservation     and Cultural   Af-
fairs,    Education,    Finance,   Health,   Housing  and  Community
Renewal, Labor, Law, Public Safety, Property and Procure-
ment, Public Works, and Social Welfare.
        There were also several separate governmental instrumen-
talities,     such as the Urban Renewal Board, the Virgin
Islands Housing Authority,         the Virgin Islands Water and
Power Authority,      the College of the Virgin Islands,         and
the Virgin Islands Port Authority.            Each of these instru-
mentalities,     except the Port Authority,        had its own trea-
sury, maintained its own accounts, and published             its own
reports.

       The Office of the Government Comptroller       of the Virgin
Islands was established      in 1954 pursuant to section 17 of
the Revised Organic Act of the Virgin Islands (48 U.S.C.
1599).    The Government Comptroller      is appointed by the Sec-
retary of the Interior     and is under the Secretary's      general
supervision.     He is a Federal official     and employees of his
office   are Federal employees.     Responsibilities    of the Gov-
ernment Comptroller    include:
      1. Auditing    all accounts pertaining   to the revenues,
         receipts,    and expenditures   of GVI.

      2. Submitting to the Governor and to the Secretary of
         the Interior an annual report on the fiscal  condi-
         tion of GVI.

      3. Making audits directed  toward improving the effi-
         ciency and economy of the programs of GVI and

                                  4
        discharging  the responsibility  assigned by the Con-
        gress to ensure that Federal revenues deposited into
        the treasury of GVI are properly   accounted for.

     4. Certifying  to the Secretary of the Interior      the net
        amount of GVI revenues which form the basis       for
        Federal grants to GVI.

       GVI, in its annual report for fiscal   year 1969, showed
gross operating    revenues of $95 million.   The Government
Comptroller,    in his report for the same fiscal    year, ad-
justed the revenues reported in the GVI report to correct
certain understatements     and omissions and to offset tax re-
funds and tax subsidies against gross operating        revenues.
The Government Comptroller's     report showed that the net rev-
enues of GVI for fiscal     year 1969 were as follows:

                                               Amount
                                             (millions)

        Taxes:
            Income taxes                       $41.4
            Trade and excise taxes               3.2
            Real property   taxes                2.2
            Gross receipts    taxes              6.1
            Gasoline,   stamp, and
               other taxes                        1.6

                 Total   taxes                  54.5

        Government operating       income         2.9
        Custom duties                             1.9
        Licenses,  fees, etc.                     2.0
        Other revenues                            2.8
        Royalties                                 2.8
        Matching funds                           12.6
        Federal grants-in-aid                     6.1
                 Total   revenue               $85.6
      As shown above, GVI's two major sources of income are
income taxes and matching funds.   The income taxes are Fed-
eral income taxes which, by law (48 U.S.C. 16421, permanent
residents  of the Virgin Islands pay directly into the
treasury of GVI. The matching funds consist of net tax rev-
enues collected      during a fiscal  year by the U.S. Treasury
on articles     produced in the Virgin Islands (chiefly     rum) and
transported     to the United States.     The Revised Organic Act
(26 U.S.C. 7652(b)) provides that these revenues less col-
lection    costs be paid by the U.S. Government to GVI in the
year subsequent to the year in which they are collected,         in
an amount not to exceed local tax revenue.

      The Government Comptroller   had reported that, for the
past 10 years, local tax collections    have exceeded the rev-
enues collected  on Virgin Islands articles    transported  to
the United States and that since 1960 the total amounts col-
lected by the U.S. Treasury, less collection      costs, have
been paid to GVI.

      GVI is required by the Revised Organic Act to maintain
the matching funds in a separate account.      The funds may be
expended as determined by the Virgin Islands Legislature,
subject to the prior approval of the President or his des-
ignated representative.   The Secretary of the Interior     has
been designated as the President's   representative    for this
purpose.

      The act also provides that matching funds received by
GVI during a fiscal   year but not obligated    or expended for
approved purposes by the end of that fiscal       year be used
only for emergency relief   and essential   public projects    and
that any such funds in excess of $5 million       be returned to
the U.S. Treasury.    The Government Comptroller,      in his an-
nual report on the operations   of GVI for fiscal     year 196.9,
stated that there had been no reversions     of matching funds
to the U.S. Treasury.

     The principal   officials   responsible  for the administra-
tion of activities   discussed   in this report are shown in
appendix II.
                            CHAPTER2

         IMPROVEMENTS
                    NEEDEDIN CONTROLOVER ASSETS

       We found that GVI's control over its assets was inade-
quate.    Our review showed that improvements were needed by
GVI to strengthen     the control    of its assets, as indicated
by the fact that (1) cash on deposit in various bank check-
ing and savings accounts had not been reconciled        with the
amounts shown as on deposit by the GVI records,        (2) ac-
counts receivable     were not adequately controlled     and there
was no up-to-date     detailed   record of amounts due, and
(3) control    over fixed assets and supplies was inadequate.

     These deficiencies  and our recommendations      for   improve-
ments are described below.
NEED TO IMPROVECONTROLSOVER CASH

       Improved procedures are needed to ensure accurate ac-
counting for cash resources and to minimize the possibility
of irregularities.     An important feature in controlling
cash on deposit in banks is the reconciliation     of the bal-
ances shown on bank statements with the balances shown in
the general ledger cash-in-bank     accounts.

       GVI maintains the major part of its funds in checking
and savings accounts in two commercial banks, the Chase Na-
tional   Bank and the Virgin Islands National Bank (VINB) lo-
cated in Charlotte     Amalie, St. Thomas. General fund re-
ceipts available    for financing  the general operations     of
GVI are deposited in and disbursed from the Chase checking
account.    Other funds' receipts,    representing   monies ear-
marked for specific     uses, are deposited in and disbursed
from the VINB checking account.       To maximize interest    in-
come, cash not needed for current operations       is transferred
to savings accounts and the checking accounts are replen-
ished from the savings accounts as needed.

      The general ledger cash-in-bank   accounts are maintained
by type of fund, not by bank account.     The balances of these
fund cash-in-bank   accounts amounted to about $46 million    at
June 30, 1969, as shown below.


                                 7
             General fund                                                                                             $ 9,852,682
             Matching fund                                                                                              9,503,127
             Essential  projects   fund                                                                                    158,551
             Special funds                                                                                              8,586,204
             Enterprise  and revolving                                                   fund                           5,660,300
             Agency trust and deposit                                                    fund                          13,058,384

                            Total                                                                                     $46,819,248

      In addition  to the general ledger cash-in-bank    ac-
counts, a report designated as the Treasurer's     Bank Account
(TBA) is maintained,   which shows for each bank checking and
savings account the balance on deposit at the beginning of
each day, the daily deposits and withdrawals,     and the bal-
ance on deposit at the end of each day. The GVI accounting
procedures provide for the Department of Finance to recon-
cile monthly the bank checking and savings account balances
shown on the bank statements with the amounts shown on TBA
and the general ledger cash-in-bank    accounts.

      The need for improved cash control procedures is indi-
cated by the substantial   unreconciled differences that ex-
isted between the amounts on deposit in the two principal
checking accounts at June 30, 1969, according to confirma-
tions obtained by us from the banks and according to the
amounts shown on TBA and the general ledger cash-in-bank
accounts, as summarized below.
                                                                                                         Cash   balance          at    June        30,    1969
                                Account         title                          Bank
                                                                               --__      confi?&tions                              -TBA                          General        ledger

    Chase     :
            Common       checking          account                                    S 3,433,816                         S           915,056       cr.
            Savings         accounts:
                    General         fund                                                  3,535,3G2                                   29,980
                    Federal        appropriations                                         3,193,696                             3,158,263
                    Special        and     other        funds                           14,157,628                            14,010,550
                    Jnemployment              insurance          fund--local             4,299,604                              4,254,237

                           Subtotal                                                    28,620,186                             20,537,974

    VINB:
            Common       checking           account                                      3,924,693                                    119,702       CT.
            Savings         accounts:
                    General         fund                                                 4,986,221                              4,801,271
                    Federal         appropriations                                     11,138,171                             11,032,095
                    Special         and     other        funds                           1,264,258                              1,242,158

                           Subtotal                                                    21,313,343                             17,035,822

    Other       local      bank:
            Checking         account:
                    Moderate-income                   housinn                                231,363                               220,785
            Savings        accounts:
                    Moderate-income                   housing     reserve                     94 ) 840                              94)      840
                    Conservation             fund                                        2,789,325                             2,759,72

                           Subtotal                                                      3,115,528                             3,075.365

                           Total                                                      $53,049,057                         $40,649,161                             $46.819.248
                                                                                       ---=              :                 =-




                                                                               8
       Cur review of the reconciliation   of the Chase and VINB
checking account balances with TRA as of June 30, 1969,
showed that they actually    were not reconciled   because the
amounts included in the balances for outstanding      chec'ks
 (checks not paid by the banks), in the amount of $4,761,406
for the Chase account and of $2,977,591 for the VINB ac-
count, were not supported by detailed     listings  of the items,

       Also, the balances on deposit in bank checking and sav-
ings accounts, as shown by TBA, were not in agreement with
the general ledger cash-in-bank        accounts,  Insofar as we
were able to determine,      these records were not reconciled
for other than the general fund since November 1966. A
purported reconciliation       of these records pertaining   to the
general fund was prepared as of June 1969 and January 1970;
but, in our opinion,     these reconciliations    were meaningless
since TBA had not been reconciled        with the amounts on de-
posit,

       We were informed by Department of Finance officials
that the amounts shown above as outstanding           checks repre-
sented amounts that had been computed by starting            with the
amounts of checks outstanding         on the Chase checking account
in February 1968 and on the VINB checking account in July
1968, by adding to them the amount of checks that had been
issued, and by subtracting        the amount of checks paid by the
banks in each following      month. Our examination        of the rec-
onciliation   for the Chase checking account as of Febru-
ary 29, 1968, showed, however, that the amount of $1,474,097
shown on that reconciliation         as outstanding   checks may not
have been correct because it exceeded by $237,897 the amount
shown in the detailed     listing     of the outstanding    checks.

       A review of the June 30, 1969, reconciliation        of the
Chase checking account also showed that the amount for out-
standing checks used in the reconciliation         had not been cal-
culated in the manner described above by Department of Fi-
nance officials.     The initial reconciliation      of this account
showed a reconciling    item of $5,299,623 for outstanding
checks at June 30, 1969. Also shown as a reconciling           item
was an item for $733,324, described as an item requiring           a
reduction    of the TBA balance for payroll     items paid by the
bank but not recorded in the warrant register,         which is a
detailed    record of payments, or in TBA.


                                  9
        The Government Comptroller,      in reviewing this recon-
ciliation,    noted that the item of $733,324 had been entered
in the warrant register        and in TEA and should not have been
included in the reconciliation.          To account for this cor-
rection    in the reconciliation,     the Department of Finance
merely decreased the amount shown for outstanding          checks by
a like amount.

      Also, the Department of Finance, in preparing a re-
vised bank reconciliation       as of June 30, 1969, to account
for items totaling     about $195,000, which were noted by the
Government Comptroller       as being incorrectly charged to this
checking account, merely increased the reconciling           item for
outstanding  checks.      It is obvious that the reconciling
item for outstanding      checks used in the reconciliations      is
a meaningless 'splug'J figure used to account not only for
outstanding  checks but also for any differences         between the
amounts on deposit as shown by the bank statement and by
TBA that could not otherwise be identified.

        Aside from the fact that the exact amount of checks
outstanding     for both bank checking accounts at June 30,
1969, was unknown, the so-called        reconciliations      as of that
date included many other reconciling         items, representing
either errors by the banks or errors in TEA, which had been
identified    by the Department of Finance but had not been
corrected    by the banks or by the department.          For the Chase
checking account, there were 273 such items totaling             about
$4.8 million,      of which several pertained       to periods in 1962.
For the VINB checking account, there were 307 uncorrected
items totaling      about $1.6 million,   of which one pertained
to a period in 1955.

      We were informed by Department of Finance officials
that the inability      to determine the actual checks outstand-
ing at June 30, 1969, had been caused by a malfunctioning
of the computer program for matching issued and paid checks
and by computer breakdowns.         As a result of these difficul-
ties,  information     on each check issued was not recorded in
the computer, which made it impossible to use the computer
to compare the issued and paid checks to produce a listing
of outstanding     checks.   We were unable to obtain a reason-
able explanation     from the officials    concerning why the nu-
merous other reconciling       items, representing   errors either
by the banks or by GVI, had not been corrected.     They in-
formed us, however, that the banks' errors were being
brought to the attention of the banks for correction    and
that steps would be taken to correct errors in the GVI rec-
ords.

      Also, the Department of Finance, in response to a rec-
ommendation by the GVI Comptroller,     has developed a com-
puter program designed to determine the correct amounts of
checks that were outstanding    on the bank checking accounts
at June 30, 1969. IJnder this program, all checks issued on
the bank checking accounts after June 30, 1969, will be
matched against the checks paid by the banks after that
date and all paid checks that were issued prior to that
date will represent   those outstanding   at June 30, 1969.

      The Government Comptroller,    in a series of letters        to
the Commissioner of Finance in the latter        part of fiscal
year 1970, stressed the seriousness      of the.Department      of
Finance's  failure  to properly reconcile     the amounts shown
by the GVI records as cash on deposit in the banks with the
amounts shown on the banks' statements and to make the nec-
essary adjustments    in the GVI records.     On July 14, 1970,
we advised the Governor that immediate action should be
taken to establish    procedures for ensuring the maintenance
of adequate cash controls.

Recommendations to the Governor

         We recommend that the Governor instruct      the Commis-
sioner     of Finance to require the Department      of Finance to:

         --Complete     the program initiated   in June 1970 for de-
            termining     the actual checks outstanding  on the bank
            checking    accounts both as of June 30, 1969, and cur-
            rently.

         --Determine  that the balances on deposit in the bank
            checking accounts as of June 30, 1969, are adjusted
            by the banks for all identified errors.

         --Adjust   the TBA account balances for identified  errors
            and for differences,   if any, between the amounts of
            the checks determined to have been outstanding   on the

                                      11
  bank checking accounts as of June 30, 1969, and the
  amounts shown in the so-called checking account rec-
  onciliations  as of that date.
--Adjust   the general ledger cash-in-bank   account bal-
   ances as of June 30, 1969, for any differences    nec-
   essary to bring the balances into agreement with the
   amounts shown by TBA, as adjusted,    to have been on
   deposit in the banks as of that date.

--Follow prescribed     accounting procedures to (1) cor-
   rectly   record daily transactions   on TBA so that it
   will show the amounts on deposit in all bank accounts
   at the end of each day, (2) reconcile     each month the
   amounts shown by TBA as on deposit in the bank check-
   ing and savings accounts with the amounts on deposit
   as reported by the banks, and (3) reconcile     each
   month the amounts shown by TBA as on deposit in all
   banks with the general ledger cash-in-bank     account
   balances.




                         12
NEED FOR STRENGTHENINGCONTROLS
OVERACCOUNTSRECEIVABLE
      At June 30, 1969, the general ledger and the annual re-
port of GVI showed a net accounts receivable        balance of
$14.1 million,  of which $12.1 million     pertained    to accounts
maintained and recorded on a central computer.          Our review
was confined to those receivables     recorded on the central
computer, since they represented    the major part of the re-
ported amount.

       For those receivables        included     in our review,    we noted
that

       --there    was no reliable     record     of amounts due,
       --many of the receivables           'had been outstanding    for     long
          periods of time,
       --little     effort    had been made to collect      outstanding
           receivables,      and

       --existing     'procedures had hampered the write-off              of un-
          collectible     accounts receivable.

       Proper accounting       for receivables    is an important form
of control     over agency resources.         Such accounting    should
result   in a systematic       record of amounts due from others,
which must be accounted for.            The general ledger accounts
receivable     accounts should function        as control accounts
over the detailed,        or subsidiary,    ledger records of amounts
due.    Individual    billings     should be summarized periodically,
usually monthly, the total should be recorded in the general
ledger control      accounts, and the billings        should be recorded
in the individual      accounts in the subsidiary        ledger.
       Similarly,   cas'h collections     and approved adjustments
should be summarized, the total should be recorded in the
general ledger control accounts, and the amounts of the col-
lections    and adjustments     should be recorded in t'he individ-
ual accounts in the subsidiary         ledger.     Periodically, usu-
ally monthly, the individual         accounts in the subsidiary    led-
ger should be totaled and reconciled           with the balances of
the general ledger control accounts.

                                      13
Lack of reliable     record   of amounts due

       The accounting  s,ystem for accounts receivable  did not
result   in a reliable  record of amounts due. The general
ledger accounts did not serve as control accounts for the
detailed   record of amounts due as recorded in the subsid-
iary records maintained on the central computer.       Instead,
the general ledger accounts for the accounts receivable
maintained on the computer merely were adjusted monthly to
agree with the total of the amounts due as compiled on the
computer.

       Individual    billings    recorded on the computer were not
summarized, and the total was not recorded in the general
ledger accounts.         Amounts collected    were recorded on the
computer on the basis of information           supplied by the vari-
ous departments.         These collections    were not summarized,
and the total was not recorded in the general ledger ac-
counts receivable       account.     Also, there was no procedure
for verifying     that the amounts reported as collections           by
the departments agreed with the accounts receivable              collec-
tions recorded in the general ledger cash accounts.               There-
fore, in the absence of a control account, there was no as-
surance that all amounts billed           and collected    had been cor-
rectly   recorded in either the individual           accounts or the
general ledger.

       We noted that delays by the various departments and
agencies in reporting    billings  to tine Accounts Receivable
Section 'had precluded the accumulation      of an up-to-date
record of amounts due. Our test of 20 schedules of bill-
ings submitted for processing     on the computer during fiscal
year 1970 showed that two hospitals      and a clinic   had been
particularly   slow in reporting   receivables.     For these
agencies, the elapsed time between the dates of the bill-
ings and the dates on which they were reported for record-
ing on the central    computer ranged from 70 to 111 days.

       We also noted that Hansen Memorial Hospital,    which ac-
counted for about 20 percent of the billings    recorded on
the computer as of December 31, 1969, had not issued
timely billings    for services provided.  Our analysis    of one
hospital   schedule of 98 bills  totaling about $3,500 showed
that the elapsed time between the date on w*hich the


                                  14
patients  were discharged or the services were rendered and
the date of the billings    for the services in 15 instances
was 8 months, in 48 instances was 4 months, and in only 35
instances was less than 1 month.      Since the schedule list-
ing these billings   was not reported to the Accounts Receiv-
able Section for an additional     5 months, the time span be-
tween the date on which the patients     were disc'harged or the
services were rendered and the date on which the billings
were reported to the Accounts Receivable Section for record-
ing ranged from 6 to 13 months.

      In another test of 63 outstanding    hospital    bills re-
corded on the central computer at December 31, 1969, we
were unable to locate 12 of the bills    in the outstanding
bill  files at the Hansen Memorial Hospital.        Seven of the
bills   were over 4 years old, three were between 2 and 4 years
old, and two were between 1 and 2 years old.

Inadequate   collection    practices

         At December 31, 1969, the accounts receivable     main-
tained on the central       computer amounted to approximately
$12 million.       Our analysis   of an aging schedule prepared by
GVI of these accounts showed that about $6.9 million,          or 58
percent, had been outstanding        for 1 year or more and that
about $1.4 million,       or about 12 percent, had been outstand-
ing for more than 4 years.         In our opinion,  the age of the
receivables     indicates   that many are of questionable   collect-
ibility.

       The Commissioner of Finance has the overall           responsi-
bility   for the collection     of all revenues for GVI. To
carry out this responsibility,          a collection  enforcement
group was created within the Treasury Division             of the De-
partment of Finance to facilitate          collection  of delinquent
accounts through direct contact with debtors.              This group,
however, concentrated       its efforts    on the collection     of de-
linquent    real property taxes.

        The initial   responsibility for making collections   rests
with the billing     departments and agencies, which are re-
quired to exhaust all means at their disposal       to effect col-
lection    of past-due receivables.     Our review of the collec-
tion efforts.of     the Department of Public Works for amounts


                                       15
owed for potable water and of the Hansen Memorial Hospital
showed that little    effort had been made to collect    delin-
quent accounts.     Of the $12 million   of accounts receivable
maintained on the central     computer at December 31, 1969,
about $1.26 million,     or about 11 percent, was owed to the
Department of Public Works for potable water and about
$1.2 million,   or about 10 percent, was owed to the Hansen
Memorial Hospital.
       Our review showed that about 29 percent of the amounts
owed to the Department of Public Works and about 78 percent
of the amounts owed to the hospital         were over 1 year old.
About 18 percent of the hospital        receivables  were over
4 years old,     Officials     of the Department of Public Works
offered no explanation       for the lack of effort   to collect  the
accounts.    Officials     of the Hansen Memorial Hospital advised
us that their lack of effort        was due to a shortage of avail-
able manpower,
      We noted that audit reports issued by the Government
Comptroller   and by the Audit Division    of the Department of
Finance had been critical   of the efforts    to collect the ac-
counts receivable.

_Basic authority   for writing off
uncollectible    accounts needs revision

        The basic authority    for GVI to write off uncollectible
accounts receivable      is granted in section 3406, title     33 of
the Virgin Islands Code, approved in February 1966. The
act permits the Commissioner of Finance to certify         for can-
cellation    amounts which have been wholly or partially       in
arrears for more than 4 years.        The Commissioner is re-
quired to submit to the legislature,       through the Governor,
a certified    list showing the dates and actions taken by GVI
to collect    amounts owed, which, in the Commissioner's judg-
ment, are uncollectible      and warrant cancellation.

       A memorandum dated August 1, 1966, issued by the De-
partment of Finance to implement the provisions         of the act,
required the GVI departments to refer to the Attorney Gen-
eral amounts in arrears for more than 4 years, along with
information   showing the dates and steps taken to effect
collection.    Specific   criteria   were established   to deter-
mine the uncollectibility       of an account, as follows:

                                 16
       1. Debtorisdeceased        and left      no known assets.

       2. Debtor   left   jurisdiction        of the courts.

      3. Debtor is indigent         and has no means of liquidating
         indebtedness..
One or more of the criteria  had to apply before               the Commis-
sioner would certify  the account for write-off.
       We were informed that the Department of Public Works
had not referred    any delinquent   potable water bills  to the
Attorney General.      Also, the Hansen Memorial Hospital had
referred   only a limited    number of its accounts to the Attor-
ney General.

        Subsequent legislation   approved by the Governor in
January 1970 gave the Commissioner of Finance the authority
to write off uncollectible      accounts, without prior approval
by the legislature,      on the basis of the Commissioner's  de-
termination    that the probable cost of collection    would ex-
ceed the amount due. This authority,        however, was re-
stricted    to accounts not exceeding $20 and to an aggregate
of not more than $2,000 in any one year.
      We believe that the laws of the Virgin Islands do not
provide adequate authority     to remove uncollectible      accounts
from the records.     As noted on page 15, the accounts receiv-
able maintained   on the central    computer at December 31,
1969, amounted to about $12 million,         of which about 58 per-
cent was more than 1 year old.       TEt$.samount consisted    of
about 189,000 unpaid bills     averaging about $64 each.        In-
cluded in the outstanding     bills  were about 139,000 billings
by the hospitals,   totaling    $3.4 million,    an average of
about $25 each.

        The present law states that, if a bill          is outstanding
for less than 4 years, it must be $20 or less before it can
be written      off and that the total dollar amount that can be
written     off in 1 year cannot exceed $2,000.           Any other un-
collectible      bill    can be written   off only after it is at
least 4 years old and is included in a listing              sent to the
legislature,       outlining   the collection   action taken and the
reason that it has been determined to be uncollectible.

                                         17
        Thus under present law, accounts receivable        are prob-
ably carried        in the records long after they have become un-
collectible        or after the date that the cost of further      col-
lection     effort    exceeds the amount of the receivable.       We
therefore      believe that there is a need to consider liberal-
izing the laws dealing with the write-off         of uncollectible
accounts.

Recommendations     to the Governor

       We recommend that the Governor require that the follow-
ing actions be taken to establish      adequate control over and
collection    of the accounts receivable   of GVI.
      --Prepare a detailed       listing  of all accounts receiv-
         able recorded on the central        computer and compare
         this listing     with the outstanding     bills maintained
         by the various departments,       to establish   from the
         available    records a starting     point for determining
         the amounts due.

      --Propose legislation     which would liberalize    the GVI
         authority   to remove uncollectible    accounts from the
         records.    The proposed legislation    should provide
         criteria   on the age and amount of accounts that may
         be written    off and should authorize   the write-off     of
         accounts when the estimated cost of collection         ex-
         ceeds the amounts due.
     --Require  the billing     departments to initiate and main-
        tain aggressive    action to collect  amounts due.

     --Revise the accounting       system to require the use of
        the general ledger accounts as control             accounts for
        the subsidiary    receivable     records.      The  system should
        provide for the recording        in the general ledger ac-
        counts of totals of individual         billings     recorded in
        the subsidiary    receivable     accounts.       Similarly,    the
        collections,   adjustments,      and  write-offs      recorded     in
        the subsidiary    receivable     accounts should be summa-
        rized, and the total should be recorded in the gen-
        eral ledger accounts.        Also, the collections          should
        be compared with the amounts recorded in the cash
        accounts,    Periodically,     usually monthly, the total
  of the amounts due, as recorded in the subsidiary re-
  ceivable accounts, should be reconciled with the bal-
  ances in the general ledger accounts.
--Require billing     agencies to issue billings   for ser-
   vices wit'hin a, reasonable period after the services
   are rendered or after a determination      has been made
   of t'he amounts due and to promptly report the amounts
   for recording    in the general ledger and subsidiary
   receivable   accounts.




                         19
DEFICIENCIES IN CONTROLOVER FIXED ASSETS

      The GVI accounting methods did not provide for adequate
control over its substantial   investment in fixed assets.
Prescribed procedures were not being followed,    and there
was no complete record of GVI's fixed assets.

       Accurate financial   and quantitative       information    on
fixed assets --such as land, buildings,          and equipment--for
management's use and for financial         reporting     can be ob-
tained only from a properly       designed and operated system of
general ledger fixed asset accounts and subsidiary             property
records.     The value of all fixed assets acquired or dis-
posed of should be recorded in the general ledger accounts
on the basis of the related financial          transactions.      Sub-
sidiary property records should be maintained for each as-
set or group of assets, showing as a minimum its value, date
acquired,    location,  and identification       number.

      Periodically,      the total values of the items recorded in
the subsidiary      property records should be reconciled    with
the balances in the general ledger fixed asset accounts.
Also, at regular intervals,        usually annually, a physical   in-
ventory of all assets should be taken to ascertain        whether
all recorded assets are accounted for.

       The general ledger fixed asset accounts and the finan-
cial statements as of June 30, 1969, showed that the fixed
assets had a total value of about $58.5 million,   as shown
below.

               Enterprise    and         General fixed
               revolving    funds         asset group       Total

Land             $2,056,243               $20,797,549    $22,853,792
Buildings             13,876               27,286,423     27,300,299
Equipment             38,013                8,343,313      8,381,326

    Total        $2,108,132               $56,427,285    $58,535,417

       The above values include the value of the fixed assets
transferred   to the Virgin Islands Port Authority  in Febru-
ary 1969.    (See ch. 6 for comments on the Port Authority.)


                                    20
      The authority for the management and control of the
GVI fixed assets is vested by law in the Commissioner of
Property and Procurement.   Pursuant to this authority,  the
Commissioner issued a property manual to assist the various
departments and agencies in controlling   and accounting for
the fixed assets.
       The manual required the Department of Property and
Procurement to take an initial     physical  inventory  of all
GVI-owned fixed assets and to prepare a property record
card for each asset.      Each department was required to pre-
pare and submit property record cards for subsequent acqui-
sitions   to the Department of Property and Procurement.
Each acquisition   was to be recorded at actual cost except
when such value was unrealistic      in terms of current value.
In such cases it was to be recorded at appraised value.

      Each department was required        to take an annual inven-
tory of equipment and a biannual        inventory,of  realty.   The
manual required the Department of        Property and Procurement
to audit the physical   inventories       to test the accuracy of
the inventory  reports.

       The prescribed     accounting procedures required the De-
partment of Finance to record the fixed assets in one of
two categories     of accounts, the enterprise        and revolving
funds or the general fixed asset group.            The first    category
was to account for the fixed assets of self-supporting               GVI
owned and operated enterprises         and for working capital       funds
serving various GVI departments or agencies.             All other
fixed assets were to be accounted for in the general fixed
asset group of accounts.         The procedures provided for the
general ledger fixed asset accounts to be charged with the
value of all acquisitions        and to be credited with the re-
corded value of all disposals         and for the accounts to func-
tion as controls      over the subsidiary     property records,      show-
ing pertinent     details   regarding   the acquisition,     disposal,
retirement,    or replacement of each asset.

      We found that, contrary to the prescribed      accounting
procedures,    the balances of the general ledger fixed asset
accounts had not been derived by the Department of Finance
on the basis of recording     financial transactions   covering
the acquisitions    and disposal of assets but represented

                                   21
values based on reports by the Department of Property and
Procurement.   At the close of each fiscal  year, the Depart-
ment of Finance adjusted the general ledger account balances
to show the investment in land, buildings,   and equipment on
the basis of information   included in a document entitled
"Dollar Value Report,"   submitted by the Department of Prop-
erty and Procurement.

      We were advised by an official      in the Department of
Property and Procurement that the amounts reported for land
and buildings    in the Dollar Value Report had been based on
an inventory   listing    of GVI-owned realty,  entitled     "Property
Owned by the Government of the Virgin Islands,"          which was
based on records of the tax assessor in 1967 and was ad-
justed for subsequent acquisitions      and disposals.      We were
advised also that the amount for equipment in the Dollar
Value Report had been taken from the detailed         property rec-
ords maintained     by the Department of Property and Procure-
ment.

      Our review showed, however, that the amounts reported
in the Dollar Value Report for recording   in the general led-
ger fixed asset accounts for land and buildings   had not been
supported by a complete record of GVI-owned realty.     We com-
pared the amounts shown in the May 1970 Dollar Value Report
with the totals  of the amounts shown in the subsidiary  prop-
erty record maintained by the Department of Property and
Procurement and found that they differed  by about $15 mil-
lion, as shown below.
       Dollar Value Report:
            Land                              $20,270,808.29
            Buildings and structures           27,290,697.85

                Total                         $47,561,506.14

       Subsidiary property    record:
           Land                               $18,455,262.52
           Improvements                        14,125,941.00
                Total                         $32,581,203.52




                                  22
      Factors   contributing   to the difference   follow.

      1. The Dollar Value Report was based on the acquisi-
         tion and disposal of some land and buildings  which
         were not recorded in the subsidiary property  rec-
         ord.

      2. The Dollar Value Report was based on the acquisi-
         tion cost of some assets which were recorded in the
         subsidiary property record at assessed values.

       We also noted that several properties   included in the
subsidiary    property record as owned by GVI had not been in-
cluded in the records of the tax assessor and that, con-
versely,   properties  shown in the tax assessor records as
owned by GVI had not been included in the subsidiary     prop-
erty record.
       We also noted that there were errors in the amounts re-
ported in the Dollar Value Report and in the recording           of
these amounts in the general ledger fixed asset accounts by
the Department of Finance.       For example, an enterprise      and
revolving    fund asset, homestead lands, valued at $1.7 mil-
lion, was entered in the general ledger accounts three
times --once correctly    as an enterprise   and revolving    fund
item and twice erroneously     as a general fixed asset.       This
error was apparently     caused by a misinterpretation     of the
Dollar Value Report by the Department of Finance.          Also, a
typographical    error in the Dollar Value Report resulted        in a
$20,000 understatement     in the Dollar Value Report and in the
general ledger account for fixed assets.

      We also compared the amount of the inventory    of equip-
ment shown in the Dollar Value Report for three departments
with the total of the values of the detailed   property rec-
ord cards that were maintained  for each of the departments
by the Department of Property and Procurement.      Our compari-
son showed that, for each of the departments,    the detailed
records did not agree with the Dollar Value Report.

       Our review of a limited number of receiving and disposal
reports for equipment in another department showed that prop-
erty record cards had not been prepared for equipment


                                  23
acquisitions  valued at about $115,000 and that cards for
disposed equipment valued at about $22,000 were still  on
file.

       Our review also revealed that periodic  physical  inven-
tories of fixed assets to provide a check on the accuracy of
the property records and to indicate    the need for any im-
provements in procedures to prevent errors,    losses, or ir-
regularities    had not been taken. The Government Comptroller
reported that a complete physical   inventory  of equipment
under the control of every department and agency had not
been taken during the period July 1, 1961, through June 30,
1968, the period covered by his audits of property functions.

Recommendations to the Governor

     We recommend that the Governor instruct         the Commissioner
of Property and Procurement to require that:

     --A complete physical       inventory  of all GVI fixed assets
        be taken, each of the assets to be valued at acquisi-
        tion cost when such information       is readily  available
        or at appraised fair values when such information           is
       not readily    available.      The general ledger fixed as-
        set accounts and the subsidiary       property record
        should be adjusted to agree with the results        of the
       physical   inventory.

     --All property unaccounted for by the physical      inven-
        tory be investigated to identify   the procedures
       needed to prevent errors,   losses, or other irregular-
        ities.

      We recommend also that the Governor instruct        the Commis-
sioner of Property and Procurement, in conjunction         with the
Commissioner of Finance, to require that:

     --The general ledger fixed asset accounts and the sub-
        sidiary   property record be maintained on the basis of
        financial    transactions covering the acquisition and
        disposal of assets.
    --The subsidiary   property record be reconciled periodi-
       cally, at least at year-end, with the general ledger
       fixed asset accounts.

                                 24
NEED FOR STRENGTHENING
                     CONTROLS
OVERMATERIALS AND SUPPLIES

        Improved control   is needed over the inventories    of ma-
terials    and supplies.     The type of control that should be
adopted is dependent on the quantities        and costs of the
various inventories      and on management's needs.

       In the case of inventories      that consist of items of
relatively     small quantities   and low cost, an acceptable
practice    is to charge the costs to general ledger expense
accounts at the time of acquisition         and periodically,     at
least at fiscal     year-end,   to take an inventory     count of the
items on hand, to adjust the balance of the general ledger
materials     and supplies asset account to agree with the
value of the inventories,       and to make a corresponding
contra-adjustment      to the general ledger materials        and sup-
plies expense account.

        In the case of inventories     that consist of large quan-
tities    of items or items that are susceptible         to pilferage,
the usual practice      is to (1) charge the cost of all acqui-
sitions    to a general ledger materials       and supplies asset
account and,to maintain subsidiary         perpetual   inventory     rec-
ords showing for each type of item the quantities            and cost,
 (2) credit the general ledger asset account and the perpet-
ual inventory     records for the cost value of items issued
on the basis of approved requisitions,          and (3) periodically,
at least at fiscal year-end,       take a physical     inventory
of the items on hand, to adjust the balance of the general
ledger materials      and supplies asset account to agree with
the value of the inventory,       and to make a corresponding          ad-
justment to the general ledger expense accounts.

        Also, at the time that the physical     inventory     is taken,
all major differences     between the inventory     quantities      of
the various items and those shown by the subsidiary             perpet-
ual inventory     records should be investigated     to determine
the reasons for the differences.        An important function        un-
der this system of control      is the periodic    determination,
usually at month-end, that the total dollar value of the
various items, as shown by the perpetual        inventory     records,
is in agreement with the balance of the general ledger ma-
terials     and supplies asset account.

                                   25
      The GVI methods of accounting did not provide for ade-
quate control over its inventories      of materials  and sup-
plies or for accurate and complete information       for finan-
cial reporting  purposes.  Specifically,     we found that:

      1. Although some of the warehouses maintained perpet-
         ual inventory  records, these records had not been
         maintained under general ledger accounting      control
         as provided for under the perpetual   inventory    sys-
         tem described above.

      2. The balance of the general ledger materials   and
         supplies asset accounts as of June 30, 1969, and
         the amounts shown on the statement of financial
         condition  as of that date did not include the value
         of all inventories   on hand.

        As of June 30, 1969, the value of the inventory       of ma-
terials    and supplies,    as shown by the general ledger asset
account, was $578,813, representing          the value of the inven-
tories as reported by the Department of Property and Pro-
curement and the Department of Health.           In September 1969
the Government Comptroller,         in developing his required re-
port on the fiscal       condition   of GVI, requested these two
departments and three other departments--Agriculture,          Pub-
lic Works, and Education --to report the cost value of their
inventories    of materials      and supplies on hand as of June 30,
1969.

       As a result of this request, the Department of Property
and Procurement and the Department of Health reported in-
ventories   with a total value of $578,813 and the other
three departments reported inventories       with a total value
of $249,241--a total inventory value of $828,054 for the
five departments.       This amount was reported to the Depart-
ment of Finance, and the general ledger materials         and sup-
plies account was adjusted to show the total value of
$828,054.     Of this total amount, three departments--Agri-
culture,   Health, and Public Works--indicated      that the val-
ues reported,    totaling   $685,469, represented   estimated
values, not cost values based on a physical       inventory   of
the items actually      on hand as of June 30, 1969.



                                26
       The GVI records showed that about $4.7 million            was ex-
pended for the purchase of materials           and supplies in fiscal
year 1969. To determine whether any departments,              other
than the five referred       to above, had any inventory       on hand
at June 30, 1969, the nature of any such inventories,               and
the type of controls maintained,         we sent a questionnaire        to
each of the 13 GVI departments and to some independent GVI
offices.     Of the six departments which responded to the
questionnaire,     two--Agriculture     and Health--had    previously
reported values for their inventories,           one was not respon-
sive to the questionnaire,         one reported that it had no in-
ventory,    one reported a value of $2,800 for its inventory,
and the remaining department reported that it had inven-
tory at 13 warehouses and storerooms but did not report the
value of the inventory.
       The Department of Agriculture       stated that it did not
maintain any perpetual    inventory    records and that the vail de
of its inventory    was $10,550, although it had previously
reported to the Government Controller          that the inventory
had an estimated value of $25,000.          The Department of
Health reported only with respect to its inventory            at
St, Croix.    The department's    response indicated      that it
maintained uncontrolled     inventory    records for office      sup-
plies and food but not for drugs, medicine, and surgical
and dental supplies with an indicated          value of about
$190,000.

      Cur review at two of the departments that had reported
their inventories       to GVI showed that the Department of
Property and Procurement at its St. Thomas warehouse and
the Department of Education at its warehouse had maintained
uncontrolled      perpetual    inventory    records.    We noted that
the Department of Property and Procurement's               reported value
of its inventory       at June 30, 1969, had been based on a
physical     inventory    of the items on hand. We were informed,
however, that the count of the items on hand had not been
compared with the perpetual           inventory   records.     We also
noted that the perpetual          records were not being maintained
on a current basis in fiscal           year 1970.

      The Department of Education informed us that its in-
ventory at June 30, 1969, had not been based on an actual



                                    27
count of the items on hand but had been based partly             on in-
formation taken from its perpetual inventory records             and
partly on estimates.

      We also noted that the Commissioner of Property and
Procurement-- who, under the law, is responsible    for control
over and supervision   of all warehouses and storerooms of
GVI--had not actively   participated  in the management of the
warehouses other than those within his department.

Recommendations   to the Governor-

      We recommend that the Governor instruct          the Commis-
sioner of Property and Procurement to:

     --Review all warehouses and storerooms to determine
        those which should be maintained under a perpetual
        inventory  system of control.

     --Establish,in    conjunction with the Commissioner of
        Finance, the necessary accounting procedures for
        maintaining  the perpetual  inventory records under
        general ledger accounting   control.

     --Require    (1) all departments to take periodic,             at
        least at fiscal     year-end, physical       inventories     of
        all materials    and supplies,     (2) all departments
       maintaining     perpetual   inventory     systems to compare
        the quantities     of the physical     inventories      with
        those shown by the perpetual        records and to investi-
        gate all major differences,        and (3) all departments
        to report the total value of their inventories               to
        the Department of Finance for adjusting            the general
        ledger materials     and supplies asset and expense ac-
        counts.




                                 28
                             CHAPTER3
                             -I_--

         NEED TO IMPROVEFUND ACCOUNTINGPROCEDURES
         -----                            --
      Adequate procedures,    if properly  implemented, should
provide assurance that funds are used for authorized           pur-
poses only and that obligations      and expenditures     do not ex-
ceed the budgeted amounts or limitations       imposed by law.
Fund control  can be achieved either on a centralized          basis
for all funds and allotments     or on a decentralized       basis
with each operating    department or suborganization       respon-
sible for the control of its own funds and allotments,              If
fund control   is maintained centrally,    the operating depart-
ments should not maintain formal allotment        ledgers.
      We found that (1) some duplicate   allotment  records
were being maintained,  (2) some funds were substantially
overobligated,  and (3) some obligations    had not been re-
corded.
ALLOTMENT
       - ACCOUNTING
     Although the GVI accounting       system was centralized     in
the Department of Finance in July        1962, certain departments
of GVI have continued to maintain        formal allotment   ledgers,
In our opinion,   this practice  is    time consuming, costly,
and unnecessary,

      In 1961, a consultant  to GVI recommended that account-
 ing and budgetary control for all regular government opera-
tions be centralized   in the Department of Finance.     The
recommendation provided that centrally     maintained allotment
accounts be updated daily to negate the need for each 'de-
partment to maintain corresponding    records and that the De-
partment of Finance furnish a copy of the allotment      ledgers
to the departments each day.

      The procedures for the operation   of the centralized
system require that each department verify     the accuracy of
the allotment   ledgers received.daily from the Department of
Finance and that they adjust the ledgers for in-transit
transactions.



                                  29
       We visited five departments of GVI and found that two
of them had adopted the procedures concerning allotment       ac-
counting prescribed    by the Department of Finance,     We
found, however, that the other three departments--Education,
Health, and Social Welfare--were     maintaining the same al-
lotment records that they had maintained prior to central-
ization   of the accounting and budgetary control    systems,

       We were unable to obtain exact data on the amount of
effort   expended by the three departments in maintaining
these records,    Estimates by officials  of these departments
ranged from 8 hours a day for the Department of Health to
12 hoblrs a day for the Department of Social Welfare.     In
the Department of Education,    an IBM 6425 machine which was
being rented for abo>Jt $9,800 a year was being used solely
for maintaining   the allotment  ledgers,  We were informed by
the departmental    business manager that the acquisition  of
the machine was approved for the purpose of performing
other wor'k but that the other wor'k was never underta'ken be-
cause of improper programming,

        The major reason advanced by the three departments for
maintaining    separate records was that the allotment   ledgers
received from the Department of Finance were inaccurate       and
untimely.     We believe,  however, that compliance with the
verification    procedures (see p, 29) would produce accurate
and current ledgers.

      We noted that, every year since 1965, the Government
Comptroller   has reported that, contrary to existing       proce-
dures, the departments were maintaining     duplicate    allotment
records.    In his annual report for fiscal   year 1968, the
Government Comptroller    stated that the Departments of
Health and Social Welfare would discontinue      maintaining     al-
lotment ledgers effective     July 1, 1968. We found, however,
that 2 years later these records were still      being main-
tained by the two departments,
       The Commissioner of Finance agreed with us that the
maintenance of formal allotment    ledgers at the departmental
level was costly and unnecessary.       In addition,   he expressed
the belief   that this practice  deprived the Department of
Finance of the use of experienced personnel,         Our review in-
dicated,   however, that the Department of Finance had not

                                 30
taken aggressive  action to effect discontinuance         of the
maintenance of these records by the departments,

BUDGETARYCONTROLOVER THE OBLIGATION
AND EXPENDITUREOF FUNDS

      Our review showed that the procedures established     by
the Department of Finance for recording    obligations  of
funds and for the subsequent liquidation    of these obliga-
tions were adequate but were not being complied with in all
instances.

       For control purposes a separate subsidiary    ledger was
maintained by the Department of Finance for each appropria-
tion and fund account.     For all transactions,   except for
payrolls   and purchases of $100 or less, funds were required
to be obligated    before an expenditure   could be made.

       To assure that all valid obligations    of GVI were re-
corded at the end of the fiscal     year, the Department of
Finance required that the departments estimate those obli-
gations which had been incurred but not recorded,         such as
payrolls,   and that the departments process miscellaneous
obligation    documents to assure that the obligations      were
recorded.     In addition,  the Department of Finance furnished
each department with a monthly listing      of unliquidated    ob-
ligations,     Each department was required   to review its ob-
ligations   and to notify   the Department of Finance of any
necessary adjustments.

       We were informed by officials        of the Department of Fi-
nance that some departments complied with the prescribed
procedures for verifying       obligations    and other did not.    As
a result,   invalid  obligations      have remained on the records
for several years; conversely,          some valid obligations   have
not been recorded.      For example, about $1.9 million        of ob-
ligations   recorded in fiscal      years 1965-67 were not written
off until   fiscal  years 1968 and 1969 when it was determined
that they did not represent valid obligations.
       In other cases valid obligations      were not recorded in
the year in which they had been incurred.         To allow for
their liquidation,    the operating    budgets for fiscal   years
1969.71 have stipulated      that prior years' obligations    could
be- liquidated   with current year's funds.

                                  31
      We believe that allowing the liquidation           of prior
years' obligations      with current year's funds contributes     to
a disregard    of budgetary controls.       In this regard the Gov-
ernment Comptroller      reported that, as of June 30, 1969,
there were 175 accounts in the allotment          ledgers that
showed overdrafts     of $3.3 million    due to overexpenditures
and/or overobligations,         As of January 30, 1970, the Gov-
ernment Comptroller      found that 87 of those accounts still
had overobligated    balances totaling      $1.3 million.

RECOMMENDATIONS
             TO THE GOVERNOR

     We recommend that    the Governor require          the departments
to

     --Discontinue   maintaining        the duplicate    allotment   rec-
        ords.

     --Review, at least annually,        the unliquidated   obliga-
        tions as recorded in the copies of the Department of
        Finance allotment      ledgers to assure that all known
        obligations   are included and that all recorded un-
        liquidated   obligations     are valid and correct,




                                   32
                               CHAPTER4

                IMPROVEMENT
                          NEEDEDIN PROCUREMENT

                       AND PAYMENTPRACTICES

PROCUREMENT
          PRACTICES

       Improvement in GVI's procurement practices         is needed to
provide assurance that items, such as equipment, materials,
and supplies,     are acquired at fair and reasonable prices.
It has been generally       recognized that this is accomplished
best under full and free competition        to provide such items--
that is, by formally advertising       for competitive      bids, as
provided for by the Virgin Islands Code. The authority             to
negotiate,    rather than to advertise     formally,    should be used
only when procurement based on advertising           is definitely   im-
practicable    or ineffective.

        Although the GVI procurement regulations          require,    with
certain exceptions,       that all purchases aggregating         more than
$1,000 be formally       advertised    for competitive    bids, our re-
view showed that many purchases were made without the bene-
fit of competition.         The Department of Property and Pro-
curement reported that its purchases during fiscal               year 1969
totaled     $3.1 million    under approximately      2,100 supply con-
tracts.      The Department of Property and Procurement's
St. Thomas office made $1.6 million            of these purchases.       Cur
review of supply contracts          awarded by the St. Thomas office
during fiscal     year 1969 showed that purchases totaling
$959,000 und er 292 individual         contracts,    each of which aggre-
gated more than $1,000 were made without the benefit               of
formal advertising       for bids.
       Some of these purchases were justified     under sections
of the Virgin Islands Code which allow purchases of medical
supplies and items to be purchased from the General Services
Administration.     Other purchases were for certain organi-
zations,    such as the Virgin Islands Legislature,    which are
not subject to the requirement     that purchases aggregating
more than $1,000 be made under formally advertised       bids and
awards.



                                    33
      Purchases amounting to $803,000 under 270 of the 292
contracts    were justified     under three clauses of section
239 of title    31, Virgin Islands Code, which permits the re-
quirement for formally advertised         bids to be waived in cer-
tain circumstances,       as follows:

      1. Section 239(a)(l)--Purchase
         is necessary in the public
         interest  during an emergency           $     8,962.75

      2. Section 239(a)(2)--The    pub-
         lic exigency will not permit
         the delay incident    to adver-
         tising                                      545,965.42

      3. Section 239(a)(8)--The    pur-
         chase is for property or
         services for which it is
         impracticable   to obtain
         competition                              248,366.63

              Total                              $803,294.80

      Purchases under items (1) and (2) above require the
approval of the Governor, and written  justification  must be
submitted to the Department of Property and Procurement by
the buying agency for purchases under item (3).

      The waiving of the requirement    to advertise   formally
for bids was questionable     for some of these procurements.
For example, in fiscal    year 1969 the St. Thomas office pur-
chased 20 passenger vehicles under section 239(a)(2)        and
purchased seven under section 239(a)(8).       From July 1,1969,
through May 10, 1970, this office     purchased 29 additional
passenger vehicles  under these two clauses--l7      were justi-
fied by section 239(a)(2)     and 12 by section 239(a)(8).

        Some of the purchases    under section 239(a)(2)  were
justified    to the Governor    by the Commissioner of Property
and Procurement solely on       the basis of a statement that the
public exigency would not       permit the delay incident  to ad-
vertising.     The reason as    to why the vehicles were needed
immediately was not given.


                                  34
      We noted that, for those procurements in which some
other written   justification was included,  the emergency na-
ture of the request appeared to be attributable    to poor
planning.    For example:

      1. A 5-year old car was replaced by a new one at a cost
         of about $2,400 because it had been determined that
         maintenance costs on the old car exceeded its worth.
         The requisition     was submitted after the old car be-
         came inoperable      due to a deficient transmission and
         frontend.     Replacement of another 5-year old car
         was similarly     requested after a department decided
         that the car had passed the point of economical re-
         pair.     The replacement vehicle cost $4,600.

      2. Road equipment costing about $224,000 was purchased
         to supplement and replace existing   equipment for the
         construction  and maintenance of roads.

      In our opinion,  the replacement of equipment can and
should be anticipated    far enough in advance to permit pro-
curement through formal advertising.      If the departments
wait until equipment is inoperable,     GVI will always be
faced with emergency situations    which limit the opportunity
to obtain competition.

      We discussed with the Commissioner of Property and Pro-
curement the justification       for procurement of vehicles       on
the basis that competition      was not available.       He stated
that competition    was always available,     theoretically;      but,
when there was only one Virgin Islands'         supplier     and only
one or two vehicles     to be procured, he believed that the
best price was obtained without advertising          because the cost
of advertising   was avoided.       He also noted that the Virgin
Islands law permitted      GVI to purchase from suppliers        in the
Virgin Islands when the cost did not exceed by more than 15
percent the cost of the same supplies outside the Virgin
Islands.

      We believe that, with proper planning,    the purchase of
passenger vehicles would not be limited     to a single or a
few units and that the advantage of competition      would make
advertising    worthwhile. If GVI determined,   in advance, its


                                  35
annual passenger vehicle requirements      by type (sedan, sta-
tion wagon, 4-wheel drive, etc.),      we believe that it would
be able to obtain the,benefits    of formal advertising     by re-
questing bids on its requirements.       We believe further   that
the absence of planning is demonstrated by the fact that,
during the first   10 months of fiscal    year 1970, 18 con-
tracts for one or two passenger vehicles       each were awarded
without the benefit   of formal advertising     for bids.   No ad-
vertised  procurements of passenger vehicles were made dur-
ing this period.

       The Commissioner of Property and Procurement agreed
with us that the extent of purchases made without formal
advertising    was significant    and unwarranted.   He stated,
however, that he believed that his department was essen-
tially    bound to make purchases on the open market if ap-
proval had been obtained from the Governor or if the buying
agency submitted the justification       required for purchases
under section 239(a)(8).       Although the Commissioner of
Property and Procurement advised us that he may recommend
to the Governor that a request for approval of a purchase
without formal advertising      not be granted, he rarely took
such action.

       The Commissioner also stated that, since the approval
to purchase supplies without advertising      for bids was rela-
tively    simple to obtain,  the agencies were not motivated to
anticipate     their needs and plan their purchases.   For ex-
ample, in a memorandum to all departments in September 1969,
the Commissioner requested estimates of requirements       for
materials,     supplies, and equipment to be purchased during
the second half of fiscal     year 1970. He advised us that
there had been practically     no response to his request.




                                36
LATE PAYMENTSOF BILLS BY GVI

     Our review of vouchers paid in March 1970 showed that
GVI did not pay its creditors  on a timely basis.  The num-
ber of days between the receipt of a voucher for payment by
two departments and the date of payment is summarized below.

                                                Number of days
             Department                                      Average

            Public Works                 353          15                72
            Education                    718           9               150
       The Commissioner of Finance acknowledged that consider-
able delays exist in this area of GVI's operations.     He in-
dicated    the following items as contributing  to the delays.

         1. Departments do not submit completed receiving                         re-
            ports to the Department of Finance promptly.

         2. Payments cannot be made because of insufficient                         bal-
            ances in appropriation accounts,

         3. There is a shortage          of staff     in the Department            of
            Finance.

       The Director of the Accounting Division,   Department of
Finance, said that the matter of late payments was a con-
tinuing   one. He said that, although it was not possible      to
measure the bad effects   of the practice,   they could include:

         1. Fewer suppliers      bidding        on advertised        contracts.

         2, Suppliers     not offering         discount     terms.

         3. Suppliers   factoring  into their              prices    the cost of
            anticipated    late payments.

         4. Late payment of invoices             being     countered     with     late
            delivery of goods.

         The Government Comptroller   has also reported on this
matter     in his prior annual reports;   in his annual report


                                          37
for fiscal   year 1969, he stated that test checks indicated
that there   had not been any significant  improvement.

ISSUANCEOF NUMEROUS
                  CHECKS

       We also have noted that, in accordance with established
procedures,     the Department of Finance issued a check to a
vendor for each purchase for which the vendor submitted an
invoice.     Invoices from each vendor were not accumulated
and paid at regular intervals     by one check.

      Cur review of March 1970 disbursement vouchers dis-
closed many instances  in which more than one check was is-
sued to vendors during the month.     Several examples, re-
lating to only one department--Public    Works--follow.

                                             Number
                                               of       Total
               Vendor                       payments   payments
     Antilles   Air Boats                       53     $ 1,008
     St, John Corporation                       11           38
     Consolidated   Parts                       22       2,342
     Control Concrete Products                  51      64,455
     A. J. Wadsworth Sales                      20          958
       The issuance of numerous checks to the same vendor
during a month results    in increased administrative     costs to
the Department of Finance.      To eliminate    these unnecessary
costs, we believe that consideration       should be given to re-
quiring vendor invoices     to be accumulated and paid at regu-
lar intervals    by one check.

RECOMMENDATION
             TO THE GOVERNOR
     We recommend that   action        be taken to:

     1. Require the GVI departments to forecast     their re-
        quirements for equipment, materials,     and supplies
        sufficiently  in advance of need to permit the in-
        creased use of formal advertising    for bids.




                                  38
2. Assure that the requirements     for formal advertising
   be waived only in true emergencies or upon demon-
   stration  that it is impractical    to obtain competi-
   tion.

3. Determine the steps necessary to correct the condi-
   tions identified    by the Commissioner of Finance
   (see p. 37) as causing delays in the payment of
   bills  and identify   and correct any other factors
   which may be contributing     to this problem.

4. Amend the requirement  that a check be issued for
   each invoice submitted and require that invoices
   from each vendor be accumulated and paid by one
   check to be issued weekly or monthly, as appropri-
   ate.




                           39
                              CHAPTER5

             NEED FOR STRENGTHENINGINTERNAL AUDIT

       We believe that the effectiveness    of the GVI internal
audit could be increased if certain      changes in this activity
were adopted.     The Revised Organic Act of 1954 requires      that
the Governor of the Virgin Islands provide for internal         au-
dits.   The authority   for performing   such audits has been
delegated to the Commissioner of Finance who reports di-
rectly   to the Governor.

      Internal   audits are made by the Internal   Audit Section
of the Department of Finance's Audit Division.       The internal
audit function,    as it now exists, was established    in 1962.
The internal    auditors, however, performed very little    au-
diting work until January 1966.
        During fiscal year 1969 internal    audit activities     were
confined mainly to accounting and financial        matters, and,
even in this area, very little      emphasis was given to per-
forming audits where major problems existed.          Two major
problem areas noted during our review--control          over fixed
assets and the reconciliation      of cash balances in savings
and checking accounts --received     no audit coverage during
fiscal year 1969. We were informed by the Deputy Commis-
sioner, Audit Division,     that the internal    auditors had never
performed an audit of either fixed assets or cash reconcili-
ations.

      The annual report of the Department of Finance for'fis-
cal year 1969 stated that internal         audits were limited     to
accounting and financial       matters and effort     was concentrated
on the follow-up     of findings    and recommendations in the
Government Comptroller's       audit reports.      The report also
showed that, during the year, 124 internal           audits were per-
formed; 16 of these related to follow-up           of the Government
Comptroller's    reports and 20 were concerned with surprise
cash counts and clearance of exceptions          issued by the
Government Comptroller.        The report classified      the remaining
88 audits as limited      and special audits.



                                  40
      We reviewed 35 of the 88 reports issued as the result
of the limited     and special audits;      24 of these reports
dealt with minor financial        matters,    s;lch as travel trans-
actions,  unofficial    long-distance      calls,   and petty cash; 1Q
dealt with financial      and accounting procedures,         documen-
tation of transactions,      and   maintenance     of files;   and one
dealt with controls     over the purchasing        and receiving   of
supplies in one GVI department.

       Although the types of audits performed in fiscal    year
1969 are necessary, we believe that greater audit effort
should be devoted to the examination      and appraisal of the
operations    of GVI to be of more assistance   to management.

        In addition,     the position     of the internal       auditor    in
the organization        should be such that he is independent of
the officials      who are directly       responsible     for the oper-
ations he reviews.         The Commissioner of Finance is respon-
sible for the collection           of all revenues, the administration
of disbursement activities,           and the maintenance of the cen-
tralized    accounting      system, in addition       to the internal       au-
dit function.        As  shown   in  chapter   2,  the   operations     relat-
ing to these functions          are in need of the type of attention
which could be provided by an effective               internal    audit orga-
nization.     To be most effective,          however, we believe that
the internal      audit functions      should not be located in the
Department of Finance.

      The Governor and the Commissioner of Finance both
agreed that the internal      audit function    should be organized
within the Office of the Governor.         As far as broadening the
scope of audits to include more reviews of operations,          how-
ever, the Commissioner of Finance believed that any action
in this regard would have to await an increase in the size
of the internal     audit staff and an upgrading of its tech-
nical capabilities.

       We found that, with regard to the size of the internal
audit staff,   one third of the authorized  auditor positions
were unfilled   as of June 1970, as shown in the following
table.




                                      41
                                               Strength
           Job title                  Authorized          Actual

     Supervisory   auditor                     2              2
     Senior auditor                            9              4
     Junior auditor                            3              3
     Audit technician                      4                Ad3
          Total

       We were advised   that four of the 12 auditors       on the
internal   audit staff   were college graduates.

RECOMMENDATION
             TO THE GOVERNOR

      We recommend that the internal audit function   be trans-
ferred to the Office of the Governor and that additional
emphasis be placed on audits of the operations    of GVI.




                                 42
                              CHAPTER6

               THE VIRGIN ISLANDS PORT AUTHORITY

        The Port Authority   was established    as an autonomous
instrumentality      of GVI by Act No. 2375 enacted by the Sev-
enth Legislature      of the Virgin Islands;    this act was approved
by the former Governor on December 24, 1968. The Secretary
of the Interior      approved the establishment     of the Port Au-
thority    on January 16, 1969; and the Eighth Legislature
passed Act No. 2405 making the establishment          of the Port Au-
thority    effective   as of February 11, 1969.

       Act No. 2375 established    a governing board composed of
nine members to act for the Port Authority.         The membership
consisted    of the Governor, the Director    of the Budget, three
members appointed for 2-year terms by the President of the
Legislature,    and four members appointed for 3-year terms by
the Governor with the advice and consent of the legislature.
Act No. 2611, which was passed by the Eighth Legislature         on
December 16, 1969, and approved by the Governor on Janu-
ary 21, 1970, amended the provisions       of Act No. 2375 by giv-
ing the Governor authority      to appoint all seven of the ap-
pointed members of the governing board.

      Act No. 2375 combined the functions           of the Resources
Agency and the Marine Division       of GVI in the new organiza-
tion.    The Resources Agency had been responsible          for the
operation   of air terminals   and various industrial,         commer-
cial, residential,    and recreational     facilities,     and the
Marine Division was responsible        for the operation      of seaports
and marine terminals.

       The law provided that the Port Authority          was to obtain
title    to all property administered      by the predecessor agen-
cies and assume the personnel,       records,    contracts,    deeds,
leases, subleases, mortgages, rights,         and franchises     of
those organizations.      In addition,     the act provided for the
transfer    to the Port Authority    of any other property that
could be identified     as airport   related,    property   of the
former submarine base, and all public docks, piers, wharves,
or bulkheads.



                                   43
      The purpose of the Port Authority         was:

      'I*** to establish,     acquire,   construct,    develop
      and improve, own, operate and manage any and all
      types of air terminals,       marine terminals,      and
      industrial,     commercial, residential       and recrea-
      tional    developments,    and to make available      the
      benefits    thereof in the widest economic manner
      *** ~11

       Although the Port Authority    became a separate entity
on February 11, 1969, GVI continued to perform the account-
ing for the functions     transferred   to the Port Authority
through June 30, 1969. The Port Authority         assumed account-
ing responsibility    for these functions     on July 1, 1969, but
because of numerous deficiencies      in the GVI accounting    sys-
tem had not been able, as of May 1970, to prepare financial
statements for the Port Authority       as of the beginning of
fiscal    year 1970.

       We were advised by a Port Authority       official that there
had been no formal planning prior to the transfer         of the
former GVI activities      and functions   to the Port Authority.
We were also advised by the Government Comptroller         and the
Chief Internal   Auditor that neither the Government Comptrol-
ler nor the Audit Division,       Department of Finance, GVI, was
involved in the transition       either before or after the Port
Authority   became effective.

      The certified      public accounting firm of Price Water-
house & Co. was retained by the Port Authority               in July 1969
to develop an accounting         system and to prepare fiscal        year
1969 financial      statements.      By March 1970, Price Waterhouse
& Co. had developed tentative           June 30, 1969, account bal-
ances for the Port Authority.            We were advised by the Price
Waterhouse & Co. representatives           that these balances were
subject to change because they had been derived from incom-
plete and uncoordinated         operating    and statistical    records.
Final statements for fiscal          year 1969 for the Port Authority
were not completed by June 1970.

      The problem associated with the transfer        to the Port
Authority   of assets and liabilities     of the former GVI activi-
ties is illustrated   by the difficulties      encountered in

                                   44
determining     the value of the GVI fixed assets transferred
to the Port Authority.         Section 3 of the law establishing
the Port Authority      required that a listing    of real property
transferred     to the Port Authority    be prepared for approval
by the legislature.        To comply with the law, the Port Au-
thority    prepared a listing     of the 19 parcels of land which
had been transferred.        The listing  did not show the dollar
values of the parcels transferred.         A separate listing    pre-
pared by GVI showed assessed values rather than acquisition
costs and did not include all of the properties.

      We found, as stated on page 20 of this report,   that GVI
did not have a complete record of its land, buildings,     and
equipment including   those transferred to the Port Authority.

        On May 11, 1970, the U.S. Attorney for the Virgin Is-
lands filed a civil       suit in the U.S. District       Court of the
Virgin Islands,     Division      of St. Thomas and St. John, repre-
senting the plaintiffs--        the United States    of America, the
Secretary of the Interior,          and the Governor.     Named as de-
fendants were eight members of the governing board of the
Port Authority.       The suit sought to have the several acts
that created the Port Authority,            Acts No. 2375, 2405, and
2611, declared null and void and of no legal effect.               The
court was also asked to issue a permanent injunction              re-
strainingthedefendants          and their agents from operating        the
Port Authority     properties      and facilities   and to order the
defendants to restore to GVI all property,            increments,    fa-
cilities,    and funds under their control.          The suit further
sought an accounting       of monies received and expended by the
Port Authority.       No action     had been taken on the suit at the
time of the completion of the review.
      The basic premise of the suit is that the acts which
created the Port Authority     are in excess of the authority
granted to the Virgin Islands Legislature     by the U.S. Con-
gress and are in conflict    with the Revised Organic Act be-
cause of the following    reasons.

      1. The Governor was provided the power to exercise gen-
eral supervision      and control   over all of the departments and
other instrumentalities       of the executive  branch of GVI. The
Secretary of the Interior        has general administrative  and
audit responsibilities      with respect to GVI. The governing
board of the Port Authority  has unlawfully    assumed a large
share of the powers, duties,  and prerogatives    delegated to
the Governor to be exercised under the supervision      of the
Secretary.

        2. The legislative    power vested in the legislature          is
limited    to legislation    consistent   with the laws of the
United States which are applicable          to the Virgin Islands,        of
which the Revised Organic Act is a part.             The legislature
exceeded its authority       by creating a separate, perpetual           en-
tity to control and supervise the operations            of the harbors
and airports,      to have the power to sue and be sued, to ac-
quire property without limitation         as to use or purposes to
collect    all fees for the use of its facilities,          to borrow
money, and to issue bonds.         The legislature     acted illegally
by altering     the fundamental structure       of the territorial
government so as to infringe         upon the powers vested by law
in the Governor and upon the supervisory           powers of the Sec-
retary of the Interior.

       3. The Revised Organic Act authorizes       general obliga-
tion bond issues only for the construction         and repair of
hospitals,    schools, libraries,    gymnasia, athletic      fields,
sewers, sewage disposal plants, and water systems.              Act
No. 2375 authorizes     the Port Authority    to issue general obli-
gation bonds in an amount up to $65 million,         in addition       to
all bonds authorized      by the legislature    for particular       pur-
poses.     The act permitted the use of the income-producing
properties    as a lien; thus, in the event of default,           bond-
holders could take over the properties        and operate them for
personal gain.

        The suit also charged that Act No. 2611, previously
discussed in terms of the Governor's appointive       powers to
the governing board, was unintelligible     and void.     Although
this act increased the number of appointive        members to be
named by the Governor from four to seven, it stipulated         that
I'*** not more than two shall be residents     of the same Dis-
trict."     There are, however, only two districts    in the Virgin
Islands from which appointments     can be made, the District      of
St, Thomas-St. John and the District     of St. Croix.




                                    46
RECOMMENDATION
             TO THE GOVERNOR

        We believe that, before an adequate accounting           of the
assets and liabilities        transferred     to the Port Authority
can be established,       GVI must correct the deficiencies,         sum-
marized in chapter 2 of this report,            dealing with improve-
ments needed in control         over assets.     We believe also that
a proper determination        of the assets and liabilities       which
have been, or should have been, transferred             to the Port Au-
thority    in accordance with the law establishing           the Port Au-
thority    is necessary regardless        of the outcome of the suit
challenging      the establishment      of the Port Authority.

      If the establishment    of the Port Authority      is upheld
by the courts, a proper accounting      is needed to comply with
the law, to support the sale of bonds authorized           by the law,
to establish    proper fees for services,    and to be used for
other management purposes.      If the plaintiffs     are successful
in their suit, a proper accounting would still         be necessary
for the proper management by the GVI agencies which would
again become responsible    for the functions     assumed by the
Port Authority.




                                   47
                               CHAPTER7

                           SCOPEOF REVIEW

       Our review of financial-management         activities     of GVI
included an examination       of pertinent    legislation    and re-
ports of the Government Comptroller          of the Virgin Islands
and independent consultants       relating    to the operations      of
the government,     We reviewed policies        and procedures appli-
cable to financial      management activities       and examined ac-
counting records,    reports,    statements,     and transactions      to
the extent considered necessary to evaluate the adequacy of
management controls      and the reliability      of selected finan-
cial data.     In addition,    we interviewed     officials    respon-
sible for financial      management in the Virgin Islands.           Our
review did not include the activities           of independent gov-
ernment organizations,      such as the Water and Power Authority
and the College of the Virgin Islands.

       Our review was conducted at St, Thomas, the seat of
government for the Virgin Islands,    and covered transactions
occurring   generally in fiscal years 1969 and 1970.




                                  46
APPENDIXES




 49
                                                                      APPENDIX I
                                                                         Page 1




             THE VIRGIN ISLANDS OF THE UNITED STATES
                          OFFICE OF THE: GOVFBNOR
                         CHARLO!ITE   AN&LUG    ST. THOMAS



                             February      20, 1970



The Honorable Elmer B. Staats
Comptroller  General of the United States
General Accounting Office
Washington, D. C. 20548

Dear Mr.   Staats:

              Since becoming’Governor      of the Virgin Islands in July 1969, I
have concluded that in carrying out my responsibilities      it would be helpful
to have an independent appraisal made of the adequacy of the accounting
system and the related financial management controls within the Government
of the Virgin Islands.   I am particularly   interested in obtaining an appraisal
of the adequacy of the internal controls over assets, liabilities,    receipts and
expenditures,   and of the budgeting and reporting functions.

              Although the,specific   audit responsibility of the General
Accounting Office in the Government of the Virgin Islands is limited to an
examination of the activities of the government comptroller,      both the
Comptroller   of the Virgin Islands and I believe that in view of the amount of
federal funds made available for carrying out the Islands’ activities     it would
be desirable and appropriate    for your office to review the adequacy of the
system used to account for such funds.

                I recognize that the General Accounting Office has limited man-
power resources for carrying out its responsibility      for auditing the activities
of the various Federal Government departments         and agencies and that it may
not be practicable    at this time for your staff to make a comprehensive
examination of all aspects of the financial management system of the
Government of the Virgin Islands.       I believe, however, that a substantial
federal interest would be served by an independent appraisal by your office
of those aspects of the financial management system which you believe you
are in a position to undertake at this time.


                                           51
APPENDIX    I
     Page   2

The Honorable    Elmer   B. Staats            2             February    20, 1970



               It is requested that any reporting on the results of your
examination be made in accordance with the reporting requirements
applicable to your examinations of the activities of the Government      Comp-
troller of the Virgin Islands.

               I would appreciate your consideration  of this request and if
you are agreeable to your office making an appraisal of the financial manage-
ment system --or aspects thereof 0-1 will take the actions to assure that your
staff receives complete cooperation from the officials and employees of the
Government of the Virgin Islands.

                                                        Sincerely   yours,




I concur in the above statements.



                Howard L. Ross
U. S. Government Comptroller   for the Virgin     Islands




                                         52
                                                              APPENDIX II


                       PRINCIPAL OFFICIALS RESPONSIBLEFOR

                        THE ADMINISTRATION OF ACTIVITIES

                            DISCUSSEDIN THIS REPORT

                                                  Tenure of office
                                                  From            -To
SECRETARYOF THE INTERIOR:
   Walter J. Hickel                            Jan.    1969    Nov.     1970
   Stewart L. Udall                            Jan.    1961    Jan.     1969
DIRECTOR, OFFICE OF TERRITORIES:
    Elizabeth P. Farrington                    Jan.    1969    Present
    Ruth G. Van Cleve                          Mar.    1964    Jan. 1969
GOVERNOR OF THE VIRGIN ISLANDS:
   Melvin H. Evans                             July    1969    Present
   Ralph M. Paiewonsky                         Apr.    1961    Feb. 1969

GOVERNMENT COMPTROLLEROFTHE
 VIRGIN ISLANDS:
   Howard L. Ross                              Oct.    1969    Present
   C. Loring Jetton                            Sept.   1968    Oct.    1969
   Peter A. Bove                               Aug.    1957    Sept. 1968




u.9. BAO Weak*, B.C.
                                        53