oversight

Financial Audit: EPA's Financial Statements for Fiscal Years 1988 and 1987

Published by the Government Accountability Office on 1990-03-16.

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

                             United   States   General   Accounting        Office
                             Report to the Congress
GAO

March1990        ~   -   -
                             --FINANCIAL AUDIT
                             EPA’s Financial
                             Statements for Fiscal
                             Years 1988 and 1987




                                                                      ‘!
                                                                           .




GAO/AFMD-90-20
GAO
      United States
      General Accounting    Office
      Washington,   D.C. 20548

      Comptroller   General
      of the United States

      B-216351

      March 16.1990

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

      This report presents our opinion on the Environmental Protection
      Agency’s (EPA) consolidated financial statements for the fiscal years
      ended September 30, 1988 and 1987, and our reports on internal
      accounting controls and compliance with laws and regulations. We con-
      ducted our audits in accordance with generally accepted government
      auditing standards.

      Our opinion discusses the financial condition of EPA'S Superfund pro-
      gram. Considering EPA'S experience to date and the limitations in its esti-
      mating methodology, we believe that the cost to pay for and oversee the
      cleanup of the nation’s most hazardous waste sites will far exceed EPA'S
      current $30 billion estimate and overwhelm the remaining $7.1 billion
      Superfund authorization. The information presented in this report
      should contribute to the upcoming congressional deliberations on the
      Superfund program’s reauthorization.

      As we reported last year, our opinion is qualified because of (1) the
      manner in which EPA accounted for and supported its property accounts
      and (2) weaknesses in the internal control system it used to control and
      safeguard property assets totaling over $320 million. EPA'S problems
      with property are not new. The agency first reported an accounting sys-
      tem weakness related to property for fiscal year 1983. But, as a result of
      our first financial statement audit for fiscal year 1987, EPA reported this
      problem as a material weakness in its internal control system for prop-
      erty assets in its fiscal year 1988 Federal Managers’ Financial Integrity
      Act report.

      Our report on EPA'S internal accounting controls discloses that, while
      improvements have been made by EPA, the previously mentioned mate-
      rial weakness in its accounting for and controlling property assets con-
      tinues to exist. Our report provides details on our findings and our
      recommendations for improvement.

      Other financial management and control problems uncovered as a result
      of our first financial audit in 1987 have been resolved. These include the
      following:




      page1
Page 3   GAO/AFMIM@ZOEnvironmental Prdxtion   Agency
contents




Abbreviations

CERCLA     Comprehensive Environmental Response, Compensation, and
               Liability Act of 1980
EPA        Environmental Protection Agency
FMFIA      Federal Managers’ Financial Integrity Act
GAAP       generally accepted accounting principles
NPL        Kational Priorities List


page 5                         GAO/AF’MD-90-M-90
                                             Environmental Protection Agency
Our opinion on the fiscal year 1987 consolidated statement of financial
position was qualified because of (1) the manner in which WA accounted
for and supported its equipment, buildings, and library accounts and
(2) weaknesses in the internal control system EPA utilized to control and
safeguard these assets. Supporting records did not provide the cost and
depreciation data needed to account for property assets in accordanc,c
with generally accepted accounting principles. In addition. related
account balances were neither supported by adequate documentation
nor subject to periodic reconciliations to subsidiary records. Our audit of
the fiscal year 1988 financial statements disclosed that these conditions
continued to exist. Accordingly. we determined, as we did in our fiscal
year 1987 audit, that it was not practical to perform, nor did we per-
form, auditing procedures necessary to satisfy ourselves as to the fail
presentation of the equipment, buildings, and library accounts and
related expenses in EPA'S consolidated financial statements for the fiscal
years ended September 30, 1988 and 1987.

In our opinion, except for the effects of adjustments, if any, that might
have been necessary had we been able to satisfy ourselves as to the fair
presentation of EPA'S equipment, buildings, and library accounts and
related expenses, as discussed in paragraph four above, the accompanp-
ing consolidated financial statements present fairly, in all material
respects, the financial position of the Environmental Protection Agency
as of September 30, 1988 and 1987, the results of its operations. and its
changes in financial position and reconciliation to budget for the fiscal
year ended September 30, 1988, in conformity with generally accepted
accounting principles. Our audits were made for the purpose of forming
an opinion on the consolidated financial statements taken as a whole.
The supplemental schedules by fund activity as of and for the fiscal
year ended September 30, 1988, are presented for the purpose of addi-
tional analysis and are not required as part of the financial statements.
This information has been subjected to the same auditing procedures
that were applied in our audit of the consolidated financial statements.
In our opinion, except for the effects, if any, of the matters discussed in
paragraph four above. the information in the supplemental schedules is
fairly stated in all material respects in relation to the consolidated finan-
cial statements taken as a whole.




Page 7
B-216351




As of September 30. 1988, EPA had identified over 30,000 sites, including
more than 2,000 which were added during fiscal year 1988. Of the iden-
tified sites, EPA had completed preliminary assessments at over 26,000
and inspections at over 9,000. EPA had determined that over 11,000 sites
showed no evidence that further EPA action would be required. Through
the end of fiscal year 1988, EPA had proposed approximately 1,200 sites
for inclusion on the NPL. While determining the eventual number of sites
that will be added to the NPL is difficult, it is important to recognize that
the size of the NPL is increasing because new sites are being added to it
faster than existing sites are being removed

At the end of fiscal year 1988, cleanup work had begun at 20 1 of the
1,200 sites and had been completed at 27. EPA had spent approximately
$3.0 billion (68 percent) of the $4.4 billion appropriated for Superfund
program activities. This represents approximately 30 percent of the
total $10.1 billion authorized. EPA estimates that about half of the
$3.0 billion spent on Superfund has been used for specific site cleanup
activities, while the other half has been used for various program sup-
port activities.

EP.~currently estimates that it will need $30 billion to pay for and over-
see the cleanup of the approximately 1,200 sites on the NPL as of Sep-
tember 30. 1988. However, several aspects of EPA'S methodology for
estimating the $30 billion figure lead us to believe that it is low. First,
the estimate uses a current average cleanup cost figure which does not
include the potential impact of inflation, even though EPA'S cleanup
efforts are expected to stretch well into the next century. Second, as
recently reported in EPA'S Management Review of the Superfund Pro-
gram, there is every reason to believe that the average cleanup cost fig-
ure will likely increase as cleanup work begins at some of the more
complex hazardous waste sites. In addition, EPA'S $30 billion estimate
relates only to the 1,200 sites presently on the NPL and makes no provi-
sion for future sites that will be added. Based only on its inventory of
sites under evaluation, which makes no provision for sites that will be
identified in the future. EPA expects that 900 more sites will be added to
the NPL by the year 2000. Considering EPA'S experience to date and the
limitations in its estimating methodology, we believe that the cost to pay
for and oversee t,he cleanup of the nation’s most hazardous waste sites
will far exceed EP.~'Scurrent $30 billion estimate.




page9                              GAO/AFMD9020EnvimnmentalProtectionAgency
Page 11   GAO/~-90.20   Environmental Protection Agency
Report on Internal Accounting Controls




Act of 1982 (FMFIA). In fulfilling this responsibility, estimates and judg-
ments by management are required to assess the expected benefits and
related costs of internal control procedures. The objectives of a system
of internal accounting controls are to provide management with reason-
able assurance that (1) obligations and costs are in compliance with
applicable laws and regulations. (2) funds, property, and other assets
are safeguarded against waste, loss, and unauthorized use or misappro-
priation, and (3) assets. liabilities, revenues, and expenditures applica-
ble to agency operations are properly recorded and accounted for to
permit the preparation of reliable financial and statistical reports and to
maintain accountability over agency assets. Because of the inherent lim-
itations in any system of internal accounting controls, errors or irregu-
larities may nevertheless occur and not be detected. Also, projection of
any evaluation of the system to future periods is subject to the risk that
the procedures may become inadequate because of changes in conditions
or that the degree of compliance with procedures may deteriorate.

In accordance with FMFIA, EPA reviewed and reported on its system of
internal accounting controls for fiscal year 1988. We reviewed the report
and considered its findings in determining the nature, timing, and extent
of our internal control tests.

Our study and evaluation of EPA’S system of internal accounting con-
trols, made for the limited purpose described in the second paragraph,
would not necessarily disclose all weaknesses in the system. Accord-
ingly, we do not express an opinion on EPA’S system of internal account-
ing controls taken as a whole or on any of the categories of controls
identified in the second paragraph. However, our study and evaluation
of internal accounting controls disclosed conditions which we believe
pose a high degree of risk that material errors or irregularities may
occur and not be promptly detected. These conditions relate to the inad-
equacies in EPA’S accounting for and controlling property assets which
we observed during the fiscal year 1988 audit. We reported these same
conditions as a material weakness in our fiscal year 1987 internal con-
trol report (GAo;AFMD89-24,dated February 9, 1989). In that report, we
observed that E~A’S property management records, which serve as the
subsidiary accounting system for capital assets, (1) do not provide infor-
mation needed to account for capital assets and (2) are not subject to
 adequate internal controls. In addition, EPA was unable to provide the
supporting documentation needed to audit the fair presentation of its
 buildings and library account balances. As a result, we qualified our
 opinion on 1x4’s statement of financial position for fiscal year 1988, as it



 Page 13                                 GAO/APMD-W20 Environmental Protection Agency
    F&port on Internal Accounting Controls




    provide financial information, such as type of asset, date of acquisition,
    cost, estimated useful life, applicable depreciation data, physical loca-
    tion, and identity of custodial officers. Without reliable property man-
    agement records. it is extremely difficult for EPA to manage and
    maintain accountability for property assets. In addition, accounting
    information must be accurate in order to maximize its usefulness to
    agency management in making decisions regarding agency programs and
    operations.

    We identified the following material weaknesses in EPA'S ability to
    account for and report personal property financial information:

. The Personal Property Accounting System, which serves as the property
   control system as well as the subsidiary accounting system for the gen-
   eral ledger personal property account. does not provide the data needed
   to account for assets. including cost, estimated useful life, and applica-
   ble depreciation data.
. Instead of capitalizing personal property when it is purchased and
   placed into service, as required by GAAP, all disbursements for property
   are charged to the operating expense account. At fiscal year-end, a man-
   ual general ledger adjustment is made to reduce expenses and increase
   the personal property account balance by the amount of capitalized per-
   sonal property purchased during the year. The resulting personal prop-
   erty general ledger balance is compared to the balance in the property
   control system, and any difference is written off without investigating
   the origin of the difference.
 . For fiscal year 1988. EPA4did not reconcile personal property disburse-
   ments recorded in the general ledger with related acquisitions recorded
   in the property control system. As a result, EPA was unable to identify
   the cause of the $15.3 million difference in the personal property bal-
   ance between the two systems at the end of fiscal year 1988. This was
   due, in part, to the fact that EPA'S general ledger and property control
    system are not integrated and do not have a common data element(s) or
    interface(s) to facilitate a reconciliation.
 . During fiscal year 1988. physical inventories were not conducted in 22 1
    of 800 custodial areas (28 percent) we reviewed. Of the 579 inventories
    that were conducted, 2 12 (37 percent) were not reconciled to the prop-
    erty control system to determine the reasons for identified differences.
l   There were often delays of up to 6 months between the time property
    was acquired and the time it was recorded in the property control sys-
    tem. At the end of fiscal year 1988, personal property totaling at least
    $10.3 million had been acquired by EPA4but was not yet recorded in the



     Page 15                                 GAO/AFMD-90.20Environmental Protection Agrnry
    Report on Internal Accounting Contmls




    similar to those found in prior audits of Superfund obligations and dis-
    bursements. -4s noted earlier. we utilized its control testing to augment
    ours. We concur with its findings and recommendations related to per-
    sonal property. The Superfund auditor’s findings can be summarized as
    follows:

. Property was not always recorded in the property control records. In a
  test of 786 property items. 276 (35 percent) were not recorded. One rea-
  son for this was that receiving documents were not always sent to the
  property accountability officers when property was ordered or received.
  Required physical inventories were not always performed and recon-
  ciled to the general ledger, and proper transfer documents were not
  maintained.
  Property and equipment were not capitalized when purchased or placed
  in service, as required by GAAP. Instead, it was charged to operating
  expenses. EPA'S Financial Management System does not have the trans-
  action codes necessary to capitalize property at the time of disburse-
  ment. EPA officials indicated that the new system will correct this
  weakness.
. Custodial officers did not accept responsibility for the care and protec-
  tion of property assigned to them.

    The Superfund auditor’s recommendations can be summarized as
    follows:

    Property accountable officers should certify that unrecorded property
    items identified by the audit have been recorded in the property control
    system.
    EPA should ensure that procedures have been established to properly
    record capitalized property and equipment in the accounting records.
    EPA should establish an interim policy requiring the reconciliation of the
    property and accounting records.
    EPA should emphasize to the appropriate property accountable officers
    the importance of complying with EPA policies for physical inventories
    and accepting custodial duties.

    EPA'S accounting system problems with property are not new. As
    required by FMFIA, agencies annually review and report on the adequacy
    of their systems of internal controls (section 2) as well as their account-
    ing system (section 4). In its initial report covering fiscal year 1983, ~4
    identified the need for an accounting system enhancement to integrate
    its accounting and property management systems. EPA'S fiscal year 1988
    report indicated that little progress had been made in the intervening


    Page 17                                 GAO/AFMD9@20 Environmental Protection Agency
                          reasonable assurance that (1) agency assets are safeguarded against
                          waste, loss, and unauthorized use or misappropriation and (2) property-
                          related information appearing in financial statements reported to the
                          Department of the Treasury is fairly stated.


                          To improve EPA’S accounting for and control over all property assets we
Recommendations           recommend that the Administrator of the Environmental Protection
                          Agency

                      l ensure that the new accounting system and the property control system
                        (1) provide accurate and reliable financial and management control
                        records (including the type of asset, date of acquisition, cost, estimated
                        useful life, applicable depreciation data, physical location, and identity
                        of custodial officers) to account for and control property assets and
                        (2) contain a common data element(s) or interface(s) to permit the rec-
                        onciliation of accounting and property systems data and
                      . address the property-related findings and implement the recommenda-
                        tions reported by the Superfund auditor in its fiscal year 1988 audit
                        report dated September 22, 1989.


                          Except for the property weakness identified by GAO in this report, by
                          EPA in its FMFIA report, and by Leonard G. Birnbaum and Company in its
                          Independent Auditor’s Report on Internal Accounting Controls, our
                          study and evaluation disclosed no other conditions which we consider to
                          be material to the consolidated financial statements taken as a whole.
                          While several GAO and EPA reports disclose, in our judgment, internal
                          control weaknesses of a financial and/or programmatic nature, we
                          believe these matters do not have a material effect on EPA’S fiscal year
                           1988 consolidated financial statements. We considered these weaknesses
                          in determining the nature, timing, and extent of our audit tests. Except
                          for the inadequacies of the accounting system and internal controls
                          related to property which caused us to qualify our opinion on the
                          agency’s consolidated financial statements for the fiscal year ended Sep-
                          tember 30, 1988. the weaknesses identified do not affect that opinion.


                          During the course of our examination, we identified a number of other
Other Opportunities       weaknesses in internal accounting controls which will be reported sepa-
for Improvement           rately to the Environmental Protection Agency. These weaknesses
                          included problems with (1) overtime and leave usage, (2) payroll control
                          procedures, (3) invoice payments, (4) controls over cash and checks,


                          Page 19                          GAO/AFMD!WZO Environmental Pmtection Agency
Report on Compliance With Laws
and Regulations

                 We have audited the consolidated financial statements of the Environ-
                 mental Protection Agency (EPA) for the fiscal years ended September 30.
                 1988 and 1987. and have issued our opinion thereon. Our audit was
                 made in accordance with generally accepted government auditing stan-
                 dards and. accordingly. included such tests of the accounting records
                 and such other auditing procedures, including tests of compliance with
                 laws and regulations, as we considered necessary in the circumstances.
                 This report pertains only to our consideration of EPA’S compliance with
                 laws and regulations for the year ended September 30, 1988. Our report
                 on compliance with laws and regulations for the year ended Sep-
                 tember 30, 1987, is presented in GAOIAFMD-89-24, dated February 9, 1989.

                 The management of EPA is responsible for compliance with laws and reg-
                 ulations applicable to EM. As part of obtaining reasonable assurance as
                 to whether the consolidated financial statements were free of material
                 misstatement, we selectively tested EPA’S compliance with certain provi-
                 sions of the following laws and their implementing regulations:

             . Federal Managers’ Financial Integrity Act (31 USC. 3512 (b. c));
             l Anti-Deficiency Act (31 G.S.C. 1341);
             * Debt Collection Act of 1982 (31 U.S.C. 3717);
             l Prompt Payment Act (31 U.S.C. 3902,3903, and 3905);
             l U.S. Treasury reporting standards (31 U.S.C. 3513 (a));
             * Accounting and -4uditing Act of 1950 (31 U.S.C. 3512 (a) (3));
             l Supplemental Appropriations Act of 1955 (Section 1311 (a) of Public
               Law 83-663, 31 INC. 1501, 1502)); and
             l US. Treasury cash custodianship standards (31 USC. 3302 (e), 3305)

                 Because of the limited purpose for which our tests of compliance were
                 made, the laws and regulations tested did not cover all legal require-
                 ments with which EPA has to comply.

                 The results of our tests for fiscal year 1988 indicate that, with respect to
                 the items tested, CPA complied in all material respects with the provi-
                 sions of laws and regulations that could have a material effect on its
                 consolidated financial statements. With respect to transactions not
                 tested, nothing came to our attention that caused us to believe that EPA
                 had not complied, in all material respects, with those provisions, Our
                 testing disclosed certain compliance matters which, while not material,
                 nevertheless warrant ~p.4 management’s attention. These matters will be
                 reported separately to F.~A.




                 Page 21                           GAO/AFMD-W-20 Environmental Protection Agency
                                                    Financial Statements




Consolidated   Statement      of Operations


                                                FOR THE FISCAL YEAR ENDED SEPTEMBER30. 1988
                                                           (DOLLARS IN THOUSANDS)
                     EXPENSES                                                        1988                  1987
                                                                                                        (RESTATED)
                     Grants     and Other Assistance         (Note     7)           $3,063,727             $3,353,538
                     Contractual          Servrces                                   1,194,544                 796.675
                     Personnel         Compensation and
                       Fringe Benefits                                                  624,299                 553,933
                     Rent,
                     -       .-Utllltles,       and Telephone                           120,290                  98.944
                     Travel,      Prlntlng,       supplies ana
                       Other Expenses                                                   136,052                 127,440
                     Depreclatlon          (Note 1)                                      21,101                  la.838
                              TOTAL EXPENSES                                         5.160,013               4,949,368

                     FINANCING SOURCES (Note               1)
                     Approprlatlons             Expended                             5.108.491               4.898.914
                     Depreclatlon             and Other                                  21,101                  20,039
                     Appropriations             to be Provided                            2,694                   3,324
                              TOTAL FINANCING SOURCES                                 5,132,286              4,922,277

                     NET RESULTS OF OPERATIONS                                             (527,727)             (S27,0911
                                                                              I5mlllllilllPII        IIl=PI=lllllli=
                     The accompanying             notes   are a" Integral   part of these statements.




                                                     Page 23                                GAO/~SC20         Environmental   Protection Agency
Notes to Financial   Statements


                       Note       1:   Significant     Accounting       Policies
                       Entity
                       EPA was created           in 1970 by executive               reorganization          from various
                       components        of other        agencies         in order        to better          marshal       and
                       coordinate        federal       pollution        control       efforts.           The Agency         is
                       generally      organized        around the media and substances                      it regulates
                       --air,     water,     hazardous         waste,    pesticides,         and toxic        substances.
                       A major mechanism for achieving                     the Agency's        pollution        prevention
                       goals      is   the     provision          of   financial         assistance          (grants       and
                       cooperative        agreements)         to states,       local     government,        universities
                       and other qualified            recipients.           A major     focus of EPA's activities
                       is the Superfund           program,       to clean up hazardous              waste sites.
                       Basis       of Consolidation
                       EPA's consolidated      financial      statements       are prepared    in conformity
                       with generally     accepted      accounting     principles      as contained     in the
                       Federal   Accounting      Standards      of the General        Accounting     Office's
                       (GAO) Policv       and Procedures           Manual      for  Guidance      of  Federal
                       Aqencies.
                       The accompanying       consolidated      financial      statements     of EPA include
                       all   accounts    under EPA's control          which have been established           and
                       maintained     to account     for the resources         entrusted    to the Agency's
                       management.      EPA's consolidated        financial     statements     do not include
                       the unappropriated       portion    of the "Hazardous          Substance    Superfund"
                       trust    fund.   The financial      statements       are prepared      on the accrual
                       basis of accounting.
                       Revenue         Recognition      and Expended       Appropriations
                       Financing      sources    are principally       provided       through    Congressional
                       appropriations         on an annual,         multi-year,         and no-year       basis.
                       Appropriations       may be used to finance            operating      expenses   as well
                       as capital      expenditures       for land,    equipment,        and other    assets     as
                       specified      by law.     Additional     revenue     is recognized       from services
                       related     to the revolving        fund operations.
                       The current     budgetary       process      does not distinguish           between capital
                       and operating          expenditures.          For budgetary         purposes,        both     are
                       recognized      as a use of budgetary                  resources      (outlays)       as paid.
                       However, for financial           reporting      purposes under accrual            accounting,
                       operating     expenses       are recognized          when incurred,         while    advances,
                       reimbursements,         and expenditures           for capital     and other       assets     are
                       recognized       when consumed,             or     collected,      in     EPA operations.
                       Financing     sources      for these expenses,             which are derived         both from
                       current    and prior-year          appropriations,          are recognized        on the same
                       basis.     Appropriations         for current        operating    expenses are recorded
                       as a financing      source when expended.               Unexpended appropriations             are
                       recorded    as equity        of the U.S. government.




                                                     page25                                    GAO/AFMDSQZOEnvironmentalProtectionAgency
Executive Service   employees     may carry    forward  an unlimited    amount
of annual  leave from one year to the next.            Most other    employees
may carry forward   up to 240 hours.        Any excess hours not taken are
forfeited unless  special    approval   is granted.     Sick and other types
of leave are expensed     as taken.
Cost    Allocation
Certain      Agency       support        costs      (such     as leases,         utilities,         mail
operations,         etc.)      are initially             charged      to a carrier              account
established         under      the Agency's             Salaries       and Expense             (S & El
appropriation.            During      the year these support                costs are allocated
respectively          to    the       S & E appropriation                   and the          Superfund
appropriation          based        on a ratio           of direct         labor        hours,     using
budgeted      or actual      full-time         equivalent       personnel,       charged to these
appropriations           to the total           of all      direct      labor     hours.         Agency
support      costs      charged        to Superfund          may not exceed               the ceiling
established        in the Superfund             appropriation.
Funds      with     U.S.    Treasury
This total    represents  all  unexpended                     balances        of    accounts     under
EPA's control    with the U.S. Treasury.
Invested          Capital
Invested    capital   represents the book value of                        land, buildings,     and
equipment     (note 4) and the principal     amount                        of loans receivable
outstanding      (note 3).
Note    2 : Intragovernmental              Financial        Activities
EPA's financial       activities      are affected  by, and are dependent      upon,
those of the federal           government   as a whole.    Thus, EPA's financial
statements     do not reflect         the results   of all   financial   decisions
and activities          applicable      to EPA operations,       as if it were a
stand-alone     entity.
        The U.S. Treasury  receives,                   disburses,          and     holds    moneys on
        behalf  of EPA for 54 different                    account       titles       or   fund types
        for which EPA has management                   responsibilities.
        EPA's        consolidated    financial      statements    are not intended      to
        report        the Agency's     proportional       share of the federal
        deficit         or of public    borrowing,      including   interest   thereon.
        Financing       for major construction         projects      was provided
        through    appropriations.         To the extent        this   financing   was
        obtained     through    public    borrowing     by the U.S. Treasury,         no
        interest     has been capitalized,          since such borrowings         are
        recorded      in total     by the U.S. Treasury         and are not allocated
        to individual        departments     and agencies.
        During         fiscal      year   1988,     the    majority         of     EPA's    employees
                                                                                                                         i




                                Page27                                    GAO/~-90.ZOEnvironmenti          Protection Agency
                  Financial Statements




appropriations,         costs recovered       from responsible    parties,
fines,      penalties    and interest     earned on investments        in U.S.
obligations.          The Congress    annually    appropriates    a portion
of the fund balance          to finance    EPA's Superfund     program
activities.
As authorized            by the Congress,          EPA appropriations          for
Superfund         program activities            include    certain      amounts which
are transferred             to other      federal     agencies      for authorized
activities          in support       of the Superfund         program.       The uses of
these       transfer         appropriations          are not       reported      in EPA's
financial         statements       as part of EPA's Superfund               program
activities,           rather    they are reported          by the specific
agencies        that receive         the transfer       amount.
Under the Federal         Tort Claims Act, any award, compromise,
or settlement        in excess of S2,SOO is paid from the Claims,
Judgements,        and Relief    Acts Fund maintained        by the
Department       of the Treasury,       while   those of $2,500 or less
are paid by EPA.           Payments during       fiscal   year 1988 and 1987
for awards,        compromises,     and settlements      resulting     from such
legal    actions     amounted to $1,008,593          and $25,000    from the
Treasury's       Claims,    Judgements,      and Relief    Acts Fund, and
$13,706 and $9,568 from EPA, respectively.




                   Page 29                                   GAO/AFMD-90-20Envhmmental Protection Agency
                              Financial Statrments




    projects.       This financial       assistance       includes    both grants      and loans
    to the LEAS.              In addition,       ARERA provides           authority      for     the
i   issuance      of grants     in 1988 and 1989 to states             or LEAS to carry          out
    inspections       for asbestos-containing              material     in school      buildings
    and preparation         of management plans for school buildings                  as defined
    by this Act.         Not more than 10 percent            of the 1988 and 1989 amounts
    available      under ASHAA may be used for these purposes.                       Due to the
    recent     nature    of loans extended        under ASHAA and AHERA, the related
    collection        history      was not       sufficient         to make possible             the
    establishment          of    a meaningful          allowance       for    doubtful        loans
    receivable.           As of September           30,     1988 and 1987,          there       were
    outstanding        loans    under this      Act of $67,179,352            and $46,812,306
    respectively.
    AHERA also established             a trust   fund in the U.S. Treasury,    known as
    the "Asbestos   Trust          Fund."    Repayments of loans must be made to EPA
    for deposit   in the          General    Fund of the U.S. Treasury.      Repayments
    of Asbestos    School         Loans totaled      $2,440,780 and $846,184    for the
    fiscal  years ended           September    30, 1988 and 1987 respectively.
    B. Puerto      Rico    Loans
    EPA, pursuant         to Public       Law 97-357 (October           1982), has loaned funds
    to the Commonwealth              of Puerto        Rico in the amount of $16,720,039.
    These loans          were granted          as a result          of special        congressional
    action     to allow certain            construction        grant unobligated          balances       to
    be used as loans to enable the Commonwealth of Puerto Rico to fund
    five    specific       regional       wastewater       treatment      systems.        These funds
    may be used by the Commonwealth                           of Puerto       Rico      to fund        the
    nonfederal        share of the costs of such projects.                     Interest      for these
    loans      is    recorded        monthly,        based      on the      U.S.     Treasury        rate
    established        for this       loan program.          An allowance      for doubtful        loans
    receivable        was not established               for these      loans due to the large
    amount of collections                and probability          that   the remaining          balance
    will    be collected.           As of September           30, 1988 and 1987, there were
    outstanding         loans for this program in the amount of $4,463,851                             and
    $4,484,984,         respectively.




                               Page 31                                      GAO/AFMD-90.20Environmental Protection Agency
Future  minimum real                                estate  lease payments                                 at      September     30,   1988,
for operating  leases                                are as follows:
Fiscal          Year
(Dollars              in        thousands)

1989       . . . . . . . . ..I............................                                                         $ 5,502
1990       ...    .   .    ..   .   .   ...   .   ...   ...   ...   ...   .   ...   .   .   ..   .   ...   .   .     6,017
1991       ...    .   .    ..   .   .   ...   .   ...   ...   ...   ...   .   ...   .   .   ..   .   ...   .   .     2,872
1992       ...    .   .    ..   .   .   ...   .   ...   ...   ...   ...   .   ...   .   .   ..   .   ...   .   .     1,268
1993       ...    .   .    ..   .   .   ...   .   ...   ...   ...   ...   .   ...   .   .   ..   .   ...   .   .             0
                                                                                                                   $15.659
Ncta       6:             Commitments                   and     Contingencies
Under the Federal               Insecticide,         Fungicide,         and Rodenticide               Act
(F-IF-1,      as amended at 7 U.S.C.               136m, EPA is authorized                to suspend
and cancel        registration         of pesticides          determined       to be hazardous.
Prior    to the 1988 FIFRA Amendments,                    under certain          conditions,          EPA
made indemnity           payments to eligible             owners who incurred               losses      as
a result        of cancellations             or suspensions            of pesticides.                 The
Federal       Government        has also       paid      millions       of dollars           from the
Treasury       Department's         Judgement       Fund in claims          by holders           of the
cancelled       EDB, 2,4,5-T/Silvex              and Dinoseb.           Additional          claims       by
holders     of Dinoseb are projected                to cost millions            of dollars         more.
The 1988 FIFRA Amendments provide                     that indemnification              claims      will
not be paid           from EPA appropriations                 unless     Congress        provides          a
special     appropriation           for this      purpose.        As of September             30, 1988
and 1987, EPA had actual               outstanding        indemnification          claims       for two
chemicals       totaling       approximately         $16.8 million         and $12.5 million,
respectively.            The total      amount of claims          could be as high as $40.0
million.

Both the Comprehensive            Environmental          Response,        Compensation,      and
Liability        Act     (CERCLA)       and      the      Superfund         Amendments       and
Reauthorization         Act   (SARA) provide           for    cost-recovery        of funds.
 (See note 7).          Cost recovery         expenditures         are expensed         because
there     is no assurance        that    these      funds will         be recovered.         EPA
establishes        an account    receivable        when there        is a sum certain        due
from the responsible           party(ies).            This    occurs      when a judgment,
consent     order,    or other binding         agreement       is made for payment.            As
of September 30, 1988 and 1987, the balance                      of accounts      receivable
was $ 9.6 million            and $6.5 million,              respectively.          Since     the
inception      of Superfund     through      fiscal      year 1988, EPA has collected
approximately        $104.2 million        in cost-recovery.
Under Section        119 of CERCLA, as amended by SARA, EPA has authority
to indemnify       response        action    contractors     and certain         other persons
for negligent        releases        arising     out of response        action      activities.
Indemnity      claims       will     be paid out of available                balances           in the
Hazardous     Substance          Superfund.       The indemnification          process           is not
subject     to     the      provisions        of    the   Anti-Deficiency             Act.           If




                                              page33                                                               GAO/AFMD-SQZOEnvironmentalProtectionAgency
                             Financial Statements




The Superfund        Amendments and Reauthorization         Act (SARA) was enacted
October      17, 1986.     SARA reauthorized        CERCLA for $3.5 billion     to be
appropriated          over   a 5-year        period    (FY 1937-1991)       for    the
continuation         of the    program      launched     by CERCLA to clean          up
hazardous       waste sites,    strengthen       and expand the cleanup     program,
and change the tax structure             for financing     the Fund.
Grants      and    Other     Assistance
The Agency,         in fulfilling            its responsibilities               for protecting             and
enhancing        the     quality         of the environment,                  provides         financial
assistance        to various         public,        private,      and state       recipients           in the
form of grants            and cooperative                agreements.         The Agency provides
assistance         for many different                   Agency media functions,                  i.e.      air
pollution,         water      pollution,            toxic     substances,         hazardous            waste,
construction           grants         for        wastewater          treatment          (which          is     a
significant           amount        of      the        funds     the      Agency        provides           for
assistance).             Assistance            also      represents        the most significant
portion       of the Agency's             appropriation.               In fiscal      years 1988 and
1987,       the     Agency        obligated            $3.5    billion        and $2.6            billion,
respectively,          for recipients.
At the expiration         of an Assistance           Agreement,       unused or improperly
applied       funds     are     either       collected        from     the   recipients         or
appropriately         adjusted       by an offset,           or otherwise        utilized        in
/accordance        with     the     conditions         of the Assistance            Agreement.
Arrangements        are made for the disposition                    of property        purchased
through     the Assistance        Agreements       according      to Federal    regulations.
The Construction                 Grant program,           a federally          funded multi-billion
dollar       activity,            has begun a period                 of transition.                  In 1987
Congressional              legislation,          the Water Quality             Act of 1987 (PL loo-
4),      created        the State          Water Pollution              Control        Revolving          Funds
 (SRF).          SRF is a capitalization                         grant     program,         intended             to
facilitate          the         establishment          of permanent           institutions            in each
State that will               provide      continuing         sources      of financing           needed to
maintain         water       quality.          From the SRF, States                 can provide           loans
and other           types         of financial            assistance,          but      not grants,              to
communities            and intermunicipal                 and interstate             agencies         for the
construction              of publicly-owned              wastewater         treatment         facilities.
The funds may also be used for implementation                                     of nonpoint           source
management programs                   and development             and implementation               of plans
under the new estuary                    protection        program.         The intent         of the SRF
program        is to eventually                bring     to an end the Federal                  government
role      in funding           municipal         wastewater        plants       by making grants                 to
States       on a matching              basis.        Under the SRF program,                 States         will
have control            of the proceeds              of the loans which they collect                        from
the cities.             The proceeds           of these loans are to be used by States
as a revolving               fund to make additional                  loans.         Implementation              of
this      program has the potential                    for making a significant                   impact on
the Agency's             financial        statements,         as it will         decrease       the grants
portion       of the Agency's               expenditures.




                              page35
Supplemental Schedules


Schedule   of Financial   Position    by Fund Activity


I---                                                 AS    OF SEPTEMBER 30. 1988
                                                         (DOLLARS IN THOUSANDS)
                                                                    GENERAL FUND    SUPER FUND   CONSOLIDATED
                                                                   APPROPRIATIONS APPROPRIATIONS   BALANCES
               ASSETS
              Funds with U.S. Treasury                                   $8,687,269         $1,661,453           $10,348,722
              Advance to the Trust Fund                                      733,955                       0          733,955
              Other Advances, Accounts and Loans
               Receivable,     Net                                            98,585              16,305                114,890
              Land, Bulldlngs,     and Equipment,
               Net of Accumulated     Depreclatlon                           130,444              11,941                142,385
              Future  Flnanclng    Sources                                    35,502               5.362                 40,864
               TOTAL ASSETS                                                 9,685,755         1,695,061            11,380,816
                                                                    PIIJIEli=IIImI=      111111111==1==        ID1151----____
                                                                                                                       - - - - __ _ _

               LIABILITIES           AND EQUITY
               LIABILITIES
              Repayable Advance From Treasury                                733,955                       0            733,955
              Accounts Payable and Accruals:
               To the Public                                                 275,943              89,446                365,395
               To Other Federal Agencres                                       41,644            154,192                201,836
              Other Advances:
               From Other Federal Agencies                                      8,902             13,404                  22,306
               From The Public                                                  3,786             20,248                  24,034
              Amounts Due to Treasury                                          83,831             15,412                  99,243
              Accrued Payroll   and Leave                                      67,686             12,166                  79.852
              Superfund  Claims                                                      0            20,500                  20,500
                     TOTAL LIABILITIES                                     1,221,753             325,368             1,547,121

              EQUITY OF THE U.S. GOVERNMEhT
              Unexpended Appropriations:
                Unobligated      Balances                                  1,129,729             124,584             1,254,313
                Unllquldated       Obllgatlons:
                 Grants and Other Asslstance                               6,996,997             418,906             7,416,903
                 Contracts     and Other                                      291,804            859,638             1,151,442
              Invested     Capital                                            202,363             11,941                214,304
              Cumulative     Results of Operations                           (156,891)           (46,376)              1203,267)
                     TOTAL EQUITY                                          8,464,002          1,369,693              9,833,695
              TOTAL LIABILITIES            AND EQUITY                   $9,605,755            51.695.061         $11,380,816
                                                                    =3101=1111111==      IIlDlD1llD1==1        ==Eli511111===




                                                     Page37
                                                   SupplementalSchedules




Schedule   of Changes   in Financial   Position   and Reconciliation   to Budget by Fund Activity

r                                           FOR THE FISCAL YEAR ENDED SEPTEMBER30. 1988
                                                       (DOLLARS IN THDUSANDS)
                                                                           GENERAL FUND    SUPER FUND CONSOLIDATED
             RESOURCESUSED:                                               APPROPRIATIONS APPROPRIATIONS BALANCES
             operating      uses:
             Operating      Expenses                                           $4.176.352            $983,661       55,160,013
             Items (Providing)       Requiring Funds:
               Depreclatlo"                                                         (17,261)            (3,840)         121,101)
               Loss on property                                                      (8.862)            (6.478)         (15,340l
               Unfunded Annual Leave                                                 t1;9791               (715)          12,694)
               Superfund      Claims                                                       0          (20,500)          (20,500)
               Increase     1" Other Advances.
                 Accounts and Loans Receivable,       Net                            14,720              6,537           21,257
               Increase     I" Accounts Payable and Accruals                        (93,885)         (177,360)         (271,245)
                                                                          -
                         Funds Used by Operations                                4,069,085            781,305        4.850.390
            Non-Operating    Uses:
            Acqulsltlons    of Property                                              36,787             13,417           50,204
            Net Transfers    Out                                                    125,055                             125,055
            Funds Transactions     Included            In Outlays                    (5,638)            (2,88!)          18,521)
            NET RESOURCESUSED (BUDGETARY OUTLAYS)                                4,225,289            791,839        5,017.128
            RESOURCESPRWIDED:
            Current  Year Approprlatlon                                          3,885,042          1,142,415        5,027.457
            Net Transfers  In and Other                                             108,595            (50,172)          58,423
            NET RESOURCESPROVIDED                                                3,993,637          1,092,243         5,085,880
            INCREASE (DECREASE) IN U.S.TRBASURY FUNDS                              (231,652)           300,404            68,752

            U.S.TREASURY FUNDS: BEGINNING OF YEAR                                8.918.921          1.361.049       10,279,970
            U.S.TREASURY FUNDS: END OF YEAR                                       f8,687,269      $1,661,453       $10,348,722
                                                                          ILIIIIII1=ISPLI       1111=11155=10      -__-_-_-_-ii=
                                                                                                                     -------_




(917138)                                            page39                                     GAO/.4FMIM&20Environmental Protection Agency
-   .^   .   -   ._   - .~   -   _   -
                                                 Supplemental Schedules




Schedule   of Operations   by Fund Activity
                                                                                                                              1
                                              FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1988
                                                         (DOLLARS IN THOUSANDS)
                                                                 GENERAL FUND    SUPER FUND CONSOLIDATED
                                                                APPROPRIATIONS APPROPRIATIONS BALANCES
                 EXPENSES
                 Grants and Other Assistance                         S2.986,229               $77.498         S3,063,727
                 Contractual       Services                                 468,848           725,696          1,194,544
                 Personnel     Compensation and
                  Fringe Benefits                                           511,712           112,587             624,299
                 Rent, Utllrtles,        and Telephone                      101,903            18,387             120,290
                 Travel,    Printing,      Supplles and
                  Other Expenses                                             90,399            45,653             136,052
                 Depreclatlon                                                17,261             3,840              21,101
                       TOTAL EXPENSES                                     4.176.352           983,661          5.160.013

                 FINANCING SOURCES
                Approprratlons        Expended                            4.135.544           972,947          5,108,491
                Depreclatlon                                                  17,261            3,840              21,101
                Approprlatlons        to be Provided                           1,979               715              2,694
                       TOTAL FINANCING SOURCES                            4.154,784           977,502          5,132,286

                 NET RESULTS OF OPERATIONS                                (521,568)            (56,159)           ($27,727)
                                                                ***************        __
                                                                                       --***********      **************




                                                 Page38
                          FinancialStatements




NOTE a:      RESTATEMENT OP FISCAL              YEAR 1987     FINANCIAL        STATENENTS
The fiscal       year 1987 consolidated           statements       of financial       position,
revenues        and expenses,            and changes      in financial          position        and
reconciliation          to budget have been restated                to correct      identified
errors       in     the   application         of    generally         accepted      accounting
principles.           In total,        these  changes      increased      assets      by $844.7
million,       increased     liabilities       by $910.2 million,          decreased       equity
by $65.5 million          and decreased         net results       of operations         by $28.3
million.

SUPPLEMENTAL ECHEDULES
The following          supplemental          schedules       provide,          by   major  fund
activity,      further       detail        of     assets,       liabilities,           and U.S.
government      equity:      revenue,         financing        sources,        and expenses;
sources    and uses of funds:            and budgeted        and actual        outlays.
General    fund accounts     are used to record             financial         transactions
arising   under congressional        appropriations        or other authorizations
to spend general        revenues.         EPA is managing             49 general           fund
accounts,    of which 6 are funded by current-year                 appropriations,            11
have unobligated     balance    carryovers       from previous         fiscal      years,and
18 cannot     incur  new obligations.           The remaining         14 are suspense,
receipt,    and deposit    accounts.        In addition,        the general         fund has
been combined with a small certification               revolving        fund and the GSA
Building    Fund for financial        reporting      purposes.
Superfund      accounts    are used to record          transactions      arising     from
the fulfillment         of EPA's responsibilities            under CERCLA and SARA.
 (See note 7.)         The Superfund   program       activity       has been combined
with     two     smaller     program   activities            covering    the     Leaking
Underground        Storage     Tanks  Trust       Fund      and the     Miscellaneous
Contributed       Funds.




                          Page36
                          Financial Statements




sufficient      funds are unavailable        to make such payments,            the Agency
has authority       to request    special    appropriations       for such purposes.
The Agency has indemnified              approximately        1,000 contractors         and
subcontractors.         Because of the newness of this              program,      and the
lack of an actuarial        base, the potential         financial    liability      of the
Agency is indeterminate          at this    time.
EPA is       a party     in various    administrative                    proceedings,      legal
actions,      and claims   brought  by, or against,                it.       These include:
*      Various  personnel actions,    suits    or claims                   brought    against
       the Agency by employees     and others.
*      Various       contract,        assistance,        and     program     claims    and
       counterclaims          brought    against     the Agency by vendors,
       grantees,      and others.        Outstanding      claims     totaled   in excess
       of $29.2 million          and $17.4 million        as of September        30, 1988
       and 1987, respectively.
*      The legal      recovery    of EPA's Superfund          costs  incurred     for
       pollution      cleanup    of specific     sites,     to include     the
       collection       of fines   and penalties        from responsible       parties.
*      Claims against        recipients        for improperly         spent assistance
       funds,     which may be settled             by a reduction        of future       EPA
       funding     to the grantee         or the provision          of additional
       grantee     matching     funds.       As of September          30, 1988 and 1987,
       approximately        $32.2 billion           and $33.7 billion           respectively,
       of EPA payments         to units       of state     and local        governments        for
       construction       of wastewater          treatment    facilities          are awaiting
       audit.       EPA believes        that     recovery    of any improperly              spent
       costs will      not be material           to its financial          statements.
In the       opinion      of EPA's management         and General     Counsel,                  the
ultimate       resolution      of legal     actions     still pending     will                  not
materially       affect    EPA's operations      or financial  position.

Note    7: Uajor     Activities
Superfund      Program     Activities
On December           11,      1980,       Congress     passed       the       Comprehensive
Environmental        Response,       Compensation,       and Liability           Act of 1980
 (CERCLA), commonly referred                to as "Superfund."           This Act created
the Hazardous         Substance       Response Trust        Fund and authorized               $1.6
billion      over the period        FY 1981-1985.      The Trust Fund, administered
by the U.S. Treasury,             was established      to provide        money to respond
to      actual    or     threatened          releases    of     hazardous         substances,
pollutants,       or contaminants          that may endanger public            health       or the
environment.              This     Act      authorizes      funding       for      liability,
compensation,          cleanup,        and emergency         response        for     hazardous
substances       released       into     the environment         from uncontrolled             and
abandoned hazardous            waste sites.




                           page34
                                     Financial Statements




croci                            ',ildin,~~;~'~'~~~~ember                      30,       1988     and    1987,
I       respectively,            consisted        of the following:
                                         September          30.1988            September         30.    1987
                                                            (Dollars   in   thousands)
        Land:
         cost                               $      2.676                         $       2.668
        Building:
         cost                                     70,584                               64,443
         Accumulated
           Depreciation                               0                                    0
         Book Value                               70.584                               64.443
        Equipment:
         cost                                    267,208                             239,038
         Accumulated
          Depreciation                          (211,979)                            (190.878)
         Book Value                                55,229                               48,160
        Library    Volumes:
         cost                                     13,896                               13,351
         Accumulated
           Depreciation                               0                                    0
          Book Value                              13.896                               13.351
        Property   and
         Equipment                              5142.385                              $128,622


        Note    5:      Leases

        The Agency        leases    office    and laboratory          space,                    copiers     and
        computers     from GSA and from commercial             sources.      All                   leases   are
        considered     to be operating     leases rather       than capital                     leases:   some
        may be cancelled         without    penalty      cost     and expire                     at variable
        intervals.      Lease payments during       fiscal    year 1988 and                     1987 totaled
        $83.2 million       and $94.7 million,      respectively.
        The majority       of EPA's office     space is leased    through     GSA, while
        the majority      of the leased laboratory    space is leased directly        from
        commercial      sources.    Rates charged to EPA by commercial       sources are
        based upon appraisals         of comparable   space, while     GSA's rates      are
        approximations       based upon appraisals.     During fiscal    year 1988, EPA
        did not cancel        any leases.    EPA does not foresee      any termination
        of leases      in the near future.




                                      Page32
                               Financial Statements




Note     3:    Receivables                                                                                               I
                                                                                                                         I
Receivables,              as    of September           30,      1988   and    1987,      respectively,                   I
consisted    of          the    following:
                                                   September     30,            September        30,
                                                        1988                          1987
                                                         (Dollars            in thousands)
 Advances

  Other        federal         agencies            $      9,948                 $       4,898
    The public                                            4,923                       11,611
    EPA employees                                              777                         653

 Total        Net Advances                              15,648                        17.162
 Accounts         Receivable
    Other       federal         agencies                     3,431                      2,303
    The public                                          87,805                        84,309

 Less:     Allowance     for
  doubtful      accounts                               j’63.913).                     (61.798)
 Total  Net Accounts
  Receivable                                            27,323                         24,814

 Loans        Receivable          (A,     B)
  Due through  July                31, 2008,
  at interest  rates                of up
  to 6.125 percent                                      71,643                         51,297
 Interest         on loans         receivable                  276                         360
 Total    Loans Receivable
 (including     interest)                               71,919                         51.657
 Total        Net Receivables                      $114.890                            u,633-

A. The Asbestos                School      Loans
The Asbestos    School     Hazard    Abatement      Act of 1984 (ASHAA),                 as
amended by the Asbestos          Hazard   Emergency      Response        Act of 1986
 (AHERA), gives   EPA the lead responsibility              to compile        technical
information   on asbestos,      to develop      procedures       and standards         for
both public   and private     local    educational      agencies       (LEAS) to use
in abating   asbestos    hazards,     and to provide        financial       assistance
to    LEAS on a school-by-school           basis     to    carry      out    abatement




                                Page30                                        GAO/~SO-20Environmental    Protection Agency
              FinancialStatements




participated      in the Civil      Service      Retirement     System (CSRS).
Contributions        to the plan      are based on 7 percent                of the
employees'       gross     pay,    to    which       EPA made a matching
contribution.         EPA pension    contributions        for the years
ending     September    30, 1988 and 1987, totaled            approximately
$25.7 million       and $27 million,        respectively.
On January       1, 1987, the Federal              Employees'         Retirement         System
 (FERS) was implemented,             pursuant        to Public        Law 99-335.           This
is a defined        contribution         retirement         plan and is            comprised
of a Social       Security       Benefits       Plan, a Basic Benefit                 Plan,
and a Savings        Plan.       Generally,        it is mandatory              for all
employees      hired     on or after        January        1, 1984.         Employees
hired    before     January      1, 1984, had the option                  until     December
31, 1987, to elect             to transfer        coverage         from CSRS (extended
to June 30, 1988, for extenuating                      circumstances).
Contributions        to the plans are based on a percentage                            of the
employees'       gross pay.        Under the Thrift              Savings        Plan,
employees      can also elect          additional          contributions           between 1
and 10 percent         of their      gross pay and EPA will                  match up to 4
percent     of the employee-elected                 contribution.            EPA also pays
 1 percent     of the employees'             salary      into the Thrift            Savings
Plan.      FERS and Thrift         Savings       employer         contributions          for
the years ended September                30, 1988 and 1987, totaled
approximately         $19.5 million          and $10.7 million,               respectively.
EPA matches the employees'       FICA and Medicare          contributions.
FICA and Medicare     employer's   contributions        for the years
ended September    30, 1988 and 1987, totaled           approximately
$17.3 million   and $12.5 million,        respectively.
EPA does not report      CSRS or FERS assets,     actuarial     present
value    of accumulated   plan benefits,      or unfunded   liabilities
applicable    to its employees,    since this    data is maintained
by the Office    of Personnel    Management and is not allocated
to individual    departments    and agencies.
The General      Services  Administration        (GSA) provides     many
services    to the EPA, such as procurement           and
telecommunications,       which are charged through          interagency
billings    as goods are shipped         or services   are rendered.
The EPA contracts        for a wide range of goods and services
through     interagency     agreements     with other     federal    agencies
and units      of state    and local     governments    (reimbursable       only)
which,    for the fiscal       years ended September         30, 1988 and
1987, amounted to approximately              $108.9 million       and $102.9
million     in expenditures       and $33.9 million       and $31 million
 in reimbursements,        respectively.
The U.S. Treasury       accounts     for   and reports      the financial
activity   of the Hazardous      Substance    Response Trust     Fund,
which receives    funds from taxes on petroleum           and chemicals,
an environmental     tax on corporations,       congressional




               Page28                                      GAO/AFMD-80-20Environmental Protection Agency
                          FinancialStatements




Future      financing        sources      represent       future       appropriations       to be
provided       to finance       annual      leave accrued        as earned but not taken.
The current          year      change      in the      accrual        is    recognized      as an
operating         expense      with    a corresponding             recognition         as current
revenue       in the form of an Appropriation                        to be Provided.            The
recognition           of    the      current       period        revenue        results      in   a
corresponding          increase      over the prior          year balance          in the future
financing        source asset account.
The statement     of changes in financial  position     and reconciliation
to budget    presents   a reconciliation  of operating      expenses       on an
accrual   basis with cash basis budgetary     expenditures.

Advances
Repayable     advance from the U.S. Treasury                  represents   the liability
of EPA's general         fund for advances         received      by the Superfund      Trust
Fund.     In fiscal     years 1988 and 1987, the repayable               advance balance
was $734.0 million         and $848.0 million,           respectively.      The repayment
of $114.0 million,          during    fiscal    year 1988, is excluded          from EPA's
Statement      of Revenues         and Expenses.            The remaining      balance      is
repayable      by December 31, 1991.              Repayments        are made to the U.S.
Treasury's      general      fund after      consultation        with the U.S. Treasury
and Office      of Management and Budget.
Advances        receivable        represent        funds paid        to employees          (such as
travel     advances),        other federal        agencies,       contractors,        and grantees
for goods or services:                 amounts       advanced       for goods and services
which have not been received:                   or unspent       funds which have not been
returned.          These advances          include      an accrual        of $2.4 million        and
$6.7     million        for     fiscal       years      1988 and 1987,             respectively,
representing           EPA's      estimate       of drawdowns            by letter-of-credit
recipients         for which costs have not yet been incurred.                             Advances
payable      represent        funds paid to EPA by other                 federal      agencies   and
grantees       to purchase         goods and services            on their      behalf     and prior
to EPA providing            the goods and/or           services.

Land,     Buildings,      and Equipment
Land, buildings,           and equipment       with a cost greater          than $5,000 and
a useful        life    of 2 years       or greater        are capitalized.             Library
volumes       are capitalized        without       regard    to dollar       value     minimum.
The Agency's           procedure      is     not     to   calculate        depreciation         on
buildings        or library     volumes;      on equipment,         it is calculated         on a
straight-line         basis    over an estimated          useful      life  of 5 years.
Annual,      Sick,     and Other     Types    of   Leave
Employee's  annual leave is accrued as it is earned,           and the accrual
is reduced as leave is taken.        At least   once per year,     the balance
in the accrued     leave  account   is adjusted     to reflect     current     pay
rates   of cumulative    annual   leave    earned    but not taken.        Senior




                           Page26                                     GAO/~8820          EnvimnmentalProteetionAgency
                                                  Financial Statements




Consolidated     Statement   of Changes   in Financial   Position and Reconciliation    t0 Budget


                                 FOR THE FISCAL YEAR ENDED SEPTEMBER30,                    1968
                                          (DOLLARS IN THOUSANDS)
               RESOURCESUSED:                                                                     1968                1967
                                                                                                                   (RESTATED)
               operating      uses:
               Operating      Expenses                                                         55,160,013             $4,949,368
               Items (Provldlng)         Requlrlng   Funds:
                 Depreclatlon       (Notes 1, 4)                                                      (21,101)            (18,838)
                 Loss on Property                                                                     ':p;                 (8,897)
                 Unfunded Annual Leave                                                                                      13,324)
                 Superfund Claims                                                                     (20:5001                    0
                 Increase     (Decrease)    in Other Advances,
                   Accounts and Loans Receivable,           Net                                        21.257             (19,408)
                 Decrease (Increase)         rn Accounts Payable         and Accruals                (271,245)             10,555
                     Funds Used by Operations                                                     4,850,390            4,909,456
               Non-Operatrng    Uses:
               Acqulsltlons    of Property     (Note 1)                                                50,204              24,348
               Net Transfers    Out                                                                   125,055             650,000
               Funds Transactions     Included     In Outlays                                          (8,521)            l27,C99)
               NET RESOURCESUSED (BUDGETARY OUTLAYS)                                                5,017,128          5,556,705
               RESOURCESPROVIDED:
               Current  Year Approprlatlon                                                          5,027,457          5,364,187
               Net Transfers  In and Other                                                              56,423            590,664
               NET RESOURCS PROVIDED                                                                5,085,880          5.954,851
               INCREASE IN U.S.TREASURY FUNDS                                                           60,752            398,146

               U.S.TREASURY FUNDS: BEGINNING OF YEAR                                           10,279,970              9,881.824
               U.S.TREASURY FUNDS; END OF YEAR                                                  $10,348,722          $10,279,970
                                                                                          t*Lll=il=llllli                 _----_
                                                                                                                 IfSPI=------,zli
               The accompanying      notes    are an Integral         part   of these     statements.




                                                    Page24
Financial Statements


Consolidated   Statement   of Financial   Position


                                                         AS OF SEPTEMBER30. 1968
                                                          (DOLLARS IN THOUSANDS)
                                                                                     1988                1987
                           ASSETS                                                                     (RESTATED)
                           Funds with U.S. Treasury      (Note 11                  $10,348.722         s10,279,970
                           Advance to the Trust Fund                                    733,955             848,000
                           Other Advances, Accounts and Loans
                            Receivable.     Net (Notes 1. 3)                           114,890               93,633
                           Land, Bulldings,     and Equi&nent,
                            Net of Accumulated     Depreclatlon
                            (Notes 1, 4)                                               142,385              128,622
                           Future Flnanclng     Sources                                 40,864               38,170
                           TOTAL ASSETS                                             11.380.816          11.388.395

                           LIABILITIES       AND EQUITY
                           LIASILITIES
                           Repayable Advance From Treasury                             733,955              848,000
                           Accounts Payable and Accruals:
                            To the Public                                              365,395              246,724
                            To Other Federal Agencies                                  201,836               80,152
                           Other Advances:   (Note 1)
                            From Other Federal    Agencies                               22.306              35,672
                            From The Public                                              24,034              11,925
                           Amounts Due to Treasury                                       99,243              76,472
                           Accrued Payroll   and Leave                                   79,852              67,782
                           Superfund  Claims                                             20,500                    0
                                TOTAL LIABILITIES                                    1,547,121            1,366,727

                           Commitments       and Contingencies        (Note   6)
                           QUITY     OF THE U.S. GOVERNMEhT
                           Unexpended Approprlatlons:            (Note 1)
                             Unobligated     Balances                                1,254,313            1,913,682
                             Unllquldated       Obligations:
                              Grants and Other Assistance                            7,416,903            7,179,701
                              Contracts    and Other                                 1,151,442               915,158
                           Invested     Capital      (Note 1)                           214,304              179,919
                           Cumulative     Results      of Operations                   (203,267)            (166,792)
                                TOTAL EQUITY                                         9,833,695           10,021,668
                           TOTAL LIABILITIES           AND EQUITY               $11,380,816           $11,388,395
                                                                            1111113111111*x1  ILIIILIII=IIII==
                           The accompanying          notes    are an integral   part of these statements.




                                                     page22                                 GAO/AF’MD-W-20Environmentnl Protection Agency
                      Report on Internal Accounting Controls




                      (5) accounts receivable. and (6) financial reporting. Although we did not
                      consider these weaknesses to be material to the fair presentation of the
                      consolidated financial statements, they nonetheless merit management’s
                      attention.

                      During the last half of 1989, EPA conducted an assessment of its internal
                      controls and audit follow-up. This effort, performed as part of a special
                      review of government management and integrity at the request of the
                      Director of the Office of Management and Budget, identified several
                      areas which need to be improved and strengthened. The areas identified
                      were the Superfund program, contract and property management. the
                      new Integrated Financial Management System, audit follow-up, the
                      enforcement program, and scientific equipment and facilities. The
                      results of this assessment and our audit offer EPA management the
                      opportunity to focus its attention on pursuing actions needed to reduce
                      risk by strengthening EPA management control practices.


                      Although we did not obtain official agency comments from EPA, we dis-
Comments of           cussed a draft of this report with the Director and Deputy Director of
Cognizant Officials   EPA’S Financial Management Division and representatives of EPA’S Facili-
                      ties Management and Services Division. We have incorporated their
                      views where appropriate. They agreed with our property accounting
                      and control findings conclusions, and recommendations and with our
                      decision to qualify our opinion due to the agency’s property-related
                      weaknesses. In addition, they stated that corrective actions and/or sys-
                      tem improvements were either in process or planned and would, in their
                      opinion, resolve the agency’s property weaknesses over time. These
                      actions included completion of an agencywide physical inventory during
                      fiscal year 1990; testing of a manual interface between the Integrated
                      Financial Management System and the property control system data.
                      which would for the first time permit a manual reconciliation of new
                      acquisitions; and the planned installation of the automated property
                      module for the new financial management system after the end of fiscal
                      year 1990.




                      Page 20                                  GAO/AFMDWZO Environmental Protection Agency
                                  -
              Rrpmt on Intmmal Accounting Controls




              years. In response to our fiscal year 1987 audit results, EIH expanded its
              FMFIA recognition of its property weaknesses by reporting. for the first
              time, a material weakness in internal controls over property. I -ndcr sec-
              tion 2, EPA reported that the property control system and the Financial
              Management System are not integrated. Under section 3, EP.~reported
              that property management and accounting records are not subject to
              adequate controls to ensure accurate data. Our review of ~1~‘s property
              accounting for fiscal year 1988, together with the results reported by
              the Superfund auditor, confirms the continuing existence of material
              weaknesses in both EPA’S accounting system for property and the inter-
              nal control system over property.

              Finally, we were unable to perform audit procedures necessary to test
              the fair presentation of EPA’S $84 million in buildings and libraries
              because we were unable to obtain supporting documentation. EW’S sub-
              sidiary support for buildings consists of files maintained by the Facili-
              ties Management and Services Division. Division representatives were
              unable to provide documentation necessary to establish the ownership,
              age. and cost of buildings. In addition, we found that EPAdoes not record
              depreciation on building assets. EP.4officials informed us that initiatives
              are underway to reconstruct building records; they expect this effort to
              be completed in fiscal year 1990.

              EP.4 records library books as capital assets although the acquisition costs
              of these assets do not meet the minimum capitalization criteria specified
              in GAAP. However, EPA does not maintain a subsidiary record of library
              books, nor does it record related depreciation. Records of library inven-
              tory are maintained by the Information Management and Services Divi-
              sion. Each quarter, EPA adds the obligation amount of volumes
              purchased to the total already recorded. This addition is not adjusted to
              reflect average cost. as required by EPA policy. In addition, the library
              inventory balance is not always adjusted to reflect dispositions or losses
              and was not subject to a physical inventory during fiscal year 1988.


              EPA’S subsidiary accounting system for property and related internal
Conclusions   controls did not adequately account for or maintain control over these
              assets. EPA’S ongoing efforts to correct its property weaknesses provide
              the opportunity to improve accountability for and control over personal
              property. Additional actions are needed to improve the accuracy and
              reliability of accounting data maintained by the subsidiary records as
              well as the internal control environment over property assets. The cur-
              rent property management system did not provide management with


              Page 18                                GAO/AFMD-90.20Envircnmwntal Protrcrion Agrncy
    ltep~rt on Intend Accounting (hWds




    control system. These delays increase the risk that the property lvill be
    lost or misappropriated.
l   Controls governing the recording of property transactions in the prclp-
    erty control system are not effective. Instead of property acquisltlons
    being recorded at the actual cost, as required by EPApolicy and (;.Yw.
    property was recorded in the property control system at the amount
    obligated. Amounts recorded do not reflect the effect of other factors,
    such as discounts, installation charges, and trade-ins. We also found
    many input errors. For example, in EW’S Cincinnati office. a filing cabi-
    net costing $133 was erroneously recorded at $7.6 million. This error
    was not detected in time to prevent a misstatement of EIY’S unaudited
    Financial Statements reported to the Department of the Treasury- for fis-
    cal year 1988. Overall, 41 of 76 items we tested (54 percent) reflected
    differences between the invoices and the amounts recorded in the prop-
    erty control system, resulting in a net property overstatement of
    $10.7 million (21.3 percent of total capital property acquisitions during
    fiscal year 1988).

    EPA officials informed us that changes are underway to improve the
    property control system and address the serious weaknesses in personal
    property management. These initiatives include (1) performance and
    reconciliation of physical inventories of all personal property, (2) addi-
    tional edit checks to prevent the input of erroneous data, and (3) the
    addition of data elements compatible with the general ledger to facilitate
    reconciliation. These efforts, if successful, should bring about significant
    improvements in EPA’S ability to account for and control personal prop-
    erty. However, many of these initiatives were not begun until fiscal year
    1989, and EPA officials do not expect their effects to be realized until
    fiscal year 1990. Consequently, personal property balances appearing in
    fiscal year 1989 financial reports will, in all likelihood, be as unreliable
    as they were in fiscal year 1988. In addition, since the close of fiscal
    year 1988, EPA has implemented a new Integrated Financial Management
    System, which replaced the existing Financial Management System.
    However, implementation of the property module, originally scheduled
    for completion by the end of fiscal year 1990, has been postponed until
    at least fiscal year 1991. As a result, EPA will continue to rely heavily on
    the property control system for the foreseeable future.

    In its Independent Auditor’s Report on Internal Accounting Controls for
    the fiscal year ended September 30, 1988 (issued September 22, 1989).
    Leonard G. Birnbaum and Company, the Superfund auditor, reported
    material weaknesses in EPA’S accounting for and controlling personal
    property. The property weaknesses noted by the Superfund auditor are


    Page 16                              GAO/AFMD-90-20Environmental Protection .4gmcy
                          Report on Internal Accounting Controls




                          was not practical to perform auditing procedures necessary to satisfy
                          ourselves as to the fair presentation of ~~-4’s property balances.

                          Other financial management and control problems uncovered as a result
                          of our first financial audit in 1987 have been resolved. These include the
                          following:

                      l We identified discrepancies totaling over $1.2 billion between EP.4’Sgen-
                        eral ledger and the balances appearing in the financial statements it sub-
                        mitted to Treasury at the end of fiscal year 1986. We also found that
                        these reports were not supported by adequate documentation. Cor-
                        recting these errors required adjustments to EPA’S fiscal year 1987 con-
                        solidated financial statements totaling over $789 million. EP.4
                        subsequently improved the quality of the documentation supporting its
                        external reports, and we did not find similar problems in our fiscal year
                         1988 audit.
                      . We reported discrepancies totaling over $742 million in EPA’S cash,
                        receivable, and receipt account balances. EPA management was unaware
                        of these problems because it had not performed the periodic reconcilia-
                        tions necessary to identify and correct errors and omissions. As a result
                        of our audit, EPA management has placed increased emphasis on recon-
                        ciliation as an internal control technique, and similar reconciliation
                        problems were not found in fiscal year 1988.


                          Our review of EP.4’s property-related general ledger balances for fiscal
Property Assets Are       year 1988 (totaling $354.4 million) disclosed that the internal control
Not Adequately            problems in property management we reported on for fiscal year 1987
Accounted For and         had not been corrected. The material weaknesses we identified included
                          (1) the inability of the property management records to provide finan-
Controlled                cial information, such as cost and depreciation data, needed to account
                          for personal property in accordance with generally accepted accounting
                          principles (GAAP),’ (2) ineffective control over EP.4’Spersonal property
                          assets, and (3) the lack of supporting documentation for EPA’S libraries
                          and buildings.

                          Both GAAP and the Office of Management and Budget’s Financial Man-
                          agement and Accounting Objectives require that property records pro-
                          vide accountability for assets by maintaining financial information
                          needed to account for and control property. Property records should

                           ‘GAO’s Policy and ProceduresManual for Guidanceof FederalAgenaes.Title 2. “Accountmg Pnncl-
                           pies and Standards.”



                           Page 14                                  GAO/~90-20       Environmental Protection Agency
Report on Internal Accounting Controls


                   We have audited the consolidated financial statements of the Environ-
                   mental Protection Agency (EPA) for the fiscal years ended September 30.
                    1988 and 1987, and have issued our opinion thereon. This report per-
                   tains only to our study and evaluation of EPa4’ssystem of internal
                   accounting controls for the fiscal year ended September 30, 1988. Our
                   report on our study and evaluation of EP,4’Ssystem of internal account-
                   ing controls for the fiscal year ended September 30. 1987, is presented in
                   GAO AE’MD-SR-~4,dated February 9, 1989.

                   As part of our audit, we made a study and evaluation of EP.4’s system of
                   internal accounting controls to the extent we considered necessary to
                   evaluate the system as required by generally accepted government
                   auditing standards. The purpose of our study and evaluation was to
                   determine the nature. timing, and extent of the auditing procedures nec-
                   essary for expressing an opinion on the agency’s consolidated financial
                   statements. For purposes of this report, we have classified the signifi-
                   cant internal accounting controls into the following categories:

              . obligations,
              l disbursements.
              l grants.
              . payroll,
              l property,
              . receivables and receipts, and
               lfinancial reporting.

                   Our study and evaluation included all of the categories listed above.
                   However, we did not evaluate the internal accounting controls over all
                   functions within each category because it was more efficient to expand
                   our substantive audit tests.

                   In planning the timing and extent of our work, we considered the inter-
                   nal control testing performed by Leonard G. Birnbaum and Company,
                   Certified Public Accountants, as part of its financial and compliance
                   audit of EPA’S fiscal year 1988 obligations and disbursements charged to
                   the Superfund appropriations. We reviewed and evaluated its internal
                   control testing and concluded that we could rely on the testing and
                   results to augment our work. Accordingly, we have incorporated its
                   findings and recommendations in our report, where appropriate.

                   EPA’S management is responsible for establishing and maintaining a sys-
                   tem of internal accounting controls in accordance with the Accounting
                   and Auditing Act of 1950 and the Federal Managers’ Financial Integrity


                   Page 12                           GAO,‘AF’MD-90.20Envimnmentel Protection Agency
                                B-218351




EPA’s New Integrated During   fiscal year 1989, EPA began operating a new Integrated Financial
                     Management System. EPA experienced problems with converting data
Financial Management from its old system to its new system, as well as problems with certain
System               transactions being incorrectly recorded in the new system. ,4s a result,
                     during fiscal year 1989, EPA could not obtain cumulative trial balances
                                or perform automated month-end and year-end reporting from the gen-
                                eral ledger account balances. For fiscal year 1989. the new system’s
                                reporting features did not provide accounting information in a manner
                                that satisfied agency needs. In addition, EPA could not reconcile, on a
                                timely basis, its general ledger and external Treasury reports because
                                reports at the necessary level of detail were not yet available.

                                EP.4 management   has recognized these system problems. The new system
                                software is reported as an area of concern in EPA’S fiscal year 1989
                                report to the President required by the Federal Managers’ Financial
                                Integrity Act. We concur with the assessment of EPA management that
                                these problems warrant its priority attention and resources.




                                Charles A. Bowsher
                                Comptroller General
                                of the IJnited States

                                July 5, 1989




                                 Page 10                         GAO/AFMD+W20 Environmental   Protection Agency
                              8216351




                              The current authorization for EPA'S Superfund program expires in Octo-
I‘ ll LalLLlalvvl Jition of   ber 1991. While approximately $7 billion in authorized funds remain.
EPA’s Superfund               EPA estimates that it will need $30 billion to pay for and oversee the
Program                       cleanup of approximately 1,200 of the nation’s most hazardous waste
                              sites. However, because of EPA'S experience to date and certain limita-
                              tions in its estimating methodology, we believe that the is30 billion fig-
                              ure is low. As the Congress begins its deliberations on reauthorizing this
                              important environmental statute, we believe the following financial
                              information on the program’s operations and funding mechanism Rill be
                              helpful to the discussion.


Superfund Authorization       The Comprehensive Environmental Response, Compensation, and Liabil-
                              ity Act of 1980 (CERCLA). as amended by the Superfund Amendments
                              and Reauthorization Act of 1986, authorized ~7.4 to respond to releases
                              of hazardous substances which threaten human health and the environ-
                              ment. In total. the Congress has authorized $10.1 billion to be made
                              available in annual appropriations through fiscal year 199 1. To finance
                              these appropriations. the statutes authorized the creation of the Hazard-
                              ous Substance Superfund, a trust fund managed and maintained by the
                              Department of the Treasury. The current financing for the trust fund is
                              derived from (1) an environmental tax on corporations. (2) taxes on
                              petroleum and chemicals, (3) appropriations from the general fund of
                              the U.S. Treasury, (4) costs recovered from responsible parties, and
                              (5) fines, penalties, and interest earned on invested funds. The portion
                              of the trust fund balance made available through appropriations is
                              under EPA'S control and accounted for in its financial statements. I%
                              fiscal years 1981 through 1988, EP.4 has been appropriated approxi-
                              mately $4.4 billion of the $10.1 billion authorized.


Superfund Program             As authorized by CERCLA and its amendments. WA'S Superfund program
Activity                      is responsible for identifying and prioritizing waste sites and seeing that
                              the nation’s most hazardous sites are cleaned up. Once potential waste
                              sites have been identified, EPA begins a process of evaluating the extent
                              and nature of the threat they pose to public health and the environment.
                              This process includes a preliminary site assessment and a site inspec-
                              tion. Those sites posing the most serious threat are placed on the
                              National Priorities List (KPL). KPLsites receive priority cleanup attention
                              and are generally eligible for Superfund-financed remedial action.




                              pages                             GAO/AFMD-90-20 Environmental   Protection Agency
GAO
      United States
      General Accounting  Office
      Washington, D.C. 20548

      Comptroller   General
      of the United States

      B-216351

      To the Administrator
      Environmental Protection Agency

      We have audited the accompanying consolidated statements of financial
      position of the Environmental Protection Agency (EPA) as of September
      30. 1988 and 1987. and the related consolidated statements of opera-
      tions and changes in financial position and reconciliation to budget for
      the fiscal years then ended. These consolidated financial statements are
      the responsibility of EPA’S management. Our responsibility is to express
      an opinion on these statements based on our audits. In addition to this
      report on our audits of EPA’S fiscal years 1988 and 1987 consolidated
      financial statements, we are also reporting on our consideration of EPA’S
      system of internal accounting controls and compliance with laws and
      regulations.

      We conducted our audits in accordance with generally accepted govern-
      ment. auditing standards. Those standards require that we plan and per-
      form the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. Our audits
      included examining, on a test basis, evidence supporting the amounts
      and disclosures in the financial statements. Because EPA’S principal
      financial activities consist of grants and contracts, our audits examined,
      on a test basis. internal controls over the award and disbursement pro-
      cess related to grant and contract agreements. Financial and compliance
      audits of the amounts charged to these agreements by grantees and con-
      tractors are performed by other auditors under provisions of federal
      laws and regulations. Our audits also included evaluating the overall
      presentation of the financial statements as well as assessing the
      accounting principles used and significant estimates made by manage-
      ment in its development of the financial statements. We believe that our
      audits provide a reasonable basis for our opinion.

      As we stated in our report on EPA’S fiscal year 1987 consolidated state-
      ment of financial position (GAO/AFMD-89-24),     fiscal year 1987 was the
      first year that EPA prepared consolidated financial statements in accor-
      dance with generally accepted accounting principles. Because our audit
      did not commence until July 1987. it was not practical to perform vari-
      ous auditing procedures to determine whether, as of the beginning of
      fiscal year 1987. assets, liabilities, equity. and related revenues and
      expenses were recorded in the proper accounting period. Accordingly,
      we do not express an opinion on the consolidated statements of opera-
      tions and changes in financial position and reconciliation to budget for
      the fiscal year ended September 30. 1987.


       Page 6                           GAO/AFMIMO-20 Environmental   Protection Agrncq
Contents


Letter
Opinion Letter
Report on Internal
Accounting Controls    Property Assets Are Kot Adequately Accounted For and
                           Controlled
                                                                                                     14

                       Conclusions                                                                   18
                       Recommendations                                                               19
                       Other Opportunities for Improvement                                           19
                       Comments of Cognizant Officials                                               20

Report on Compliance
With Laws and
Regulations
Financial Statements
                       Consolidated Statement of Financial Position                                  22
                       Consolidated Statement of Operations                                          23
                       Consolidated Statement of Changes in Financial Position                       24
                           and Reconciliation to Budget
                       Notes to Financial Statements                                                 25

Supplemental                                                                                         37
Schedules              Schedule of Financial Position by Fund Activity
                       Schedule of Operations by Fund Activity
                                                                                                     37
                                                                                                     38
                       Schedule of Changes in Financial Position and                                 39
                           Reconciliation to Budget by Fund Activity




                       Page 4                           GAO/AFMD-90-20 Environmental   Protection Agency
                 -
  5216351




. We identified discrepancies totaling over $1.2 billion between EPA'S gen-
  eral ledger and the balances appearing in the financial statements it sub-
  mitted to Treasury at the end of fiscal year 1986. We also found that
  these reports were not supported by adequate documentation. Cor-
  recting these errors required adjustments to EPA'S fiscal year 1987 con-
  solidated financial statements totaling over $789 million. EPA
  subsequently improved the quality of the documentation supporting its
  external reports. and we did not find similar problems in our fiscal year
   1988 audit.
. We reported discrepancies totaling over $742 million in EPA'S cash,
  receivable, and receipt account balances. EPA management was unaware
  of these problems because it had not performed the periodic reconcilia-
  tions necessary to identify and correct errors and omissions. As a result
  of our audit, EP.4 management has placed increased emphasis on recon-
  ciliation as an internal control technique, and similar reconciliation
  problems were not found in fiscal year 1988.

  In 1989, while we were completing our fiscal year 1988 audit, EPA con-
  verted to a new integrated financial management system and, in the pro-
  cess, experienced problems. These problems have not yet been resolved
  and will require the full attention of EPA financial management person-
  nel. EPA'S management has taken the position that dealing with the sys-
  tem problems warrants its priority attention and resources. For that
  reason, we will not conduct a fiscal year 1989 audit. It is vital, however,
  that the improvements realized and corrective actions underway to
  improve control over property not be lost while the problems with the
  new system are being addressed. In order to continue the progress begun
  with our audits, we will monitor EPA'S efforts to improve its system and
  work with the agency to determine when to resume financial audits.

   We are sending copies of this report to the Director of the Office of Man-
   agement and Budget, the Secretary of the Treasury, and the Administra-
   tor of the Environmental Protection Agency.




   Charles A. Bowsher
   Comptroller General
   of the United States




   Page2