oversight

Financial Audit: Food and Nutrition Service's Financial Statements for Fiscal Years 1988 and 1987

Published by the Government Accountability Office on 1990-12-21.

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

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                        FINANCIAL AUUIT
                       Food and Nutrition
                       Service’s Financial
                       Statements for Fiscal
                       Years 1988 and 1987


                                       142865




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GAO
          United States
          General Accounting Office
          Washington, D.C. 20548

          Accounting and Financial
          Management Division

          B-231263

          December 21,1QQ0

          The Honorable Clayton K. Yeutter
          The Secretary of Agriculture

          Dear Mr. Secretary:

          This report presents the results of our financial audit of the Food and
          Nutrition Service (FNS).

          Our report includes:

      . an unqualified opinion accompanying FNS'Sfinancial statements for the
        fiscal years ended September 30,1988 and 1987;
      l an evaluation of FNS'Ssystem of internal control which indicates high-
        risk conditions requiring prompt remedial actions; and
      l a report on FNS'Scompliance with laws and regulations which discusses
        one instance of noncompliance.

          FNShas some material internal control weaknesses which have not been
          fully reported in its FMFIA reports. Briefly, we found that:

      l   FNSis not adequately monitoring the states’ control over food coupons.
          Without proper monitoring, FNScannot be sure that the states are main-
          taining the controls necessary to prevent coupons from being lost,
          stolen, or misappropriated. A serious risk exists that losses, thefts, and
          misappropriations will go undetected.
      l   FNS'Sfinancial reporting process does not produce reliable results. Mate-
          rial audit adjustments were required to present the historical financial
          statements included in this report in accordance with generally accepted
          accounting principles. Further, FNS'Syear-end reports to Treasury and
          the Office of Management and Budget are inaccurate.

          This report contains recommendations to you to deal with these
          problems. The head of a federal agency is required by 31 U.S.C. 720 to
          submit a written statement on actions taken on these recommendations
          to the Senate Committee on Governmental Affairs and the House Com-
          mittee on Government Operations not later than 60 days after the date
          of this letter and to the House and Senate Committees on Appropriations
          with the agency’s first request for appropriations made more than
          60 days after the date of this letter.




          Page 1                                 GAO/AFMD-913   Food and Nutrition   Service
B-231263




We are sending copies of this report to the Director of the Office of Man-
agement and Budget, the Secretary of the Treasury, the Administrator
of the Food and Nutrition Service, and interested congressional
committees.

Sincerely yours,




Donald H. Chapin
Assistant Comptroller General




Page 2                                 GAO/AFMD-91-3   Food and Nutrition   Service
Page 3   GAO/AFMD-91-3   Food and Nutrition   Service
Contents


Letter                                                                                                        1

Opinion Letter                                                                                                6

Report on Internal                                                                                       10
Accounting Controls    FNS Does Not Always Monitor States’ Control Over Food                             13
                           Coupons
                       FNS’s Financial Reporting Process Does Not Provide                                15
                           Accurate Information
                       Conclusions                                                                       18
                       Recommendations                                                                   19
                       Agency Comments                                                                   19

Report on Compliance                                                                                     21
With Laws and
Regulations
Financial Statements                                                                                     23
                       Statements of Financial Position                                                  23
                       Statements of Operations                                                          24
                       Statements of Changes in Funds With U.S. Treasury                                 25
                       Notes to Financial Statements                                                     26




                       Abbreviations

                       AMS         Agricultural Marketing Service
                       ASCS        Agricultural Stabilization and Conservation Service
                       FMFIA       Federal Managers’ Financial Integrity Act,
                       FNS         Food and Nutrition Service
                       GAAP        generally accepted accounting principles
                       GAO         General Accounting Office
                       OMH         Office of Management and Budget


                       Page 4                                  GAO/AFMD-91-3   Food and Nutrition   Service
Page 5        GAO/AFMD-91-3   Food and Nutrition   Service




         1’
      United States
GAO   General Accounting Office
      Washington, D.C. 20648

      Accounting aud Financial
      Management Division

      B-231263

      To the Administrator
      Food and Nutrition Service

      We have audited the accompanying statements of financial position of
      the Food and Nutrition Service (FNS),an agency of the Department of
      Agriculture, as of September 30,1988 and 1987, and the related state-
      ments of operations and changes in funds with the U.S. Treasury for the
      fiscal years then ended. These financial statements are the responsi-
      bility of FNS’Smanagement. Our responsibility is to express an opinion
      on these financial statements based on our audits. In addition to this
      report on our audit of FNS'Sfiscal year 1988 and 1987 financial state-
      ments, we are also reporting on our consideration of FNS'Ssystem of
      internal accounting controls and on its 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
      include examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements. Our audits also include assessing
      the accounting principles used and significant estimates made by man-
      agement, as well as evaluating the overall financial statement presenta-
      tion. We believe that our audits provide a reasonable basis for our
      opinion,

      As we stated in our report on FNS’Sfiscal year 1987 statement of finan-
                                    fiscal year 1987 was the first year that FNS
      cial position (GAO~AFMD-89-22),
      prepared financial statements in accordance with generally accepted
      accounting principles. Because certain information with regard to
      opening account balances was not readily available, it was not practical
      to perform various auditing procedures to determine whether, as of the
      beginning of fiscal year 1987, assets, liabilities, equity, and related reve-
      nues and expenses were recorded in the proper accounting period.

      Because of the matter discussed in the preceding paragraph, the scope
      of our work was not sufficient to enable us to express, and we do not
      express, an opinion on the statement of operations and changes in funds
      with the U.S. Treasury for the fiscal year ended September 30,1987.

      The fiscal year 1987 financial statements have been restated to include
      $1.8 billion of food commodities, received from the Department of Agri-
      culture’s Agricultural Stabilization and Conservation Service (ASCS)and


      Page 6                                  GAO/AFMD-91-3   Food and Nutrition   Service
    B-231283




    its Agricultural Marketing Service (AMS), that have been distributed to
    states for child nutrition and other programs. (See notes 1 (I) and 6 to
    the financial statements.) These amounts are shown on the statement of
    operations as an additional financing source and as an offsetting oper-
    ating expense. Also, as discussed in note 1 (I), the fiscal year 1987 finan-
    cial statements have been restated to recognize certain other corrections
    and revisions of estimates.

    As reported in our 1987 report, and as described in notes 1 and 4, the
    liability for unredeemed food coupons was reduced by $477 million. For
    several years, the amount of food coupons issued exceeded the amount
    of food coupons redeemed, thereby resulting in an increase in the lia-
    bility for unredeemed food coupons. This condition occurred because FNS
    did not reduce the liability for unredeemed food coupons by the value of
    food coupons (1) that were undeliverable and returned to inventory and
    (2) that actual experience indicated would never be redeemed. Because
    the increase in this account had taken place over a number of years, it
    was not practical for FNSto determine the periods to which the adjust-
    ment should be applied. As a result, FNSincluded the entire amount of
    the adjustment in the statement of operations in fiscal year 1987.

    Finally, as discussed in our report on internal accounting controls, FNS
    has material internal control weaknesses which have not been fully
    reported in its Federal Managers Financial Integrity Act (FMFIA) reports.
    Briefly, we found that:

l   FNSis not adequately monitoring the states’ control over food coupons.
    Without proper monitoring, FNScannot be sure that the states are main-
    taining the controls necessary to prevent coupons from being lost,
    stolen, or misappropriated. A serious risk exists that losses, thefts, and
    misappropriations will go undetected.
l   FNS'Sfinancial reporting process does not produce reliable results. Mate-
    rial audit adjustments were required to present the historical financial
    statements included in this report in accordance with generally accepted
    accounting principles. Further, FNS'Syear-end reports to Treasury and
    the Office of Management and Budget are inaccurate.

    The above material internal control weaknesses did not preclude us
    from expressing an opinion on FNS'Sfinancial statements because we
    extended our audit procedures.




    Page 7                                  GAO/AFMD-91-S   Foodand   Nutrition   Service
              B231263




              In our opinion, the statements of financial position as of September 30,
GAO Opinion   1988 and 1987, and the related statements of operations and changes in
              funds with the US. Treasury for the year ended September 30,1988,
              present fairly, in all material respects, the financial position of the Food
              and Nutrition Service at September 30, 1988 and 1987, after restate-
              ment, and the results of its operations and changes in funds with the
              U.S. Treasury for the year ended September 30,1988, in conformity
              with generally accepted accounting principles,




              Donald H. Chapin
              Assistant Comptroller    General

              August 1,199O




              Page 8                                  GAO/AF’MD-91-3   Faad aud Nutrition   Sesvice
Page 9   GAO/AFMD-91-Q   Food and Nut&ion   Service
Report on Internall Accounting Controls


                   We have audited the accompanying financial statements of the Food and
                   Nutrition Service (FNS) for the fiscal years ended September 30, 1988
                   and 1987, and have issued our opinion thereon. This report pertains
                   only to our study and evaluation of FNS'Ssystem of internal accounting
                   controls for the fiscal year ended September 30, 1988. Our report on the
                   study and evaluation of FNS'Sinternal accounting controls for the fiscal
                   year ended September 30, 1987, is presented in GAO/AND-89-22, dated
                   March 16, 1989.

                   As part of our audit, we made a study and evaluation of FNS'Ssystem 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 FNS’Sfinancial statements, For pur-
                   poses of this report, we have classified the significant internal
                   a.ccounting controls into the following categories:

               9 food coupon issuance,
               . food coupon redemptions,
               l grants/disbursements,
               l expenditures,
               . asset and liability management,
               l treasury, and
               l financial reporting.

                   Our study and evaluation included all of the control categories listed
                   above except for the treasury category. For that category, we found it
                   more efficient to expand the scope of our substantive tests. Substantive
                   audit tests can also serve to identify weaknesses in internal control poli-
                   cies and procedures.

                   FNS'Smanagement is responsible for establishing and maintaining a
                   system of internal accounting controls in accordance with the
                   Accounting and Auditing Act of 1960 and the Federal Managers’ Finan-
                   cial Integrity Act of 1982 (FMFIA). FMFIA responsibilities are described in
                   a July 6,1990, Office of Management and Budget (OMB) memorandum
                   and Circular A-123, which requires an annual review and report on the
                   reliability of each agency’s internal control system. In fulfilling this
                   responsibility, estimates and judgments by management are required to
                   assess the expected benefits and related costs of internal control proce-
                   dures. The objectives of a system of internal accounting controls are to
                   provide management with reasonable assurance that (1) obligations and


                   Page 10                                 GAO/AFMD-913   Food and Nutition   Service
                             Report on Iutemal   Accounting   Controls




                             costs are in compliance with applicable laws, (2) funds, property, and
                             other assets are safeguarded against waste, loss, and unauthorized use
                             or misappropriation, and (3) assets, liabilities, revenues, and expendi-
                             tures applicable to agency operations are properly recorded to permit
                             the preparation of reliable financial and statistical reports and to main-
                             tain accountability over agency assets. Because of inherent limitations
                             in any system of internal accounting controls, errors or irregularities
                             may nevertheless occur and not be detected. Also, projection of any
                             evaluation of the system to future periods is subject to the risk that pro-
                             cedures may become inadequate because of changes in conditions, or
                             that the degree of compliance with the procedures may deteriorate.


Management’s Review of       FNSevaluated its system of internal accounting controls in accordance
Internal Controls            with FMFIA. In November 1988, FNSreported to the Secretary of Agricul-
                             ture that its internal control system, taken as a whole, complied with the
                             requirement to provide reasonable assurance that internal control objec-
                             tives were achieved. Nevertheless, FNSalso reported that several mate-
                             rial weaknesses existed in its system of internal controls. These
                             weaknesses included the following:

                         l   the accounting records were not adjusted for the value of food coupons
                             returned to inventory, thus overstating the food coupon redemption
                             liability;
                         l   external financial statements were not based on an accounting process
                             that obtained its accounting data from a general ledger, which resulted
                             in erroneous reporting; and
                         l   the accounts receivable subsystem produced erroneous external reports,
                             and FNShad been unable to reconcile this subsystem with the general
                             ledger.

                             FNShas initiated corrective action on these weaknesses, but it has not
                             yet resolved them.

                             The 1988 FMFIA report also contained FNS'Sannual assessment of its
                             financial management system’s compliance with accounting principles,
                             standards, and related requirements for federal agencies. FNShas one
                             overall accounting system comprised of six subsystems. For five of the
                             six subsystems, FNScharacterized their lack of written backup,
                             recovery, and restart procedures as materially failing to conform with
                             applicable accounting principles and standards. For the sixth subsystem,
                             accounts receivable, three additional material weaknesses were identi-
                             fied: lack of adequate system documentation, lack of interest receivable


                             Page 11                                     GAO/AFMD-91-S   Food aud Nutrition   Service
                             Report on Intmmal   Accounting   Controla




                             computations, and erroneous external reporting. These problems have
                             not been corrected, and FNS'Sfiscal year 1989 FMFIA report continues to
                             cite these material weaknesses. FNSofficials told us they expect to solve
                             these problems by implementing the core component, including accounts
                             receivable, of a new integrated financial management system in 1992.

                             ‘Office of Management and Budget Circular A-127 defines an accounting
                              system as the system, both manual and automated, for recording, classi-
                              fying, and summarizing information on financial position and operations
                              and requires that financial management information be complete and
                              accurate. Nevertheless, FNS reported that, except for the areas noted, its
                              accounting system taken as a whole generally complied with applicable
                              accounting principles and standards.

                             Because of the internal accounting control weaknesses identified in this
                             report, we do not agree with FNS'Sconclusions that its financial manage-
                             ment system provides reasonable assurance that internal control objec-
                             tives are achieved, and that its accounting systems comply with
                             applicable accounting principles and standards. We do not take excep
                             tion with FNS'SFMFIA process, which has surfaced several material weak-
                             nesses, but with management’s conclusion that such weaknesses do not
                             prevent FNS'Ssystems from providing reasonable assurance that control
                             objectives are achieved. At the end of this report, we recommend that
                             FNScarefully consider the significance of all internal control weaknesses
                             when arriving at an overall statement of conformance.


GAO’s Consideration of       We considered FNS'SFMFIA reports, the Department of Agriculture’s
Internal Controls            Office of Inspector General reports on financial matters and internal
                             accounting controls, and other GAOreports in determining the nature,
                             timing, and extent of our audit procedures. We also considered OMB'S
                             December 1989 staff summary of FNS’Shighest risk areas. Our study and
                             evaluation of FNS'Sinternal accounting controls, made for the limited
                             purpose described in the second paragraph, would not necessarily dis-
                             close all material weaknesses in a system of internal controls.

                             Our study and evaluation disclosed two material internal accounting
                             control weaknesses:

                         l FNSdid not monitor the states’ control over food coupons, including
                           physical controls over coupon inventories and recordkeeping, and
                         . FNS'Sfinancial reporting process does not produce reliable results.



                             Page 12                                     GAO/AFMD-91-3   Food and Nutrition   Service
                         Report on Internal   Accounting   Controls




                         These two weaknesses, described more fully in the following sections of
                         this report, present significant risks that food coupons, distributed from
                         2,600 locations, may be lost, stolen, or otherwise misappropriated, and
                         that FNSfinancial reports are inaccurate and misleading to
                         decisionmakers.


                         FNSdoes not always monitor the states’ control over food coupons,
FNS Does Not Always      Without the monitoring of state controls, there is no assurance that
Monitor States’          states will maintain controls necessary to prevent coupons from being
Control Over Food        stolen or otherwise misused.
Coupons                  Because food coupons are similar to cash and can be used by anyone
                         who presents them to an authorized food retailer, strict physical control
                         over food coupon inventories is necessary to prevent theft or other
                         misuse. FNShas established requirements for the states to safeguard the
                         coupons, including restricted access to the inventories and periodic
                         counts to verify the reported quantities. Under the Food Stamp Act, FNS
                         can charge the states for any food coupons that are lost, stolen, or
                         issued to unauthorized individuals.

                         To review FNSoversight of controls over inventories and recordkeeping,
                         we visited 19 of 53 state and county agencies and 6 of 7 FNSregional
                         offices. We found weaknesses in oversight controls at 4 of the state and
                         county offices and 2 FNSregional offices visited. To review controls over
                         food coupons and the preparation of the monthly inventory reports to
                         FNS,we visited 38 food coupon inventory points which issued about $2.9
                         billion in food coupons in fiscal year 1988, or approximately 26 percent
                         of the approximately $11 billion of coupons issued nationwide. These
                         inventory points were selected based upon several factors, including size
                         of inventory, prior audit coverage, and type of coupon issuance. At 17 of
                         the 38 food coupon inventory points visited, we found weak controls
                         over inventories, poor recordkeeping, or a combination of both.

~-_..~--   -
States’ Audits of Food   To ensure the accuracy of the reports submitted to FNSon food coupon
Stamp Inventories Not    activity, FNSrequires the states to have an independent count of food
                         coupons at each inventory point at least once every 3 years. The inven-
Monitored                tory points are also required to reconcile the physical count to the inven-
               I)        tory records and reports submitted to FNS.Of the 6 FNSregional offices
                         we visited, we found that 2 regional offices did not monitor whether
                         states within their regions were complying with the requirement for an
                         independent count of food coupon inventory at least once every 3 years.


                         Page 13                                      GAO/AFMD-91-3   Food and Nutrition   Service
               I                 Report on Interual   Accounting   Controls




                                 In fact, 4 of the 19 state and county agencies we visited did not ensure
                                 that the physical counts were reconciled with inventory records or
                                 reports submitted to FNS. Without these controls, there is increased risk
                                 that lost or stolen food coupons will not be detected and, therefore, not
                                 be reported to FNS.


SomeStates Not Verify ring       We found that 4 of the 19 state agencies we visited were not indepen-
Actual IssuancesWith             dently verifying actual issuances with authorizations. FNSrequires that
                                 state agencies independently verify actual food coupon issuances with
Authorized Issuances             the number of coupons authorized to be issued through a review of sup-
                                 porting documentation. This procedure is intended to detect losses
                                 which might be disguised by inflating the reported amount of coupons
                                 issued. Unauthorized issuances are billed to state agencies. Without
                                 independent verification, authorized issuances can be misstated and FNS
                                 could sustain unnecessary program losses that should be charged back
                                 to the state agencies.


Several States Not               Our review of the controls over food coupons at 38 inventory points we
                                 visited in 19 states showed that some states are not maintaining sound
Maintaining Sound                inventory controls over food coupons. For example, we found that
Inventory Controls
                             . at 3 locations, with inventories amounting to $48 million, coupons were
                               not always maintained in secure areas, and
                             . at 6 locations, with inventories amounting to $181 million, employees
                               were allowed access to coupon inventories without supervision.

                                 In addition to weak controls over food coupon inventories, we also
                                 found poor adherence to FNS requirements concerning coupon inventory
                                 recordkeeping. We found that

                             l   7 locations, with inventories amounting to $226 million, did not follow
                                 FNSregulations to include all coupons on hand when taking monthly
                                 physical inventories and
                             l   4 locations did not consistently consolidate and correctly report coupons
                                 returned in the mail. In their ending inventories, 3 inventory points,
                                 with inventories amounting to $161 million, excluded undeliverable cou-
                                 pons that had been returned in the mail. Another location, with invento-
                                 ries amounting to $48 million, inflated its ending inventory by including
                                 returned coupons received after the end of the month.




                                 Page 14                                      GAO/AFMD-91-3   Food and Nutrition   Service
                         Report on Internal   Accounting   Controla




                         At 7 of the 38 inventory points we visited, we found both poor record-
                         keeping and inadequate safeguards over food coupon inventories,
                         making theft or loss of food coupons at these locations difficult to
                         detect. These locations had inventories of about $260 million and issu-
                         ances during fiscal year 1988 of about $804 million. While FNSbills the
                         states for losses (or unauthorized reductions in food coupon invento-
                         ries), it cannot do so unless the inventory points submit reliable reports
                         which are based on records of actual inventory activity.

                         The food stamp program is the subject of extensive investigation by
                         Agriculture’s Inspector General. In fiscal year 1988, the Inspector Gen-
                         eral issued 7 15 investigation reports on all aspects of food stamp abuse,
                         Most of these were investigations of retailers, recipients, and persons
                         not authorized to possess food stamps. The remaining investigations
                         included persons involved with food stamp certification (some of whom
                         were federal employees), and investigations of the issuance of food
                         stamps and inventory sites.


                         FNS'Sfinancial reporting process does not produce accurate financial
FNS’s Financial          statements. Adjustments exceeding $7 billion were required to bring
Reporting Process        about a fair presentation of FNS'Sfinancial statements in conformity
DoesNot Provide          with generally accepted accounting principles (GAAP). FNS'Sfiscal year
                         1988 statements, submitted to Treasury and OMBbefore our audit, were
Accurate Information     inaccurate. These conditions occurred because FNS

                         did not properly apply GAAPor use its general ledger to prepare reliable
                         financial reports;
                         does not have methodologies to properly review and evaluate account
                         balances; and
                         did not clearly document how its financial reports are prepared, which
                         precludes an adequate supervisory review by FNSmanagement.


FNS Staff Did Not        FNSaccounting personnel did not fully apply GAAPand OMBand Treasury
Properly Apply           requirements in preparing FNS’Sfinancial statements. We found signifi-
                         cant errors in the financial statements which we attribute to an incor-
Accounting Standards     rect application of GAAPrequirements for preparing annual reports to
                         OMBand Treasury, Some examples follow.

                       . On FNS'Spreliminary fiscal year 1988 financial statements, revenue was
                         overstated by $1.6 billion because FNSreported total appropriations
                         received rather than the portion actually earned.


                         Page15                                       GAO/AFMD91-9   Food and Nutrition   Service
                              Report on internal   Accounting   Controls




                          . In its fiscal year 1988 Treasury Statement of Financial Condition, FNS
                            reported unexpended appropriations of $893 million. However, this
                            amount was misstated by $633 million because it erroneously included
                            asset accounts of $247 million and invalid undelivered orders of $286
                            million.
                          l FNSincorrectly reported $224 million of bad debt expense that it had
                            already recognized as an expense on its fiscal year 1987 financial
                            statements.
                          l FNS’Spreliminary financial statements omitted all of the fiscal year 1988
                            salaries and benefits expense, which amounted to $86 million and repre-                     .
                            sented 99 percent of the fiscal year 1988 Food Program Administration
                            appropriation. This occurred because FNSaccounting personnel did not
                            follow procedures for reporting FNSaccounting information which is
                            processed at the Department of Agriculture’s National Finance Center
                            but which is excluded from FNS’Sgeneral ledger. FNSofficials also told us
                            they were not aware that FNSwas responsible for including this informa-
                            tion in its financial statements.

                              Title 2 of GAO'SPolicy and Procedures Manual for Federal Agencies spec-
                              ifies that an agency’s financial statements, including Treasury and OMB
                              reports, should be the culmination of its accounting process. In addition,
                              these standards require managers and employees to apply the standards
                              sufficiently to properly account for and report the agency’s transac-
                              tions. We observed that the FNSaccounting staff did not apply GAAPto
                              the extent needed to prepare accurate financial statements. Unless the
                              accounting skill level of the FNSstaff is upgraded, it is likely that errors
                              of the magnitude we found will continue to occur and result in mis-
                              leading financial reports.


FNS Lacks Methodologies       FNShas not established adequate procedures and methodologies to eval-
to Properly Evaluate          uate its asset and liability accounts before preparing its year-end
                              reports. Without a review of critical general ledger accounts, FNScannot
Account Balances              determine whether the accounts are properly stated in its year-end
                              reports. Significant audit adjustments were necessary to fairly present
                              the assets and liabilities reported on FNS’Sfiscal year 1988 financial
                              statements. Some examples follow:

                          l   Although        acknowledged that the unredeemed food coupon liability
                                            FNS


                              account was overstated and accepted a $477.4 million adjustment to cor-
                              rect its fiscal year 1987 financial statements, it did not correct its gen-
                              eral ledger account for unredeemed food coupons. FNSdid not review or
                              analyze the account by September 30, 1988, to determine the account’s


                              Page 10                                      GAO/AFMD-91-3   Food and Nut&ion   Service
    R&ort   on Internal   Accouuting   Controls




    Rroper balance and, thus, prepared its fiscal year 1988 financial state-
    ments and reports to Treasury and OMBusing the uncorrected balance.
    As a result, the fiscal year 1988 financial statements had to be adjusted
    to correct the misstated account balances.
l   The methodology FNSused to establish its accounts payable as of Sep-
    tember 30,1988, resulted in incorrect accounts payable and unexpended
    appropriations accounts and overstated FNS'Sbudget authority. FNSmust
    estimate its accounts payable balance for the current year appropria-
    tions because it cannot know the exact balance until grants are closed, a
    process that occurs over several months after the end of the fiscal year
    and the due dates for reports to OMBand Treasury. The portion of the
    account comprised of prior year payables is determinable because most
    grants have been closed.

    However, FNS does not follow its own procedures to record the amount
    of accounts payable from closed-out grants and to deobligate unneeded
    funding. In estimating current and prior year grants payable balances,
    FNSassumed that all outstanding obligations were valid. FNSdid not
    review grant documents to determine that obligations were valid, to
    establish proper balances for prior year payables, or as a basis to esti-
    mate current year payables. We found that $361 million of the unliqui-
    dated obligations were not properly supported and, thus, were invalid.

l   FNSalso has not established a methodology to properly estimate an
    allowance for doubtful accounts in its accounts receivable in conformity
    with GAAP.An appropriate oar-based methodology would consider the
    completeness of the transactions as well as collectibility. Because FNSdid
    not properly review and value its accounts receivable, several audit
    adjustments exceeding $150 million were required to correct its allow-
    ance for doubtful accounts.

    Title 2 requires that account balances be reviewed at the end of the
    reporting period to ensure they are appropriately valued. To do this
    requires the consistent use of procedures and methodologies that will
    reliably calculate the valuation, or year-end accruals, of asset and lia-
    bility accounts. Additionally, OMBCircular A-34 requires agencies to
    review their unliquidated obligations account at the end of each fiscal
    year to determine whether the balance is supported by documentary
    evidence. To not follow sound year-end procedures for valuing assets
    and liabilities will result in financial statements that are unreliable and
    possibly misleading.




    Page 17                                       GAO/AFMD-91-3   Food and Nutrition   &rvice
                        lieport on Internal Accounting Controla




FNS Does Not Maintain   FNS has not documented how its year-end reports and financial state-
Appropriate Records     ments are prepared. Such documentation is necessary because FNS’S
                        statements and reports cannot be produced directly from its general
                        ledger, and FNSstaff must manually compile the necessary information.
                        We have reported this condition in two prior reports,’ and FNSresponded
                        that it would begin using its general ledger to prepare its reports in
                        November 1988. FNSofficials told us that its general ledger was used to
                        prepare its fiscal year 1989 Treasury statements.

                        Title 2 states that comparability is a major qualitative factor that
                        enables accounting information to be useful. To ensure that accounting
                        information is consistent from one period to the next, agencies are
                        required to use a documented process with adequate guidelines. The
                        absence of adequate documentation inhibits management’s review of
                        financial reports and information.

                        Accounting information processed by the National Finance Center, and
                        certain balances related to grants, are among the significant information
                        omitted from the general ledger. However, because the staff does not
                        prepare necessary documents showing the sources of information used,
                        it is difficult for FNSmanagement to determine whether the statements
                        and reports properly include all necessary information or whether they
                        are consistent between accounting periods. Many of the errors and omis-
                        sions previously discussed could have been detected and corrected if
                        proper documentation had been maintained and reviewed.


                        The risk for theft and other unauthorized use of food coupons is
Conclusions             increased because FNSdoes not adequately enforce its management con-
                        trol requirements for inventory points, state agencies, and FNSregional
                        offices. Without providing the required oversight of inventory points by
                        state agencies and regional offices, FNScannot ensure that food coupons
                        are safe from theft. Also, the fair cost of losses to be borne by state
                        agencies cannot be determined.

                        The FNSfinancial reporting process does not produce reliable financial
                        statements. Accounting personnel are not properly applying GAAPand
                        Treasury requirements in preparing FNS’Sfinancial statements and
                        reports to OMBand Treasury. We believe this is attributable to the staff

                               Controls:FoodandNutritionserviceLacksEffectiveControls(GAO/AFMD-88-16,
                        *Internal                                                                       March
                        11988)                                      Nices FinancialStatementifor 198’7(GAO/
                        AFMD-89-22,
                                  March16,198Q).


                        Page 18                                      GAO/AFMD-91-3   Food aud Nutrition   Service
                      Report on Intemal   AccountingControls




                      not having a sufficient understanding of GAAP.The financial manage-
                      ment staff are also not using sound methodologies to value assets and
                      liabilities and are not maintaining documentation to support year-end
                      financial reporting.

                      Furthermore, although we were able to audit FNS’Sfinancial statements
                      by performing additional substantive testing rather than relying on the
                      system of internal accounting controls, improvements are needed to gen-
                      erate reliable accounting data. Without established methodologies to
                      periodically review all of its critical general ledger accounts, FNScannot
                      ensure that its account balances are accurate and in accordance with
                      GAAP.


                      To correct these weaknesses, we recommend that the Secretary of Agri-
Recommendations       culture direct the Administrator of the Food and Nutrition Service to do
                      the following:

                  . Enforce the FNSoversight of state controls over food coupons, including
                    inventory audit procedures, recordkeeping, and reporting to FM.
                    Develop the policies and procedures necessary to ensure the consistent
                    monitoring of state agency controls.
                  l Ensure that FNSstaff are skilled in applying GAAPand in preparing
                    financial reports to Treasury and OMB.A needs determination should be
                    conducted to ascertain how many staff with accounting skills are
                    needed, and a sufficient number should be engaged and properly trained
                    to ensure the reliable accounting and financial reporting of the agency’s
                    transactions.
                  . Ensure that financial statements and reports are prepared using
                    required accounting policies, procedures, and methodologies.

                      We further recommend that FNSfollow the guidelines OMBestablished for
                      its FMFIA reporting in its July 5, 1990, memorandum, including OMBCir-
                      culars A-123 and A-127, and carefully consider the significance of non-
                      conformances when arriving at an overall statement of compliance.


                      We provided a draft of this report to FNSofficials for comment. They
Agency Comments       generally concurred with our findings and recommendations and
        I             informed us that they have initiated the following corrective actions.

                  l   Reviews of state audits have been conducted in fiscal year 1990 by the
                      two FNSregional offices which had not monitored the states within their


                      Page 19                                  GAO/AFMD-91-3   Food and Nutrition   Service
    Reporton Internal Awounting Cbntrola




  regions. Further action to strengthen inventory oversight and controls
  will be developed based on an examination of FXS,GAO,and Office of
  Inspector General review findings and investigations. Resources and
  guidance will be directed toward states and types of issuance/inventory
  facilities identified as presenting the greatest risk to coupon security.
. Two actions have been taken to ensure that FNS'Sfinancial statements
  and external reports are prepared properly. First, FNSinstituted a
  quality control procedure which requires the Director, Accounting Divi-
  sion, to personally review documentation proving that each external
  report or financial statement was prepared from the general ledger and
  is consistent with related reports or statements. Second, FNShas com-
  mitted funds to increase the expertise of Accounting Division employees
  in applying accounting standards and preparing financial statements.
. Action has been initiated to have an outside consultant perform an
  objective study of FNS'Saccounting functions and a staff needs determi-
  nation and make appropriate recommendations. The study should be
  completed by the end of January 1991.
l Appropriate actions will be taken to ensure that sufficient numbers of
  trained staff are assigned, based on the results of the needs determina-
  tion and available resources.
l A draft of procedures and methodologies for preparing annual financial
  statements has been prepared.




    Page20                                 GAO/AFMD-91-3
                                                      FoodandNutrition Service
Report on ComplianceWith Laws
and Rxgulations

                 We have audited the financial statements of the Food and Nutrition Ser-
                 vice (FNS) for the fiscal years ended September 30,1988 and 1987, and
                 have issued our opinion thereon. Our audits were made in accordance
                 with generally accepted government auditing standards and, accord-
                 ingly, included such tests of the accounting records and such other
                 auditing procedures, including tests of compliance with laws and regula-
                 tions, as we considered necessary in the circumstances. This report per-
                 tains only to our consideration of FNS'Scompliance with laws and
                 regulations for the year ended September 30,1988. Our report on com-
                 pliance with laws and regulations for the year ended September 30,
                 1987, is presented in GAO/AFMD-89-22, dated March 15, 1989.

                 The management of FNSis responsible for compliance with laws, regula-
                 tions, contracts, and grants applicable to FNS.As part of obtaining rea-
                 sonable assurance as to whether the financial statements were free of
                 material misstatement, we selected and tested transactions and records
                 to determine FNS'Scompliance with provisions of the following laws and
                 regulations which could have a material effect on FNS'Sfinancial state-
                 ments if not complied with:

             l Federal Managers’ Financial Integrity Act (31 U.S.C. 3512 (b) and (c));
             . Anti-Deficiency Act (31 U.S.C. 1341, 1342, and 1511-1519);
             l Debt Collection Act of 1982 (31 USC. 3302,3711, and 3717);
             l Prompt Payment Act (31 U.S.C. 3901-3906);
             l Legislation requiring agencies to annually certify obligations (31 U.S.C.
               1108);
             l Accounting and Auditing Act of 1950 (Public Law 81-784);
             . OMBCircular A-102 concerning requirements for grant programs;
             l Treasury Circular 1075 concerning requirements for Letters of Credit
               with grantees; and
             l Legislation concerning the food stamp program (7 U.S.C. 201 l-2027,
               2029).

                 The results of our tests for fiscal year 1988 indicate that, with respect to
                 the items tested, FNScomplied in all material respects with the provi-
                 sions of laws and regulations that could have a material effect on its
                 financial statements. With respect to transactions not tested, nothing
                 came to our attention that caused us to believe that FNShad not com-
                 plied, in all material respects, with those provisions. However, there was
                 one related matter, which although not material to the FNSfinancial
                 statements, in our view warrants comment. This matter is discussed
                 below.



                 Page 21                                      GAO/AFMD-91-3     Food and Nutrition     Service



                                                  -.   -. ..~-..- ~~.--__----        _.-_-_   - ..__ _.- ---_
                          Report on Compliance   With Laws
                          and Regulations




Use of Funds From Civil   We found one instance where FNS was not in compliance with a provi-
Penalties                 sion of the Food Stamp Act. Under section 12 of the Food Stamp Act (7
                          USC. 2021), FNShas the authority to impose civil money penalties
                          against a retail or wholesale food concern which violates any provision
                          of the act or its implementing regulations. While FNShas authority to
                          deposit funds collected from households or state agencies based on the
                          Food Stamp Act to the food stamp appropriation account, FNS’S
                          authority does not include civil penalties collected from food retailers
                          and wholesalers. Therefore, collections of civil penalties should be
                          deposited with Treasury and not used for agency operations. However,
                          we found that FNScredited the food stamp appropriation account for
                          $119,949 in civil penalties collected from food retailers and wholesalers
                          during fiscal year 1988. We brought this issue to FNS’Sattention during
                          the course of our audit. FNSagreed that collection of civil penalties
                          should be accounted for separately and has agreed to take corrective
                          action.




                          Page 22                                GAO/AFMD-91-3   Food and Nutrition   Service
l?inmcid Statements


Statements of Financial Position

                                                            As of September 30, 1988 and 1987
                                                                  (Dollars in thousands)

                                                                                                         1988                  1987
                                                                                                                       (as   restated)



                     Funds with U.S. Treasury (Note 6)                                              $11899,617          $1,645,980
                     l4cxouots Receivable      net of allowance for
                        doubtful     accounts (1988 $256,827;
                        1987 $202,956) and Mvsnces (mte 1)                                              265,720              189,788
                     Property,     Plant, and Equipment net of accunulated
                        depreciation      (1988 $2,982) 1987 $2,462)                                      5,737                    966
                                                                     /
                         lWxil. Assets                                                              $2,171,074          $1&l&73&
                  LiabilitA!e:

                     Accounts Payable, Principally to Grantees                                      $ 828,456           $ $970,993
                     Amounts Due Treasury (Note 1)                                                    497,089              504,670
                     Unredeemed FoodCoupons (Note 3)                                                  131,734               72,148
                           mtal      Liabilities                                                    $1,457,279          $1,547,811
                  Equity      of the U.S. Goverrmnt:               (Note 9)

                     Unexpended Appropriations                                                      $   526,597         S 159,456
                     Invested Capital                                                                   187,198           129,467

                           lbtal     &pity         of the U.S. Government                           $ 713,795           s    288,923
                           'Ibtal.   Liabilities        and Ekquity                                 $2,171,074          s


                  The accanpanying            notes are an inikgrsl       part   of these   financial    statements.




                     Y




                                                         Page 23                                             GAO/AFMD-91-3       Food and Nutrition   &m-ice
                                                                                                                                                            .

                                                        Ftnanci8l        Statements




Statement8   of ODerations


                                     For     the    Fiscal          Years Ended September                   30,   1988     and 1987
                                                                     (Dollars  in thousands)
                                                                                                        1988                            1987
                                                                                                                              (as     rxted)

                      Financing        Sources:

                         Expended    appropriations                                               $19,435,982                  $19,332,478
                         Reimbursements       earned      and other                                               983                  1,047
                         Food commodities         transferred
                            from  other    USDA agencies        (Note                     5)          1,410,403                      1,781,865

                             Total         financing           sources                            $20,847,368                  $21,115,390

                      Operating        expenses:

                         Grants   and subsidies:
                            Food Stamp Program                                                    $13,093,813                  $12,416,608
                            Child  nutrition       programs                                          4,828,319                       5,446,001
                            Other  programs                                                          2,721,711                       3tO39.361
                         Bad debt ex ensc                                                                53,871                         27”$;5g
                         Salaries    an B benefits       and other                                          84,738                           I


                             Total         operating           expenses                           $20,782,452                  $21,179,846

                      Excess of        financing     sources                  over
                        operating          expenses    before
                        correction          of estimate                                           8         64,916             8        (64,456)

                      Correction  of           estimate             of     unredeemed
                        food coupons               (Note       4)                                                                       477,407

                      Excese of        financing      sources                 over
                        operating          expenses     after
                        correction          of estimate                                           8         64,916             8



                      The accompanying                 notes        are     an integral        part    of     these      financial
                      statements.




                                                        Page24                                                           GAO/APMB91-3 Food and Nutrition   Service
     .

                                                        Flnancisl    Statements




Statsmenta of Change@ In Funds With U.S. Treasury

                                   For     the     Fiscal       Years Ended September                 30,   1988    and 1987
                                                                 (Dollars  in thousands)
                                                                                               1988                            1987
                                                                                                                     (as     restated)

                        Appropriations             Received                             $20,219,558                   $19,058,570
                        Fund8      Returned        to    U.S.       Treasury                  (395,872)                      (395,528)

                        Collections             on Accounts          Receivable                  29,995                          17,018

                        Outlays:
                           Grant    payments                                             (6,401,1471                       (7,964,831      1
                           Reimbursements       to Federal
                              Reserve      Banks for food
                              stamp redemptions                                         (13,114,6221                   (10,415,563
                           Administrative        and other
                              expenditures                                                      (84,275)                       (78,126

                        Increase   in Funds              with
                           U.S. Treasury                                                       253,637                         221,540

                        Funds with          U.S. Treasury:
                          Beginning          of Year                                         1,645,980                      1,424,440
                           End of        Year                                           $m                            S&645&80



                        The accompanying                notes       are   an integral         part    of    these    financial
                        statements.




                    ”




                                                        Page 25                                                     GAO/AFMD-91-3         Food and Nutrition   Service
                                                    Financial   Statemente




Note8 to Financial Statements


                      Note      1.     Summary       of   Significant         Accounting         Policies
                      A.     Entity     and    Basis      of    Accounting

                                The Food and Nutrition                Service        (FNS) was established               August
                                8, 1969 per Secretary’s                 Memorandum No. 1659 and Supplement                       1
                                pursuant        to the authority            contained         in 5 U.S.C.        301 and
                                Reorganization            Plan no. 2 of 1953.                The agency administers
                                USDA’s eight           food assistance           programs:          Food Stamp Program,
                                Child      Nutrition        Programs,       Special       Milk’ Program,         Special
                                Supplemental           Food Program         for Women, Infants,               and Children,
                                Commodity         Supplemental        Food Program,             Cash and Commodities
                                for Selected           Groups,     Nutrition         Assistance        for Puerto        Rico,
                                and the Temporary              Emergency       Food Assistance             Program.       The
                                food assistance            programs       are intended           to provide       access      to a
                                nutritionally            adequate     diet     for families          and persons         with
                                low incomes,           and encourage          better      eating     habits      among the
                                nation’s        children.         The programs          also help        to expand markets
                                for food produced              by American         farmers.         Each year these
                                programs        serve     approximately           51 million        people.
                                FNS is under the jurisdiction                        of the Assistant             Secretary
                                for Food and Consumer Services.                            FNS is headed by an
                                administrator            with     overall       policy       formulated        in the FNS
                                headquarters           in Alexandria,             Virginia       and implemented
                                through        seven regional            offices       and 75 field          offices.         At
                                the state         level,      state     departments            of education         have
                                responsibility            for food programs                serving      children       in
                                schools,        child     care centers           , and summer recreation                 centers.
                                State    departments            of health,         welfare,        and agriculture
                                usually       have responsibility                 for programs          providing        food
                                stamps      or supplemental              foods.

                                FNS maintains        eight    appropriation          funds.      The financial
                                statements      include     all    funds for which          the FNS is
                                responsible       and are presented            in accordance        with generally
                                accepted     accounting       principles         as prescribed       in Title    2 of
                                GAO’s Policy       and Procedures           Manual     for Guidance      of Federal
                                Agencies.       All significant           intra-fund       balances     and
                                transactions       have been eliminated.
                      B.        Accounts       Receivable
                                Accounts        receivable        principally        represent         claims   against
                                individuals          who have been overissued                food stamp benefits.
                                States       are responsible           for identifying           instances      of over-
                                issuance        as well      as processing         related       billings      and pursuing
                                collections.            Periodically,         states      report       summary
                                information          to the FNS Regional             Offices       on the status        of the
                                claims       and remit       collections        of past due amounts.               To




                                                    Page 26                                                     GAO/AFMB91-3        Food and Nutrition   Service
                        IYnandal   Statement.8




     encourage       aggressive      collection      efforts,      FNS permits     the
     states    to retain        a percentage      of the amounts collected             for
     certain     categories       of overissuances.            Accordingly,    the
     accounts      receivable      balances     include       only amounts due FNS.

     Recognition        of accounts       receivable    reduces      expenses     in the
     current     year.       However,     budgetary    authority       has been used in
     financing       the original       expenditure,       and, therefore,        is
     included      in expended        appropriations.         Therefore,      an excess
     of financing         sources    over expenses       is reported      annually     and
     is reflected         in invested       capital   (Note 9).
     All   accounts     receivable       are recorded       net of an allowance
     for doubtful       accounts.        During    1987 FNS began the practice
     of reviewing       the history        of collections       as the basis     for
     determining      the proper      allowance        for doubtful    aCCOUntS-
     Because      it was not possible          to determine      which portion       of
     the 1987 bad debt expense              should     have been recorded      in prior
     years     the entire     adjustment       was recorded      in 1987.

     Net proceeds           from the collections            of prior    year grants
     accounts        receivable         and food stamp accounts          receivable         due
     from retailers/wholesalers                  are not to be used for agency
     operations          but should        be deposited      with    the U.S. Treasury          as
     miscellaneous            receipts.        Accordingly,       FNS establishes         a
     liability         to Treasury         for the amount of expected            collections
     from      these     receivables.
C.   Recognition        of   Financing      Sources

     Financing        sources    are provided      through    Congressional
     appropriations          on both an annual        and multi-year       basis.    Net
     proceeds       from the collections         of food stamp accounts
     receivable        due from recipients        and governmental         entities
     are also       included     as a financing       source.      The collections
     may be used to fund program              expenditures       for food stamps,
     grants      and other     types   of food assistance          as specified     by
     law as well         as operating     expenses.

     The current        budgetary     process     does not distinguish             between
     capital      and operating       expenditures.          FOK budgetary         purposes,
     both are recognized            as a use of budgetary             KeSOUKCeS
     (outlays)        as paid.      FOK financial        reporting       purposes     under
     accrual      accounting,       however,     operating       expenses      are
     recognized        currently     while    expenditures         for capital       and
     assets      are capitalized        and are not recognized              as expenses
     until     they are consumed           in FNS's operations.             Financing
     5ou~ces       for these     expenses,     which derive          both from current
     and pKiOK year appropriations,                 are recognized          on these     same
     bases.




                        Page 27                                               GAO/AFMD-91-3     Food and Nutrition   Service
                               Financial   Statements




     FNS issues        grant    awards      for anticipated          program      expenses
     and throughout          the year obligates            funds     fOK   these grants.
     When FNS obligates             funds,     they record       this    portion      of
     unexpended        appropriations          as an undelivered           order.
     Obligations        are reduced         when expenses        are KepOKted         to FNS as
     incurred       by grantees.           At year-end,       the unused portion             of
     grant     awards     are shown on the statement                 of financial
     position       as unexpended          appropriations.           Unobligated        balances
     available       for future        periods      are also     shown as unexpended
     appropriations.
D. Grants

      FNS grant         programs      usually       provide       funds      to grantees
      through        a letter      of credit        process.          This process           allows
      the grantees            to draw on established                credit       balances,        as
      needed,        to pay expenses          associated         with      their     grants.         It
      also     allows       the federal       government          to hold funds until                the
      grantees         need the funds to pay program                     expenses.           Each FNS
      region       is responsible         for awarding            and managing           grants.         In
      addition,         the FNS regions           authorize         and monitor          letters        of
      credit       cash needs and approve                individual          requests        for cash.
      The grant         expenses      recorded        on the statement              of operations
      are based on expenditure                  reports       submitted          by the grantees.
      FNS KeVieWS           these   reports       for reasonableness                and uses a
      computer         edit     to verify     the mathematical               accuracy        of the
      reports.          On a selective          basis,      FNS visits           grantees        and
      reviews        the supporting         data for the expenditure                     reports.
      In addition,            FNS relies      on audits         of grantees           performed        by
      USDA/OIG and by independent                     auditors        under      the Single         Audit
      Act of 1984 for determining                     the validity           of expenses.

E.    Liability        FOK Unredeemed            Food     Coupons

      FNS is liable        for the unredeemed        food coupons      issued      since
      the inception        of the Food Stamp Program.             Consequently,         a
      liability     is recorded         when food coupons     are issued       and
      reduced    when redeemed.            The agency does not record           the
      redemption      value       of food coupons    as inventory      in the
      accounting      records.         Food coupons    are recorded      as an expense
      and a related        liability       at the time they are issued.
F.    Amounts       Due Treasury
      Amounts     Due Treasury      include     expected  collections      on prior
      grants     accounts   receivable      , and food stamp accounts
      receivable      due from retailers/wholesalers,              as well  as funds
      no longer      needed to satisfy        the unredeemed       food coupon
      liability.




                              Page 28                                                      GAO/AFMD-91-3      Food and Nutrition   Service


                                                                 .
                                                                :
                                                               .i
                           Financial      Statements




                                                                                                                                      1
G.   Transferred           Commodities

     As  described         in note 5, FNS distributes               food commodities
     primarily       through      its Child       Nutrition      Programs,      Temporary
     Emergency       Food Assistance           Program,      Commodity      Supplemental
     Food Program,           Food Distribution           Program    on Indian
     Reservations,           and Nutritional         Program     for the Elderly.         FNS
     recognizes        the financing          source     and related      expense    of these
     commodities         at the time        they are transferred            to state
     agencies      for distribution.              FNS receives        these   food
     commodities         through     transfers       from other       USDA agencies.
H.   Property        and    Equipment

     The majority         of the reported         property       represents       ADP
     software       and equipment.           Property     and equipment         are valued
     at cost.         Expenditures       for major      additions,        replacements,
     and alterations           are capitalized.            Property     and equipment      is
     depreciated        using     a straight       line   method over estimated
     useful     lives     ranging     from 5 to 20 years.

I.   Restatement           of    FY 1987 Financial           Statements

     The fiscal           year 1987 statements             of financial             position    and
     operations,            changes      in financial       position,            and
     reconciliation              to budget      have been restated                to recognize
     FNS ’ use of transferred                 commodities,          and to reflect
     corrections            to accounts       receivable,        accounts           payable,    and
     other     liabilities.              In total,      these    changes          have decreased
     assets      by $152.1 million,               decreased       liabilities            by $363.6
     million,        and increased          equity      by $211.5          million.
     Additionally,             financing      sources      and expenses             have been
     increased          by $1.6 billion.

     Additionally,              certain        items    on the fiscal      year    1987
     financial        statements             have been reclassified           to   conform      with
     the current           year’s         presentation.
     Commodity        transfers

     Commodities       transferred      from other      USDA agencies       and the
     related     expense     has been recognized          on the fiscal      year 1987
     statement      of operations      because     the transfer       and use of food
     commodities       are an integral        part   of FNS’ mission        and
     programs.        Therefore,    the fiscal       year   1987.statements
     recognize      the transfer      of food commodities          and the related
     expense     of $1.8 billion.          Purchases      of food commodities
     using     FNS appropriations         were previously       recognized      on the
     financial      statements.




                                                                                                                                      J




                           Page 29                                                 GAO/AFMD-91-3       Food and Nutrition   Service
                        Financhl Statements




Accounts          receivable        corrections

The fiscal      year 1987 financial            statements        have been
restated     to recognize       the advance          of $34.8 million        to
another     USDA agency      to purchase         food commodities.           The
other    USDA agency      had not used these             FNS funds      as of
September      30, 1987.       Previously        this    advance      was recognized
as a program       expense     and financing          source,     and omitted      as an
asset    and equity.       Therefore,        accounts       receivable      and
advances,      and unexpended        appropriations           have been increased
by $34.8 million.

Prior     to fiscal       year 1987, FNS believed                 collections         of
accounts     receivable          were due back to Treasury,                    and
accordingly,         FNS established            a liability        to Treasury          for
the amount of expected                collections.            However,       fiscal     year
1988 research          indicated       that     FNS is entitled            to use
collections       on certain          accounts        receivable.          Accordingly,
the fiscal       year 1987 financial                statements        have been restated
to decrease       the liability,             amounts       due to Treasury,           and
increased      equity,        invested       capital,       by $128.5        million.

Accounts          payable       corrections

Accounts       payable      for fiscal          year     1987 have been restated                to
correct      an error       in estimating            accounts      payable       because       FNS
did not perform           sufficient          work to establish             the validity          of
the unliquidated            obligations.             Assuming      all    unliquidated
obligations        are valid,          FNS divided          this   account       between
undelivered        orders       (part      of unexpended          appropriations)            and
accounts       payable.        Fiscal        year 1988 research             indicated        that
$232.6 million          of unliquidated              obligations        were not valid,
and accordingly,            the fiscal          year     1987 financial          statements
have been restated             to decrease           accounts      payable       by $232.6
million.        Since     $184.4       million       is based on obligational
authority       which would have lapsed                   if FNS had known the
unliquidated         obligations           were not valid,           the fiscal         year
1987 statements           reflect       a decrease          in funds with          U.S.
Treasury       by $184.4       million,         and an increase           in unexpended
appropriations          by $48.2 million.                 Accordingly,         expended
appropriations           and program          expenses        have also been
decreased       by $232.6        million.

Funds      with     U.S.       Treasury       not   available
On the fiscal          year 1987 financial        statements,      other
liabilities        represented       suspense   account     balances       of funds
with       U.S. Treasury.       Fiscal    year 1988 research         indicated
that       FNS does not have authority          to use these       funds.
Accordingly,         funds with U.S. Treasury           and other      liabilities
have been decreased            by $2.5 million.




                        Page 30                                                  GAO/AF’MD91-3         Food and Nutrition   Service
                              FlnancIal   Statements




Note      2.      Intragovernmental          Financial        Activities

          FNS's     financial       activities        interact     with    and are
          dependent        upon those         of the federal        government      as a
          whole.        Thus, FNS's         financial      statements      do not reflect
          the results          of all     financial      decisions      and activities
          applicable         to it,     as if it were a stand-alone              entity.
       o FNS's financial             statements         are not intended           to report       the
         agency's        proportionate            share of the federal             deficit       or of
         public       borrowing,         including        interest      thereon.        Financing      for
         budget       appropriations            reported       on FNS's statement             of
         operations         could      derive       from tax revenues           or public
         borrowing         or both;        the ultimate          source    of this      financing,
         whether       it be tax revenues               or public       borrowing,         has not been
         specifically           allocated         to FNS.
          0         During        fiscal       years    1988 and 1981,      FNS's employees.
                    participated             in the contributory         Civil   Service
                    Retirement            System     (CSRS) , or Federal       Employees
                    Retirement            System     (FERS),    to which    FNS makes matching
                    contributions.                FNS does not,     however,     report    CSRS and
                    FERS assets,             accumulated      plan benefits,       or unfunded
                    liabilities,             if any, applicable        to its    employees    since
                    this       data     is reported        in total   by the Office      of
                    Personnel          Management.
                    FNS'a total     contributions    for CSRS and FERS
                    participants,       including contributions    to Federal
                    Insurance     Contributions   Act (FICA),   during   fiscal                      year
                    1988 and 1987 were as follows:
                                                             1988                         1987

                    CSRS                                 $3,521,322                  $3,663,425
                    FERS                                  2,004,104                       871,113
                    FICA                                      56,459                        71,269
                      Total     FNS
                      Contributions                      $5,581,885                  $4,605,807
                                                         =III==IIL=                  IzTsIxI-=I=E

                    While    FNS has no liability         for future     payments    to
                    employees    under these      programs,      the Federal     Government
                    is liable    for future      payments      to employees    through
                    the various     agencies     administering       the programs.
          0         FNS leases      facilities,          primarily         office    space,    from
                    USDA and other           organizations.             These leases       are
                    cancelable     without         penalty.         Fiscal      year 1988 and 1987
                    rent   expenses        for these        leases      amount to approximately
                    $339,000    and $ 330,000,              respectively.




                              Page 31                                                  GAO/AFMD-91-3         Food and Nutrition   Service
                         Financisl Statements




Note   3.    Commitments          and    Contingencies

A.     Undelivered         Orders

       FNS is committed     under obligations           , primarily       for contracts
       and grants,   it has incurred           as of September         30, 1988 and
       1987 for goods and services             which have been ordered           but not
       yet received    (undelivered         orders).        As of September      30, 1988
       and 1987, aggregate        undelivered        orders     amounted     to
       $145,079,000    and $79,924,000,           respectively.
B.     Unredeemed        and    Unissued        Food     Coupons

       As    discussed         in Note 1, FNS records      a liability          for the
       value      of issued       food coupons.      FNS is also       contingently
       liable       for the value      of all   food coupons        which have been
       produced         but not yet issued.        Such food coupons           are under
       the control           of the companies     which produce,        distribute       and
       transport          the coupons,    as well    as the states        who control       the
       inventories           of food coupons    available     for issuance.
       Although         FNS is indemnified      for missing      food coupons         by
       these      entities,       they must honor all      redeemed       food coupons.

       The Food Stamp Program            is administered            primarily      by the
       states     in accordance      with      federal      regulations.         Monthly
       allotments      are computed        by the states’           departments      of human
       services     using   standards        for eligibility           promulgated      by FNS.
       To assure       that   the supplies     of food coupons           are sufficient
       to meet monthly          issuance   amounts,      states      maintain      several
       month’s      supply    of food coupons       in inventory.            State
       officials       may manage inventory         points      directly      or may enlist
       the services         of private    companies      to provide        storage     and
       transportation         services.

       States       regularly        report       inventory      balances,        issuance
       amounts,        and transfer           and shipping         information         to FNS
       regional        offices.         FNS regional         offices       review state
       operations          to assure        that      food coupons       are adequately
       safeguarded           and that       the Food Stamp Program                is properly
       managed.          In addition          to state      oversight        by FNS regional
       offices,        FNS maintains            additional       oversight        operations         to
       assure       that     the food stamp program                is operating          in
       compliance          with    relevant         laws and regulations.                For
       example,        FNS compliance            branch     personnel        review      retailers
       participating            in the Food Stamp Program                  to determine           that
       only eligible            food items          are exchanged        for food coupons.
       In fiscal   year          1988 and       1987, food         coupons  were         produced  by
       two independent            printing       companies         under contract           with FNS.




                         Page 32                                                    GAO/AFMD-913          Faod and Nutrition   Service
                             Financial   Statement8




        Throughout          the production         and shipment      process,      all food
        coupons       are     the responsibility         of the printing,
        distribution,            or shipping       companies.       FNS authorizes       all
        production          amounts and directly           oversees     the production
        process       to assure         that  quality    production       standards    are met
        and that        all     authorized      food coupons      are adequately
        accounted         for and safeguarded.
        The   ending      balance        of the food         coupon    inventory       as of
        September        30,  1988       and 1987 is         comprised     of the      following
        (dollars       in millions)         :


                                               September       30,    September        30,
                                                            1988                  1987

Value    of   food coupons
 held    at   States                                  $3,586                 $3,462

Value of food coupons
held at printing
companies                                              3,515                  4,063

Total    value     of food
coupons      produced    but
not   issued                                          $7,101                 $7,525
                                                      aP*DIP                 ==13=-:

        FNS relies         on the cooperation            of retailers,          commercial
        banks,       and the Federal           Reserve     Banks to adequately              control
        the process          for redeeming         negotiated       food coupons.             FNS
        policies        require      retailers       and commercial          banks to cancel
        food coupons           upon receipt        to prevent       against       food coupons
        being      redeemed       more than once.           Federal      Reserve      Banks
        additionally           cancel,      count    for accuracy,         inspect      for
        authenticity,           and destroy        to prevent       recirculation           all    food
        coupons       that     have    been presented         by commercial          banks.


Note 4.         Correction          of   Estimate     for     Unredeemed      Food
Coupons

        The adjustment          of the unredeemed         food coupon       liability         at
        September        30, 1987, reduced         an overstatement         that      had
        developed        over several      years.      Contributing       to the
        overstatement         was the practice         by FNS of not recording                as
        reductions        to food stamp program           expense     and unredeemed            food
        coupons,       the value      of food coupons        returned     to inventory            as
        undeliverable         through    the mail.        The effect      of this        practice
        was to create         and maintain        a balance      in the unredeemed            food
        coupons       account    higher    than the value          of food stamps




                             Page 33                                                 GAO/AF’MD-91-3Food and Nutrition   Service
       actually       issued.     FNS also believes        that   a number of food
       stamps      are lost     or destroyed     after   issuance      and, therefore,
       will     never    be redeemed.       Both conditions       contributed     to the
       continuous        growth   of the unredeemed        food coupon liability.

       To rectify          the overstatement           for the fiscal          1987 statement
       of financial           position,        FNS reduced       the unredeemed         food
       coupon     liability          by approximately          8477.4 million,          and
       reported       this      adjustment       as a liability,           amounts    due
       Treasury.           Because the amount of the overstatement
       pertaining          to fiscal        year 1987 could         not be distinguished
       from the amounts              pertaining      to prior       years,     the full      amount
       of the adjustment              was recognized         in the fiscal         year 1987
       statement         of operations.           This adjustment           caused    financing
       sources      to exceed         expenses     in the fiscal           year 1987 statement
       of operations.              Consequently        the effect       on prior      year
       government          equity     was not determinable,


Note   5.      Purchased        and Transferred            Commodities

       During       1988 and 1987, FNS distributed                      over $1.6 billion             and
       $2.0 billion,           respectively,             of commodities          primarily
       through       its    Child      Nutrition         Programs,      Temporary         Emergency
       Food Assistance             Program,         Commodity       Supplemental          Food
       Program,        Food Distribution                Program     on Indian       Reservations,
       and Nutritional             Program        for the Elderly.             FNS acquired         these
       commodities          by purchase,            using     its own appropriations,               and
       by transfer          at no charge            to FNS appropriations               from the
       Agricultural           Stabilization             and Conservation           Service     (ASCS)
       and the Agricultural                 Marketing         Service     (AMS).        These
       commodities          are an integral              part    of FNS’s mission           and
       programs.           Generally        accepted        accounting       principles        require
       that    the entire          cost of these            commodities       and their        related
       financing         sources       be recognized.             Therefore,        the fiscal        year
       1988 statements             recognize          the transfer       of food commodities
       and the related             expense        of $1.4 billion.            The fiscal         year
       1987 financial            statements           have also been restated               to
       recognize         the transfer           of $1.8 billion           in food commodities.

       The following     schedules             provide details  on the estimated
       commodities   diatributed               by FNS by source  and program    for
       1988 and 1987:




                            Page 34                                                    GAO/AFMD-91-3 Food and Nutrition Service
CAlId     ktrltlon
   Programs                  S400e265.250          I     522.364.904    $139,940,790     I     662,610,944

Othr    Roprams                 15,158,273               672,574,604       73.757.174          761.490.131

        Total                1415.443.523          s     994.959.5436   5213.697.%4      S1,624,101,075


FY 1987


Child    ktrltlon
   Programs                  J391,015,503          s     393.567.919    s121,665,541     s      906,468,%3


Other   &grams                  l&931,120                963,350.440     119,802,250         1,117,063.610


                             1404,946,62S          S1.376.916.359       $241.687.791     $2.023.542.775



            Although         overall      authority         to distribute        these commodities
            to eligible           recipients         rests     with   FNS, FNS delegates          this
            responsibility             to the state           and local      governments     which are
            required         to maintain        complete         and accurate       records     on the
            receipt,         disposal,       and inventory           of the commodities          and to
            provide       FNS with        monthly        inventory      reports.       However,     legal
            title      to these        commodities          passes    when the commodities            have
            been distributed               to the states.            As of September        30, 1988
            and 1987,          food commodities             remaining      in inventory      at the
            state      level      available        for distribution           to eligible
            recipients           were $296 million             and $244 million,
            respectively.


Note        6.       Funds    with          U.S.       Treasury
            FNS does not maintain              cash in commercial         bank accounts.
            Cash receipts         and disbursements         are processed         by the U.S.
            Treasury.        The balance         in the U.S. Treasury          COnSiStS of all
            unexpended       balances       of FNS accounts       with    the U.S. Treasury.
            As of September           30, 1988 and 1987, funds            available       to pay
            outstanding        obligations,         amounts   due to Treasury,          and
            amounts     available        until     expended   or obligational          authority
            lapses     were $1,899,617,000             and $1,645,980,000,          respectively.
Note        7.       Supplemental             Appropriation             for      Child   Nutrition           Program

            During      1986 grantees       of the Child     Nutrition    Program
            incurred      approximately       $117,000,000      of expenses     in excess                              of
            appropriations.           During   fiscal    1987 FNS received        a




                         Page 35                                                              GAO/AFMD-913       Food and Nutrition   Service
                                                                                                                                                                                                                   .

                                                         Financial                Statements




                 supplemental        appropriation        to cover     the prior      years'
                 expense.         In presenting       the 1987     financial       statements,                                                                                the
                 appropriation        was recorded       as an increase         to cumulative
                 results      of operations.         No supplemental         appropriation                                                                                 was
                 enacted      during    fiscal     1988.
Note              8.             Statement                             of        Reconciliation                           to       Budget              Reports

                 The schedule          below reconciles            total     operating        expenses     with
                 outlays,       as reported          in the Office          of Management           and Budget
                 Report,      SF-133,       Report      on Budget        Execution,        for fiscal      years
                 ended September            30, 1988 and September                 30, 1987 (dollars          in
                 thousands).           Outlays       as presented         in the Statement             of
                 Changes      in Funds with            U.S. Treasury          represent       cash payments
                 made by FNS.           These differ           from outlays         reported        on the SF-
                 133 for two reasons:                  Outlays     on the SF-133           include      amounts
                 transferred         to an FNS account             at Treasury          for food coupons
                 issued      which may not have been redeemed.                          Collections       on
                 accounts       receivable         reduce      reported      outlays.

                                                                                                                 1988                              1987
                                                                                                                                     (as         rGiG+ed)


Total         Operating             Expmrss               (a8      Reported            on
   the          Ststment            of      ~ratlons)                                                   S20,782,452                       S21.179.846


    Items           tbt     Roqulrlng                outlsys:
         O#w~ciatlon                  and       Whm-                                                                    (599)                           (457)
         sad oat  Exponu                                                                                         (53,671)                         (202,956)
         Food Cmmoditles                        used        In     FNS programs                             (1.410.403)                       (1,781,665)
         Ht         (Increase)              Decrease              In    Accounts             Payable
              and         Whw                                                                                   169.626                          (654,000)

           Total          Expnwe               k&t      hqulrlng                 Outlays               (J    1,275,247)              (I        2.839.278)


 Other           Items        N>+     Affecting                 Outlays!
        @wItal             Expenditures                                                                             5,370                                366
        Rec~lvables              Offsattlng                 Expenses                                              07,606                           137,579
        W     Mvancas                                                                                             29.811                                      0
        CabIt        Vouchers            Ebt         Frocoroed              by    Treasury                                     0                      3,839


           TOtSI           Evpen~~s          and        Whu            Outlays                          s        122,969                  S        141,764

Total         Outlays                                                                                   119,630,194                       516.462.352




                                                           Page 36                                                                                                GAO/AFMD-91-3     Food and Nutrition   Service
Note   9.    Equity     of   the    U.S.    Government:
       Equity     of the     U.S. Government          consists       of   Unexpended
       Appropriations,          and Invested         Capital.
       Unexpended        Appropriations
       Unexpended     Appropriations             include      the undelivered      orders
       and unobligated       balances          of the FNS funds which           receive
       Congressional      appropriations              through     the budgetary      process.
       Obligations          of appropriated            funds are recorded            as
       undelivered          orders.        Undelivered         orders      are relieved        by
       either      an expenditure           of appropriated             funds   or an obligation
       cancellation.            Appropriated           funds which are not obligated
       are included           in Unexpended           Appropriations          on the Statement
       of Financial           Position.         At the end of the fiscal                 year,
       certain       multi-year         appropriations           which have unobligated
       balances        remain     available         to FNS for obligation              in future
       periods.          Unobligated        appropriations            returned     to the U.S.
       Treasury       may be made available                for restoration           to FNS
       subject       to administrative              determination.
       The following  schedules               detail  the changes   in unexpended
       appropriations   for the             fiscal   years ended September     30,
       1988 and September    30,            1987 (dollars    in thousands):




                        Page 37                                                GAO/AFMD-91-3        Food and Nutrition   Service
                                                                  Financial             Statements




                                           Actlvlty              In    the    UnexD0nd.d      &,DraDrl4tfCM,            Account   for      Fiscal   year     1988



                                                                                                  Flrcal        Year      1988     Undelivered              Unobllgsted
                                                                                                     Approprlatlons                      Orders              mlances        -Total


emgInnIng            Balance.
  Octobw             1,        1967                                                                                                     s 19.924             s 19,532      1159.4%


Chsngm         In         Bglnnlng              Ealancn:
  Exparws       chargad       AgeIns*
  Prior   Yew      &proprlstlons                                                                                                         (34,767)                          (34,767)
  Funds   Ylthdrawn                                                                                                                      (43.784)              (79,371)   (123,155)


Changes        Attributed                  to        FY 1988          Approprlatlons:
   FY 1968           Approprlstlons                                                                   120,259,165
  Trenstu                Out       Under        Food       Stanp         Approprlatlon                         (39,627)
   Expenses              Ciwged            Agolnst          FY 1988
      kpproprlstlcns                                                                                   (19,366,312)
  Advsnea~               Chargad           Against          FY 1986
      ApproprIatIona                                                                                           (64,577)                   64,577                              64.577
  Unllquldatod                   Obllgatlonr       as
     of Septrber                     30,     1986                                                             (79,129)                     79,129                             79,129
  Un0ClIgot.d                   1966 Approprlatlas                                                          (381,357)                                          381.357       361,357
  Funds        WIthdrawn                                                                                    (328,183)
   Treasury              Funds        Restored                                                                                                                                         0




Endlng        Eblanca,               September             30.        1988                                                              1145,079             $381.518      $526,597

Iwra~se             In     Unexpended                 Approprlatlons                                                                                                       $367.141




                                                                  Page 38                                                                                  GAO/AFMBB1-3     hod        and Nutrition   Service
                                                     Financial          Statements




        ktlvlty                 In     the          UIoxpendad          @prowlotion                kcount      for     Fiscal   Yew        1987    (as   Restated)



                                                                                                            Undellvsred          IAmbligated
                                                                                         1987                 orders              balances                  Total
                                                                                        -                                         -                         -

BegInnIng                Balance,
   October                1,     1986                                                                        1090.704                 S- 9.966            $908,750
                                                                                                                                                           P

changes             In     BegInnIng                 Balaneas:
   Expnses                 Charged             Egalnst
   Prior           Year         ~proprlatlons                                                                (870,892)                (10.211)             (881,103)
   Funds           Wlthdrawn                                                                                   (27,892)                                      (27.692)


Changas            Mtributsd                   to      FY 1967
   Approprlatlons:
   FY        1987        Appropristlons                                               19.058.570
   Expanros                Charged             Against
      FY 1987 Apwoprlatlons                                                      (18.766.618)
   Advance8  Charged      AgaIns*
         FY       1967         Approprlotlons                                             (34.767)               34,767                                         34,767
   Lhllquldstmd                       Obltgstlons                (1s
        of        ~ptmbw                 30.         1967                                 (45.157)               45,157                                         45,157
   lhobllgstei                       1967
      Approprlatlons                                                                       (79.5321                                    79.532                   79,532
   Funds           WIthdrawn                                                             (132.4%)


Troswry              Funds           Rostaod                                                                                                 245                     245
                                                                                                                                       -                    -

Ending            Bslanca,             Septmbr               30,       1987                                  s 79.924                 179,532              $159,456
                                                                                                                                       -                    -



kcrease              In        tiexpmnded               &proprIatIons                                                                                    (1749,294)




                                                    Page 39                                                                                       GAO/-913                 Food and Nutrition   Service
                                        Financial    Statements




            Invested       Capital

            Invested       Capital       represents        the Government’s            net investment
            in FNS’s property              and equipment         and the total           Surplus      from
            anticipated         collections         on accounts        receivable         to which FNS
            is entitled         under the Food Stamp Act of 1977.                         Because       its
            programs       are funded with           appropriations,            prior     to fiscal
            year 1987 FNS believed                collections        of accounts          receivable
            were due back to Treasury.                     However,      fiscal       year 1988
            research       indicates        that    FNS is entitled           to use COllectiOnS
            from food stamp receivables                    except    those      collected        from
            retailers/wholesalers.
            The following      is a summary of                    the activitv    in   invested
            capital    for fiscal   years  1988                   and 1987 (dollars       in
            thousands1    :

                                                                            1988                  1987
                                                                                             (as restated)
            Beginning      Balance                                       $129,467                  $103,928
            Supplemental Appropriation                for
              PY 1986 Expenses                                                                      117,347
            Beginning  Balances After the
              Supplemental   Appropriation                               $129,467                  $221,275

            Excess of Financing   Sources              Over
              Operating  Expenses                                           64,916                   412,952
            Total Beginning    Balance and Excess
              Financing   Sources Over Operating
               Expenses                                                   194,383                    634,227

            Excess Financing  Sources               Due to
              Treasury  for FY 1986                                                                 (124,220)
            Excess of Financing Sources Due to
              Treasury for FY’s 1988 and 1987                              (11,956)                 (380,451)
            Capital      Expenditures                                        5,370                            366

            Current      Year Depreciation                                     (599)                      (455)

            Ending      Balance                                          $187.198                  %2biL&G




(1)17108)                               Page 40                                                   GAO/AFMD91-3      Food and Nutrition   Service
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