Financial Audit: Department of Veterans Affairs Financial Statements for Fiscal Years 1989 and 1988

Published by the Government Accountability Office on 1990-11-14.

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

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                                                                                                         FINANCIAL AUDIT
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                                                                                                         Department of
                                                                                                         Veterans Affairs
                                                                                                         Financial Statements
                                                                                                         for Fiscal Years 1989
                                                                                                         and 1988


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

                   Comptroller General
                   of the United States

                   November 14,lQQO

                   To the President of the Senateand the
                   Speaker of the Houseof Representatives

                   This report presents the results of our financial audit of the Department
                   of Veterans Affairs (VA) for the fiscal years ended September30, 1989
                   and 1988. Our audit results are summarized in this letter and described
                   in greater detail in our opinion on VA'S consolidated financial statements
                   and in our reports on VA'S internal control structure and its compliance
                   with laws and regulations. (Seeappendixes I through III.) VA'S financial
                   statements are presented as appendix IV.

                   In addition to the audit reports normally required by generally accepted
                   government auditing standards, we present later in this letter a discus-
                   sion and analysis of VA'S financial operations. We have also included a
                   statement analyzing VA'S appropriation activity and a summary of VA'S
                   self-assessmentof internal controls under the Federal Managers’ Finan-
                   cial Integrity Act (FMFIA). (Seeappendixes V and VI.) We believe that a
                   financial statement which analyzes appropriation activity is a desirable
                   addition to the standard set of financial statements. It provides a fuller
                   reporting of the relationship between accrual-basedstatements and the
                   status of appropriations used. We also believe that a summary of an
                   agency’sFMFIA report should be part of the agency’s annual report and
                   eventually be included within the scopeof the independent auditor’s
                   work and report.
                   We believe these additions will provide the Congressand the President
                   greater insight into and understanding of an agency’sfinancial affairs.
                   Taken together, this information represents the kind of financial disclo-
                   sure that should be made in an annual report by the head of an execu-
                   tive agency, department, or government corporation to the Congressand
                   the President. In this report, we prepared the financial information to
                   provide an illustration of how such information could be similarly
                   presented in other agencies’reports. The only difference would be that,
                   similar to the financial statements presented in this report, the prepara-
                   tion of the additional financial information would be the responsibility
                   of agency managementand the independent auditor would attest to its
                   fair presentation.

                   In our opinion, except for property and equipment, VA'S consolidated
Results in Brief   financial statements for fiscal years 1989 and 1988 are fairly stated in

                   Page1                              GAO/AFMD-91-6DepartmentofVeteransAffairs

    accordancewith generally acceptedaccounting principles (GAAP). The
    property and equipment amounts shown in the financial statements are
    not accurate primarily becauseof missing or undocumented values of
    the assetsand the inconsistent adherenceto capitalization and deprecia-
    tion policies by VA’S field personnel. The weaknessesin VA’S control over
    its property and equipment accounts are discussedin our report on
    internal control structure, which is included in appendix II.

    VA’S financial statements report certain accrued expensesaggregating
    nearly $5 billion at September30, 1989, that will have to be funded
    principally from future appropriations. These expenses(employee
    annual leave earned but not taken, life insurance premiums for disabled
    veterans that are funded by appropriations, and losseson guaranteed
    housing credit loans) are customarily financed through appropriated
    funds in the year payment is required. In addition, VA disclosed in the
    notes to its financial statements that the present value of the currently
    authorized compensation and pension benefits to veterans, which will
    also have to be funded by future appropriations, amounted to about
    $136 billion at September30, 1989.

     Our discussion and analysis of VA’S financial operations, which was
     basedon the audited financial statements and statistical data, budget
     reports, and other VA program data over the 4-year period ending with
    .,fiscalyear 1989, shows the following:
l   VA’S net operatingcosts decreasedslightly from fiscal year 1988 to fiscal
  year 1989, when they were $27.9 billion, whereas they increasedby
  $1.6 billion over the 4 fiscal years from 1986 to 1989. However, such
  costs, when measuredin 1986 constant dollars, decreasedby $1.6 bil-
  lion, or 6.1 percent, during the 4-year period.
. Costs related to VA’S health care program grew at a moderate 6.3 percent
  annually between fiscal years 1986 and 1989, but this increaseis in the
  context of a continuing decline in the number of veterans served and the
  occupancy rates in acute care hospitals. Hospital acute care costs,mea-
  sured on a per patient day basis, have increased 9.2 percent annually.
  Health care costs can be expected to continue rising at or above this
  level. However, VA is studying the possible realignment, or changeof
  mission, for its medical facilities, which may influence future funding
l Veterans benefit costs,which are comprised primarily of compensation
  and pension benefits, stayed basically constant during fiscal years 1986
  through 1989, ranging from about $15.3 billion to $16.9 billion a year.
  However, such benefits could increase significantly in the future due to

    Page 2                             GAO/APMJMl-6 Department of Veterans Affairs
  recent court rulings declaring certain citizens of the Philippines eligible
  for full U.S. veterans benefits and requiring benefit payments to those
  Filipino recipients to be paid at the samerates that other recipients are
l About $2.5 billion of the nearly $6 billion in accrued expensesat Sep-
  tember 30,1989, that will have to be paid during future years, princi-
  pally with appropriations, represents accrued losseson’outstanding
  guaranteed loans under VA’S housing credit assistanceprogram.
. VA’S life insurance program is securewith $12.2 billion in reserve. These
  reservesconsist of (1) amounts determined under GAAP neededto pay
  the actuarially determined guaranteed life insurance policy benefits,
  exclusive of future premium and investment income ($9.1 billion), and
  (2) additional amounts VA must hold in reserve to comply with the stat-
  utes which establish VA’S reserve requirements ($3.1 billion). This latter
  amount, under current VA practices, will eventually be distributed to
  policy holders through dividends or policy enhancements.The Congress
  can anticipate, though, the need to continue funding, through appropria-
  tions, certain unallocated administrative expensesrelating to the VA life
  insurance program and certain premium subsidies and policy claims
  under several insurance plans. The total of such appropriations
  amounted to about $41 million in fiscal year 1989.
l VA has serious problems collecting its receivables and therefore provided
  a reserve for doubtful accountsof $3.2 billion as of September30,1989.

    VA’S self assessmentof its accounting systems under FMFIA’haa identified
    eight areas where its major accounting systems fail to conform with
    accounting principles and standards for government agencies.These
    areas include, for example, weaknessesin the controls over property
    and equipment accounts,security controls at automatic data processing
    (ADP) centers, and the inability to adequately control funds and effec-
    tively detect duplicate payments for the loan guaranty program. As a
    result of our audit tests, we are not aware of any information which
    would contradict the matters included in VA’S FMFIA reports, and our
    summary of these reports is included in appendix VI.
    In our report on VA’S internal control structure, we are recommending
    that the Secretary of Veterans Affairs direct the Chief Veterans Benefits
    Director and various responsible assistant secretariesto take certain
    actions to correct weaknesseswe reported concerning property and

    ‘Under the FederalManagersF’inancialIntegrity Act of 1982I31 U.S.C.3612ib)and(c)l agencies
    must evaluate and report on their agencyinternal control and accountingsystemsto the President
    and the Congrea9eachyear.

    Page 8                                        GAO/AFMD-91-6Department of Vetenam Affairm

                                         equipment accounts,ADP security controls, and the recovery of erro-
                                         neousveterans benefit payments.

                                         This discussionand analysis presents information on VA’S operating
Discussion and                           costs and major assetsfor fiscal years 1986 through 1989. It is a narra-
Analysis of VA’s                         tive presentation of the results of an analytical review of financial data
EnaCid           position       aJnd     for each of VA’S programs. Important aspectsof VA’S financial operations
                                         are discussedand relevant trends are pointed out. For someprograms,
Operations                               financial data are related to other measuresof performance. In addition,
                                         we have included information, where appropriate, to make the Congress
                                         aware of critical areas, such as VA’S debt collection activities or whether
                                         a program may need significant future funding.

Highlights of VA’s                       VA’S net operating cost2for fiscal year 1989 was $27.9 billion, which rep-
Financial Operations                     resents approximately 2.6 percent of the U.S. government’s net oper-
                                         ating cost for that year. Table 1 shows VA’S total cost of operations
                                         during the 4 years beginning with fiscal year 1986, a period during
                                         which it served a declining veterans population.
Table 1: Net Cost of Operating VA’s
Programs for Fiscal Year, 1986 Through   Dollars in billions
1989                                                                                              Net operating cost for fiscal year
                                         Program                                                  1980        1987       1988        1989
                                         Health care                                               $9.5        $10.0         $10.5         $11.4
                                         Benefits                                                  15.4         15.3          15.5          15.9
                                         Housing credit assistance                                 0.7            1.6           1.8          (   0.2)
                                         Life insurancea                                           0.0           0.0           0.0           0.0
                                         Administration                                            0.7           0.7           0.8           0.8
                                         Total net operating costs                               $26.3         $27.6         $28.6         927.9
                                         ‘While VA’s life insurance program operated at slightly greater or less than break-even throughout the 4
                                         years, these operating results are shown as zero due to rounding.

                                         Although VA’S net operating cost decreasedslightly between fiscal year
                                         1988 and 1989, it grew at an average annual rate of 2 percent over the
                                         4-year period from fiscal year 1986 through fiscal year 1989. However,
                                         during this period, VA’S net cost of operations, when calculated in 1986

                                         ‘As used in this report, unless otherwise stated, the term “net operating cost” for health, benefits,
                                         and other nonbusiness-type operations is defined as the sum of expenses and benefit payments minus
                                         reimbursements and revenues, and before appropriations. For business-type programs, such as the
                                         howing credit and life insurance programs, “net operating cost” represents the net loss of the pw
                                         gram, also before appropriations.

                                         Page 4                                            GAO/APMDSlS Department of Veterans AH&n

                                          constant dollars, decreased6.1 percent, or $1.6 billion overall. Figure 1
                                          depicts VA'S net operating costs in both current and constant dollars for
                                          the 4-year period.

Flgure 1: VA’8 Net Operating Coat8 in
Current and Conrtant Dollar8 for Fiscal   a2    Dollars In billlonr
Year8 1986 Through 1989




                                           1088                              1987                                                            1989
                                           F+l ysars

                                                -         Current dollars
                                                I 1-1     Constant dollars

                                          Note: Constant dollars were computed by deflating current dollar levels using the consumer price as the

                                          VA'S totalassetsat the end of fiscal year 1989 were valued at $36.2 bil-
                                          lion-down $601 million from the previous year. Aside from cash with
                                          the U.S. Treasury of $4.9 billion, receivablesof $3 billion, and future
                                          financing sourcesof $4.8 billion, VA'S major assetswere comprised of
                                          two major categories.The first category is investments derived pri-
                                          marily from VA'S life insurance program. These investments, which
                                          amounted to $13.2 billion at September30, 1989, are mainly in special
                                          non-marketable U.S. Treasury bonds. The secondcategory is property
                                          and equipment, which is used primarily to provide medical care to vet-
                                          erans. Although the amount is not considered accurate, basedon our
                                          audit, the value of property and equipment at the end of fiscal year
                                          1989, as reported by VA, was almost $8.4 billion.

                                          Page 5                                           GAO/AFMD-914 Department of Veterans Affairs
VA’s Health Care Costs       The health care program operated by VA is the nation’s largest health
Growing at Nominal Rate      care system and includes 172 hospitals, 236 outpatient clinics, 122
                             nursing homes,and 29 domiciliary care units. All of the hospitals and
But Could Change             domiciliary care units and most of the outpatient clinics are organized
                             into 172 medical centers. In addition, VA health care is acquired under
                             contractual and grant arrangements with private and state medical
                             providers. VA'S health care program employs over 226,000 full- and part-
                             time health care workers, which is more than 90 percent of VA'S total
                             The cost of operating this health care program increased $1.9 billion, or
                             6.3 percent annually, from fiscal years 1986 to 1989, reaching $11.4 bil-
                             lion. The maJority (62 percent) of VA'S health care costs are for personnel
                             servicesand benefits of its approximately 226,000 health care
                             workers-a complement of employeesthat has remained at about the
                             samelevel in recent years. Lesseramounts finance the cost of supplies,
                             materials, and contractual services(27 percent) and rent, communica-
                             tions, utilities, depreciation, and other expenses(11 percent).

                             In recent years, VA has provided fewer episodesof inpatient care in its
                             hospitals while nursing care and other serviceshave increased slightly.
                             Between fiscal years 1986 and 1989, the inpatient occupancy rate of
                             hospitals, as reported by VA, declined from 73.4 percent to 68.8 percent
                             and the average daily censusof hospital inpatients declined from 66,940
                             to 49,040. Meanwhile, the averagedaily censusof nursing home patients
                             increased from 10,482 in fiscal year 1986 to 11,468 in fiscal year 1989,
                             In addition, the daily patient censusfor domiciliary care units increased
                             from 6,767 to 6,316 during the 4-year period.
                               Although VA reduced its hospital staffing levels of “full-time equivalent
                               employees” about 9 percent in responseto the reduced demand during
                               that period, VA'S total staffing of health care workers remained about
                               the samewith more workers used for other health care services.Recent
                               appropriations for medical care have specified minimum funding levels
                          *, for personnel compensation and benefits object classifications. For
                           ‘x, example, the supplemental appropriations act for fiscal year 1989
                               (Public Law 101-46) required that not less than $6.8 billion shall be .I
                               available for those classifications, and the conferencereport (H. R. Rep.
                               101-89)on a related bill directed VA to proceed towards a medical care,
                               full-time equivalent employee staffing level of 194,700.Accordingly,
                               VA'S flexibility to reduce the total number of health care workers may be

                             Page 6                              GAO/AF’Mb918 Department of Veterans Affairs

                          VA spent about $1.2 billion in fiscal year 1989 to acquire land, buildings,
                          and equipment, most of which was related to providing veterans health
                          care. In addition, VA spent about $460 million in fiscal year 1989 to
                          maintain its medical facilities. VA hospital construction projects were
                          mostly aimed at replacing, relocating, or modernizing facilities. VA's long-
                          range plans relating to medical facilities call for spending about $9.8 bil-
                          lion to repair or replace aging facilities.

                          The declining occupancy rate raises questions about the continuing need
                          for the present size of the aging VA hospital system-many of whose
                          facilities were constructed more than 40 years ago and are deteriorating.
                          Whether the need for hospital facilities and staffing will continue to be
                          the sameas in the past or whether reductions can be made are major
                          considerations in structuring the future alignment of VA'S medical facili-
                          ties. Significant potential may exist for consolidation of hospital facili-
                          ties and closure of older, less efficient units.
                          In this regard, in April 1990, VA established a Commissionon the Future
                          Structure of Veterans Health Care. The Commissionhas been charged
                          with reviewing the missions and programs of every VA medical facility to
                          ascertain whether programmatic improvements or enhancementscan be
                          realized through facility realignments or major mission changes.Unfor-
                          tunately, the results of the Commission’swork are not expected until
                          late 1991.

Veterans Benefits Costs   Various entitlement programs provide veterans with a number of bene-
Have Remained Constant    fits. Compensationis paid to veterans with disabilities resulting from or
                          coincident with military service and to survivors of service-connected
But Face an Uncertain     deaths. Pensionsare paid to low-income, wartime veterans who are 66
Future                    years old or older or who have becomepermanently and totally dis-
                          abled, as well as to qualified survivors of deceasedwartime veterans.
                          Other veterans benefits cover education, rehabilitation, and burial
                          The cost of operating veterans benefits programs increased an average
                          of 1.1 percent annually for fiscal years 1986 through 1989. For fiscal
                          year 1989, the cost of operating these programs was $16.9 billion, com-
                          pared with $16.6 billion the previous year.

                          About 96 percent of fiscal year 1989’snet operating costs for these pro-
                          grams, or $16.2 billion, related to disability compensation and pension

                          Page 7                               GAO/AF’MD918 Department of Veterans Affah

benefits. The remaining 4 percent related to other veterans benefit costs,
such as education, vocational training and rehabilitation, burial, and
clothing allowances.
Two factors could affect the growth (or reduction) of VA’S compensation
and pension program costs.These factors are the number of veterans
who receive benefits and the amounts these veterans receive. Together,
these factors have acted to maintain compensationand pension costs at
a generally consistent level during the past 4 fiscal years.
The number of recipients decreasedan averageof 2.1 percent each year
from fiscal year 1986 to 1989, whereas the average amount paid per
recipient increasedabout 4 percent annually during that period. The
increase in the amount paid to recipients is attributable to cost-of-living
adjustments and legislative changesin the amounts paid to recipients.

The effect of these factors is likely to result in VA’S annual compensation
and pension program costs, at least for the next several years, remaining
at levels comparable to those of the last 4 fiscal years unless the benefit
amounts are significantly changedthrough legislation or other action.
For example, one area of uncertainty that could significantly affect the
amount of annual VA benefit payments involves certain recent court rul-
ings. These recent rulings3 may increasecompensation and pension pay-
ments by as much as $1.6 billion annually, which represents 10 percent
of benefit payments for fiscal year 1989. If not reversed by a higher
court, these rulings would (1) make membersof the Philippine Common-
wealth Army and recognizedguerrilla forces eligible for full U.S. vet-
erans benefits as a result of their U.S. service during World War II,
rather than the partial benefits previously provided,,and (2) require
benefit payments to those Filipino recipients to be paid at the samerates
that other recipients are paid, rather than the previous one-half rate
paid to those Filipinos.
The present value of the authorized compensation and pension benefits
to veterans as of September30, 1989, which will be payable over future
years, is not recorded in VA’S financial statements. Federal accounting
principles governing the recording of such liabilities’ are undergoing
reexamination by the General Accounting Office (GAO). The present
interpretation of this matter by GAO is that disclosure of the estimated

                                       13 F. Supp. 436 (D.D.C.), reconsideration denied,
                                       States Veterans Administration, 713 F. Supp.

Page 8                              GAO/AFMD-916 Department of Veterans Affah


                            value of such future benefit payments, or entitlements, is required but
                            need not be recorded in the financial statements. Accordingly, VA has not
                            recorded the liability for such future payments in its financial state-
                            ments. However, VA disclosedthe estimated present value of these bene-
                            fits, not counting the potential effect of the court rulings relating to
                            Filipino benefit recipients, in the notes to its financial statements. The
                            amount disclosedwas $135.2 billion as of September30, 1989.

                            The estimated liability for these future payments is not currently
                            funded. Rather, payments for benefits that becomedue in a particular
                            fiscal year are financed from that year’s appropriation. Therefore,
                            future tax revenuesor other resources,such as public borrowings, will
                            have to be made available to finance payments of the future liability as
                            it becomesdue.

Housing Credit Assistance   VA'S housing credit program provides for the partial guaranty of home
for Veterans Will Require   mortgage loans that eligible veterans or qualified survivors of veterans
                            borrow from private lenders. At the end of fiscal year 1989, VA reported
Substantial Future          more than 3.9 million guaranteed home loans outstanding, with a total
Appropriations              face amount of $152 billion, of which VA had guaranteed about $60 bil-
                            lion, VA has also extended direct loans to home-buying veterans in cer-
                            tain rural areas where the veterans cannot find commercial lenders. As
                            of September30, 1989, VA was holding direct loans with a face value of
                            $1.2 billion, including “vendee” loans, which are direct loans on proper-
                            ties that VA acquired through foreclosure and then resold.
                            VA'Shousing credit assistanceprogram can incur expensesor lossesin
                            several ways: (1) payments made either to fully satisfy vendor claims or
                            to acquire foreclosed property, (2) expensespaid to maintain and sell
                            acquired property, and (3) lossesincurred when foreclosed properties
                            are sold. In addition, lossescan be experienced if VA sells its vendee
                            loans for less than the face value of the loans and if it pays for defaults
                            on any of these loans which may have been sold with recourse.Reve-
                            nues received from such sourcesas loan origination fees and interest
                            income from direct loans currently reduce housing program losses.
                            The cumulative net operating lossesof VA'S housing credit assistance
                            program for fiscal years 1986 through 1989 amounted to $3.9 billion.
                            Table 2 summarizesthe housing program’s net income or loss for these

                            Page 9                              GAO/AFMD-91-6Department of Veterans Affaira

Table 2: VA’8 Housing Credit Assistance
Program’s Nat Income or Loss for Fiscal   Dollars   in millions
Year8 1988 Through 1989                                                                              Fiscal year
                                          Revenue/expense category                   1988            1987        1988          1989        4-E%
                                            Fees                                     $258            $341        $135           $141          $875
                                            interest   income                          184             191            168        165           708
                                            Reimbursements                             (   1)         ( 45)       (    66)            7       ( 105)

                                            Total Revenues                            441             487          237           313         1,478

                                          Operating Expense@                        1,094           2,132       2,032            110         5,388

                                          Net Operating Income
                                          (Loar)                                    ($663)        ($1,645)    ($1,795)         $203       ($3,890)

                                          BFluctuations in the amount of operating expenses were caused by changes in the total provision for
                                          losses, which is determined through a statistical methodology based on historical default experience
                                          and economic forecasting. The provision for losses increases in those years where adverse conditions
                                          occur, such as increasing default rates and adverse statistical and economic indicators, and decreases
                                          when the conditions improve. In addition, a decrease occurred in the provision for losses during fiscal
                                          year 1989 due to a change, which the auditors approved, in the statistical methodology used to esti-
                                          mate the losses on guaranteed loans.

                                          As of September30, 1989, $2.7 billion of the 4-year cumulative net loss
                                          of the housing credit assistanceprogram represented estimated accrued
                                          loan lossesthat are payable in the future. VA’S financial statements show
                                          this net loss as a liability for losseson guaranteed 10ans.~About $2.5
                                          billion of this liability will result in a demand on future financing
                                          Appropriations will be required to finance most of this demand. This is
                                          consistent with the $2.3 billion in appropriations and transfers the Con-
                                          gress approved during fiscal years 1986 through 1989 to finance claims
                                          and operating expensesfor the housing credit assistanceprogram that
                                          were in excessof finances generatedby the program.
                                          However, becauseof recent legislative changesin the program, the
                                          demand for appropriations oriJotherfinancing for VA’S Loan Guarantee
                                          Fund, which is part of the houpng credit assistanceprogram, may be
                                          even greater in the future. The’Veterans Home Loan Indemnity and
                                          Restructuring Act of 1989 (Public Law 101-237,Title III) required that,
                                          starting in 1990, most new guaranteed or insured loan origination fees
                                          4Before fiscal year 1986, VA reported the housing credit program on a budgetary basis, whereby loan
                                          losses were recorded 89 payment was required. Beginning in fiscal year 1986, VA changed to an
                                          accrual basis of accounting for loan losses and established a reserve for the estimated cost that it
                                          would bear as loans already guaranteed default in the future.

                                          Page 10                                               GAO/AF’MD-918Department of Veterans Affah~

                           be deposited in a new fund-the Guarantee and Indemnity Fund. The
                           Loan Guarantee Fund will not, therefore, have a significant amount of
                           loan origination fees as a sourceof financing. These fees amounted to
                           $876 million during the 4 fiscal years from 1986 to 1989.
                           Future requirements for appropriations may, however, be easedsome-
                           what if the downward trend in the number of direct and guaranteed
                           loans and in loan defaults experienced in fiscal year 1989 continues.
                           Between fiscal years 1988 and 1989, the number of guaranteed loans
                           outstanding decreasedfrom 4 million to 3.9 million, and the number of
                           guaranteed loans in default dropped from 139,400to 130,276.The per-
                           centageof loans in default during this 4year period has ranged from 3.2
                           percent to 3 a6 percent.
                           In addition, the amount of appropriations required for the housing
                           credit program is affected by the number and types of loan sales.VA’S
                           experience with loan saleshas demonstrated that loans sold with
                           recourseprovide a greater amount of initial cash than those sold
                           without recourse.VA’S financial advisors for the two without-recourse
                           loan salesin fiscal year 1988 estimated that VA would have increased its
                           initial cash proceedsby about $200 million had the salesbeen made with
                           recourse agreements.Thus, using recourse contracts for selling loans
                           could have given the loan guaranty fund a substantial amount of addi-
                           tional cash receipts in fiscal year 1088. This would have resulted in the
                           fund’s requiring $200 million less in appropriated funds for that year.

Veterans’ Life Insixance   VA administers five plans to provide life insurance to veterans of dif-
Program Is Secure          ferent war eras, including World Wars I and II, and the Korean Conflict.
                           VA also supervisesthree life insurance plans, operated by commercial
                           insurance companies,which provide coverageto active military per-
                           sonnel and veterans. Of the five life insurance plans that VA administers,
                           only Service-DisabledVeterans Insurance remains open for new policy
                           issues.The other four are no longer writing new policies.
                           VA’slife insurance program receivesrevenue primarily from life insur-
                           ance premiums received from policyholders and interest earned on
                           investments. Costs are incurred for this program when it pays claims
                           and dividends to policyholders. In addition, the life insurance program
                           has administrative expenses,but the majority of these costs are paid
                           with VA’S appropriated funds and are not allocated to the life insurance

                           Page 11                            GAO/~918      Department of Vetmane Affh
                                          Over the 4 fiscal years from 1986 to 1989, the life insurance program, as
                                          intended by the Congress,has operated at a near break-even level. That
                                          is, revenuesgenerated by the program were generally sufficient to pay
                                          benefit payments and dividends to policyholders.
                                          In this regard, the life insurance program’s fiscal year 1989 expenses
                                          were $2 million less than receipts-excluding certain unallocated,
                                          administrative expenses.During the preceding 3 fiscal years, the life
                                          insurance program’s expenseswere greater than receipts ranging from
                                          $16 million to $20 million, These differences were largely attributable to
                                          the Service-DisabledVeterans Insurance plan, which is intended to
                                          receive appropriated funds to finance the portion of policyholders’ pre-
                                          miums applicable to the service-connecteddisability of the veteran. The
                                          veteran, or policyholder, pays the standard premium rate for the life
                                          insurance coverage.Two other government insurance plans, the
                                          National Service Life Insurance and the United States Government Life
                                          Insurance plans, also receive limited appropriations for payment of
                                          claims traceable to the extra hazards of military service. Table 3 sum-
                                          marizes the results of operating VA’S life insurance program during the
                                          period from fiscal year 1986 to 1989.
Table 3: Operatlng Result8 of VA’8 Llte
lnrurance Program for Flecal Yean 1986    Dollars in millions
Through 1989                                                                                 Fiscal year
                                          Revenue/exDense cateaorv                1988       1987        1988       1989
                                            Premiums                              $848        $878       $874       $871
                                            Interest income                       1.166      1.192      1.230       1.274
                                            Reimbursements                         ( 3)       ( 8)         79         43

                                            Total Revenues                       2.011       2.082      2.182      2.188
                                            Loss reserve provision                 191         230        313        222
                                            Claim payments                         931         919        933        959

                                            Total Expenses and Losses             1,122      1,149      1,248      1,181

                                          Net Qaln Over Expenses                  $889       $913       $938      $1,007

                                          Pollcv Dividends                        9907       8929       $958      91.005

                                          VA’slife insurance program is in a secureposition. Revenuesof about
                                          $2 billion have stayed reasonably constant between fiscal years 1986

                                          Page 12                            GAO/AFMD-914 Department of Veterana Affairs

                                 and 1989-rising about $200 million during that period. Life insurance
                                 program investments, which generated 68 percent of the program’s rev-
                                 enue in fiscal year 1989, are principally in special U.S. bonds and experi-
                                 encedan averagereturn of about 9.7 percent in fiscal years 1988 and
                                 1989. However, life insurance premiums, which constituted 40 percent
                                 of revenuesin fiscal year 1989, are declining as the program has
                                 matured. Most veteran policyholders are paying premiums at the capped
                                 maximum rate or are no longer required to pay premiums.
                                 In addition, costs related to claim payments and dividends remained
                                 steady. For fiscal year 1989, claim payments were about $969 million,
                                 which were slightly higher than claim payments made during the pre-
                                 ceding 3 fiscal years. Except for fiscal year 1986, the amounts paid as
                                 dividends to policyholders were slightly higher than the amounts paid to
                                 life insurance claimants.
                                 VA has provided   adequate reservesfor future life insurance policy bene-
                                 fits and participating policyholders’ interest.6These reserveswere $9.1
                                 billion and $3.1 billion, respectively, at September30, 1989. The
                                 reservesplus VA'S life insurance program revenuesare expected to be
                                 sufficient to pay future claims and dividends. Thus, VA can expect to
                                 maintain its life insurance activities without additional financial assis-
                                 tance from appropriations.

                                 The Congresscan anticipate, though, the need to continue funding,
                                 through appropriations, the VA life insurance program’s unallocated
                                 administrative expenses,which were $27.2 million in fiscal year 1989,
                                 and the premium subsidies and certain claims under several government
                                 life insurance plans, which were about $13.6 million in fiscal year 1989.

VA’s General              VA’S general administrative costs were $800 million in fiscal year 1989-

Administrative Costs Have about  the sameamount as was incurred in fiscal year 1988. In addition,
                          about $1.I5million of general administrative costs is allocated annually
Not Grown Significantly   to VA'S life insurance program to cover certain insurance plans. The
                                 remaining general administrative costs are not allocated to the life
                                 insurance or other VA programs.

                                 6As discussed in our opinion on VA’s financial statements (appendix I), VA’s current practices will
                                 eventually cause the reserve for participating policyholders interest to bc distributed to policyholders
                                 in the form of dividends or policy enhancements.

                                 Page 12                                           GAO/AF’MD-91-6Department of Veterans Affah

                        The unallocated general administrative costs represent 2.9 percent of
                        VA’stotal operating costs and increasedby $100 million between fiscal
                        years 1986 and 1989. These unallocated costs are composedof the fol-
                        lowing types of expenses:salaries and employee benefits (70 percent);
                        rents, utilities, and communications (17 percent); and other expenses
                        (13 percent).
                        The Congresscan anticipate the continuing need to finance VA’S general
                        administrative activities through appropriations. However, these costs
                        have not grown significantly in recent years and are expected to remain
                        at comparable levels in the near future.

VA Has Serious Credit   At the end of fiscal year 1989, VA had $6.2 billion in amounts due the
Management Problems     government from advancesand accounts and loans receivable. These
                        assetsincreased$1.2 billion from fiscal year 1986 to 1989. VA’S allow-
                        ance for doubtful accountsrelated to its-receivablesis considerable,
                        amounting to $3.2 billion at September30,1989. This represents 52 per-
                        cent of aggregatedaccountsand loans receivable at that time-a sub-
                        stantial increase from 34 percent in fiscal year 1986. Figure 2 compares
                        VA’S total receivableswith receivablesit expects to collect after consid-
                        ering its allowance for doubtful accounts for fiscal years 1986 through

                        Page 14                            GAO/MMD816 Department of Veterana Affahn

Figure 2: VA’8 Gross and Net
Recelvabler for Flrcal Years 1986
                                    7.6   Dollars in bllliorm
Through 1989


                                     1988                               1987                             1986                                 1959
                                     Flaoal yaars
                                          -         Gross receivables
                                          -I I I    Net receivables

                                    Note: In this figure, net receivables equal gross receivables less the provision for doubtful accounts.
                                    Therefore, the area between the two lines represents the provision for doubtful accounts.

                                    Figure 2 reflects VA'S serious credit managementproblems. In this con-
                                    nection, total bad debt lossesfor uncollectible accounts and loans aggre-
                                    gated $3.1 billion for fiscal years 1986 through 1989. Further evidence
                                    of VA’S credit managementproblems is indicated by the large percent-
                                    agesof sometypes of receivablesfor which VA has established doubtful
                                    account reserves.For instance, as of September30, 1989, about
                                    $776 million was receivable from individuals for amounts due primarily
                                    on education loan defaults and compensation and pension benefit over-
                                    payments; from third-party insurers for health care; and from veterans
                                    for hospital servicescopayment billings. VA’S reserve for doubtful
                                    accounts on these assetswas 37 percent. As of September30,1989,
                                    about $3.6 billion of the $4.7 billion in loan receivableswas for loans
                                    due under the housing credit assistanceprogram. VA’S reserve for
                                    doubtful accountson the housing credit loans was 73 percent.

                                    Page 15                                             GAO/AFMD-91-6Department of Veterans Affaira

              We have reported on VA’s serious credit managementproblems many
              times in the past. Most recently, we reported in April 19906that much
              remains to be done to ensure that a comprehensivegovernmentwide
              credit managementprogram as set forth by the Office of Management
              and Budget in Circular A-129 is fully implemented. The report included
              recommendationsto the Secretary of Veterans Affairs for improving
              VA’S credit management.

              In that report, we also recommendedto the Congressthat the Debt Col-
              lection Act of 1982!;beamendedto require agencies,including VA, to use
              certain credit managementtechniques. In addition, we recommended
              that the Congressrequire agenciesto provide it annually with audited
              financial information on their receivables and delinquencies for its use
              in making budgetary decisionsto supply new funds. As demonstrated in
              this discussionand analysis and the appendixes to this report, it is
              important for the Congressto have reliable information on receivables
              and delinquencies to assesshow well agencies,such as VA, are doing in
              collecting amounts owed to the government and the extent to which
              these government assetscan be collected.

              The above discussion and analysis is basedprimarily on accounting data
Scopeand      included in VA’S audited consolidated financial statements for fiscal
Methodology   years 1986 through 1989. However, certain analyses required the use of
              statistical and financial data, such as daily hospital occupancy rates,
              from other sources.We obtained these data from VA’S various budget
              reports and program systems, which were not subject to our audit and
              independent verification. Thus, we are not expressing any views on the
              accuracy of these other statistical and financial data.
              Our analysis is focused on the following financial attributes:
              the overall cost of VA’S operations and the operating cost of each major
              program and
              financing sourcesand their effect on VA’S financial position.
              We also consideredthe efficiency of VA’S assetutilization and the
              liquidity and solvency of VA’S business-typeprograms.

              %redit Management: Deteriorating Credit Picture Emphasizes Importance of OMB’s Nine-Point Pro-
              gram (GAO/AFMD -90 - 12, April 16,199O).

              Page 16                                       GAO/AFMD-91-6 Department of Veterans Affalra

As previously stated, the information in this report reflects the kind of
financial disclosure we believe should be made in an annual report to
the President and the Congressby the head of each executive agency
and government corporation. Such information reflects accountability
for government programs and resourcesand can be useful for oversight
and decisionmaking when assessingdepartment programs and deter-
mining public policy. With improved financial reporting as an objective,
we plan to continue working with agencies,such as VA, and the Office of
Managementand Budget to have the issuanceof annual audited finan-
cial statements permanently adopted as a requirement for all agenciesof
the federal government.
We are sending copiesof this report to the Chairmen of interested con-
gressional committees and subcommittees,the Director of the Office of
Managementand Budget, the Secretary of Veterans Affairs, and the
heads of other federal agencies.Copieswill be made available to others
upon request.

Charles A. Bowsher
Comptroller General
of the United States

Page 17                            GAO/AF’MD-91-6Department of Veterans Affaim

Letter                                                                                            1

Appendix I                                                                                      22
Opinion Letter
 --       II                                                                                    27
Report on Internal     Inconsistent Adherence to Property and Equipment
                           Capitalization and Depreciation Policies Continues
Control Structure      Certain ADP Software Maintenance and Data Integrity                      32
                           Control WeaknessesContinue
                       Controls Ineffective in Preventing Erroneous Benefit                     33
                           Payments on Behalf of DeceasedRecipients
                       Weak Controls Impede RecoveringErroneous Benefit                         34
                       Conclusions                                                              36
                       Recommendations                                                          36
                       Other Opportunities for Improvement                                      37
                       Agency Comments                                                          37

Appendix III                                                                                    38
Report on Compliance
With Laws and
Appendix IV                                                                                     40
Financial Statements   Consolidated Statements of Financial Position
                       Consolidated Statements of Operations
                       Consolidated Statements of Changesin Financial Position                  42
                           and Reconciliation to Budget
                       Notes to Financial Statements                                            43
                       Supplemental Schedules                                                   68
                       Scheduleof Assets, Liabilities, and Equity by Major                      69
                           Program as of September30,1989
                       Scheduleof Assets, Liabilities, and Equity by Major                      70
                           Program as of September30,1988
                       Scheduleof Expenses,Dividends, Revenue,and Financing                     71
                           Sourcesby Major Program for Fiscal Year 1989
                       Scheduleof Expenses,Dividends, Revenue,and Financing                     72
                           Sourcesby Major Program for Fiscal Year 1988

                       Page 18                           GAO/AFMD-BlS Department of Vetaran~ Afhirm

                          Scheduleof Sourcesand Usesof Resourcesand                                 73
                             Reconciliation to Budget by Major Program for Fiscal
                             Year 1989
                          Scheduleof Sourcesand Usesof Resourcesand                                 74
                             Reconciliation to Budget by Major Program for Fiscal
                             Year 1988
                          Budgeted and Actual Outlays by Function and Program                       76
                             for Fiscal Year 1989
                          Budgeted and Actual Outlays by Function and Program                       76
                             for Fiscal Year 1988

Appendix V                                                                                          77
Statement of VA’s         What Are Expired Appropriation, Surplus Authority,
                              “M”, and Merged Surplus Accounts?
Appropriation             Accounting for VA’s Appropriations During Fiscal Year                     78
Authority                     1989
                          Relationship of Appropriation Tables With Audited                         81
                              Financial Statements

Appendix VI                                                                                         82
Summary of VA’s           Background
                          VA Reports Annually on Material Weaknesses
Federal Managers’         Material Internal Control Weaknesses                                      84
Financial Integrity Act   Additional Special ConcernsAlso Reported                                  87
Tables                    Table 1: Net Cost of Operating VA’s Programs for Fiscal                     4
                              Years 1986 Through 1989
                          Table 2: VA’s Housing Credit Assistance Program’s Net                     10
                              Income or Loss for Fiscal Years 1986 Through 1989
                          Table 3: Operating Results of VA’s Life Insurance Program                 12
                              for Fiscal Years 1986 Through 1989
                          Table V. 1: Statement of VA Appropriations Used and                       79
                              Remaining Available for Obligation or Expenditure
                              During Fiscal Year 1989
                          Table V-2: Statement of VA’s Surpluses From Expired                       80
                              Appropriations-Fiscal Year 1989
                          Table VI. 1: Categoriesof Reported Material                               83
                              Weaknesses- 1983 Through 1989

                          Page 19                           GAO/AFMD-91-6Department of Veterans Affaira

IFigures   Ngure 1: VA’s Net Operating Costsin Current and                        6
               Constant Dollars for Fiscal Years 1986 Through 1989
           Figure 2: VA’s Grossand Net Receivablesfor Fiscal Years               16
               1986 Through 1989


           ADP        automated data processing
           CARD       centralized accountsreceivable division
                      Disbursing, Accounting and Budgeting System
           DFC        data processingcenter
           EFT        electronic funds transfer
           FMFIA      Federal Managers’ Financial Integrity Act
           GAAP       generally acceptedaccounting principles
           GAO        General Accounting Office
           IG         inspector general
           OME!       Office of Managementand Budget
           VA         Department of Veterans Affairs
           SSA        Social Security Administration

           hi@20                             GAO/AF’MD@M Deplummt of VeteMl Affair8

Page 21   GAO/AFMD-916 Department of Vetemu Affah
Appendix I

Q?   inion I&ter

                   GeneralAccounting Offlce
             GAO   Washington,D.C.20546
                   Comptndler Geneml
                   of the Unlted States


                   To the Secretary
                   Department  of Veterans              Affairs

                   We have audited           the accompanying      consolidated      statements     of
                   financial      position      of the Department       of Veterans       Affairs
                    (VA) as of September 30, 1989 and 1988, and the related
                   consolidated        statements     of operations       and changes in
                   financial      position      and reconciliation        to budget for the
                   fiscal    years then ended.          These consolidated         financial
                   statements      are the responsibility           of VA's management.           our
                   responsibility          is to express an opinion          on these financial
                   statements      based on our audits.
                   We conducted         our audits         in accordance          with generally
                   accepted       government        auditing        standards.         Those standards
                   require      that we plan and perform                   the audits       to obtain
                   reasonable        assurance        about whether           the financial         statements
                   are free of material              misstatement.             Also,     in accordance         with
                   those standards           and as an integral               part of our audits,             we,
                   with assistance           from VA's Inspector                General,      reviewed      VA's
                   internal       control      structure        and its compliance              with laws and
                   regulations,         and we are reporting                 separately       on the results
                   of these reviews.              Our audits          included       examining,       on a test
                   basis,    evidence        supporting         the amounts and disclosures                   in
                   the financial          statements.           Our audits         also included
                   assessing       the accounting            principles         used and significant
                   estimates       made by management,                as well as evaluating              the
                   overall      financial        statement        presentation.            We believe       that
                   our audits        provide       a reasonable          basis for our opinion.
                    COSTS OF LAND, BUILDINGS,                AND EQUIPMENT
                    Our opinion       on VA's consolidated      financial  statements
                    remains qualified         as to the amounts reported      for land,
                    buildings,       equipment,    and related    expense accounts.     This
                    qualification        could be removed if VA were to establish          the
                    missing       or undocumented    values by appraisal     or some other
                    reasonable       basis and install      and maintain  adequate property

                     Appendix I
                     Opinion Letter


accounting     records   that provide       accountability.           The
172 medical      centers   and related      facilities      which provide
medical    care to veterans       comprise     the majority        of VA’s
reported    property.      We believe     that the failure           to
establish     proper accountability         is a material        internal
control    weakness which requires          correction      to ensure
adequate financial       management of VA’s assets,              a proper
recording     of the cost of operating            the medical      centers,            and
the preparation       of satisfactory       consolidated       financial
Our opinion,         dated April         14, 1989, on VA’s fiscal               year 1988
and 1987 consolidated               financial      statements,        was also
qualified       because the statements              presented      life      insurance
policy      reserves       which were calculated             in accordance         with
statutorily-required               assumptions      rather     than generally
accepted       accounting        principles       (GAAP) , which would have
more fairly        presented        the amount of reserves              needed to pay
future      insurance       policy      benefits.       As described         in note 6,
in fiscal       year 1989, VA adopted the policy                   of presenting
these reserves           in its financial          statements       in accordance
with GAAP and restated                its 1988 consolidated             financial
statements        to make the change retroactive                  to that year.
Accordingly,         this qualification            was removed from our
opinion       on the 1988 consolidated               financial      statements        as
presented       herein.
VA changed to GAAP reporting                    of its life       insurance       reserves
because these principles                 are the preferred           practice       in the
insurance       industry       for the public           reporting     of life
insurance       transactions          and the resulting           reserves      and
liabilities,           As a result         of this change, VA’s reserve                 for
insurance       policy      benefits,       which is now presented              in
accordance        with GAAP, has been reduced by 82.9 billion.
The reduction          of this      reserve      and related        changes create a
new reserve         of approximately            $3.1 billion        which,    consistent
with GAAP, is called               “Participating          Policyholders’         Interest
in Accumulated           Participating          Earnings.”        However, this $3.1
billion      reserve      is not immediately              payable by VA under
existing      statutes.          Although       VA has adopted the policy               of
reporting       the reserves          that are realistically              required      to
pay future        insurance       policy      benefits,       it is still       required
by the applicable             statutes       to hold the $3.1 billion               in

                     Page 28                                         GAO/AF’lKDBl4 Department of Veterans Affaim
                        Appendtx I
                        Opinion Letter


    VA no longer         issues new life      insurance      policies      under the
    programs associated            with the $3.1 billion.            VA presently
    pays dividends           to its policyholders       , and provides         insurance
    policy      enhancements       such as "paid-up"       and "reduction-in"
    policy      premiums,      which are based upon the amount of its
    total     accumulated       premiums and earnings         in excess of its
    statutory       reserves.       As the number of policies             decreases,
    the reserves         required     under either      GAAP or VA's statutes
    will    gradually       decrease    to zero.      Accordingly,        under current
    VA practices,          the $3.1 billion       reserve    will     eventually      be
    distributed        to policyholders        in the form of dividends              or
    policy      enhancements.
    In our opinion,        except for the effect             of adjustments,         if
    any, that might have been necessary                   had we been able to
    perform    the necessary       auditing         procedures      to substantiate
    the asset and related          expense accounts,             as discussed      in
    paragraph     three above, the accompanying                  consolidated
    financial     statements     present        fairly,     in all material
    respects,     the consolidated          financial       position      of the
    Department      of Veterans     Affairs         as of September 30, 1989 and
    1988, the results         of its operations          , and the changes in its
    financial     position     and reconciliation             to budget for the
    fiscal    years then ended, in conformity                  with generally
    accepted     accounting     principles.
    Our audits   were made for the purpose                 of forming       an opinion
    on the consolidated         financial        statements      taken as a whole.
    The supplemental      schedules         to the consolidated           financial
    statements    are presented          for purposes of additional
    analysis.    The supplemental             schedules     have been subjected
    to the auditing      procedures         applied      in the audits       of the
    basic consolidated        financial        statements       and, in our
    opinion,   except    for the same qualification                 mentioned       above,
    are fairly    stated    in all material            respects     in relation       to
    the basic consolidated           financial        statements      taken as a
    In our fiscal        year 1988 and 1987 report      on VA's consolidated
    financial       statements   (GAO/AFMD-89-691,    we expressed    concern
    that,     for the loan guaranty     fund component of its housing
    credit      program,   VA might require   increased    assistance    from
    the Congress over the next several           years if certain


                         Page 24                                      GAO/AFMD-@l-6DePartment of Veterans Affah

                         Appendlr I
                         Opinion Letter


    conditions      worsened.        The conditions      did not worsen in 1989.
    The principal        condition,     home loan foreclosures,           improved in
    fiscal     year 1989, with home loan foreclosures                decreasing
    from about 49,000 in fiscal               year 1988, to about 43,000 in
    1989.      This was the first         year that VA experienced          a
    lessening      of home loan foreclosures            since 1980.
    Accordingly,        only about $780 million           in appropriations      was
    needed to supplement            the financing      of the loan guaranty
    fund’s     operations      during   fiscal     year 1989, versus the
    approximately        $900 million       requested     in VA’s budget.
    VA anticipate8       that this improvement      will     continue     but that
    it will     still  need annual appropriations          to operate       the
    fund for several        years. For example,      VA estimates         that it
    will    need about $558.5 million        in appropriations         for the
    loan guaranty      fund during  fiscal     year 1990.        VA’s fiscal
    year 1991 budget submission         includes    a request       for $512.2
    million     for the fund.
    Establishment       of an Additional      Fund--
    the Guaranty       and Indemnity     Fund
    On December 18, 1989, the Veterans                   Home, Loan Indemnity          and
    Restructuring        Act of 1989 (Public           Law 101-237,        Title     111)
    established        an additional        revolving      fund called       the
    Guaranty      and Indemnity         Fund , which is available            to operate
    VA’s programs for guaranteed                 or insured     loans closed on or
    after     January     1, 1990.       Among other things,          this
    legislation        changed the veteran’s           loan origination           fee on
    each loan guaranteed,             insured,      or made by VA from 1 percent
    to a percentage         that varies        from zero to 1.25 percent,
    depending      on the veteran’s          status    and amount of downpayment
    made on a loan.           These fees are to be credited                to the Fund.
    The Act also added the requirement                   for the federal
    government       to credit      the Fund with certain            amounts for each
    loan guaranteed,          insured,      or made through        the Fund.         A bill
    introduced       in the Congress          (S. 2100) would make technical
    corrections        to the amounts the federal              government        must
    credit      to the Fund.
    Both VA and the Congressional              Budget Off ice (CBO) estimate
    that the fees and credits           required     by the legislation               will
    not be sufficient       to finance       the operations             of the Fund for
    the long term.       This cash insufficiency               will      not be
    apparent     for a number of years because outlays                      for losses
    will   not be required     until      that time.          VA estimates         that
    the Fund will     require    direct      appropriations            beginning      in
    fiscal     year 1995, while CBO estimates              that such
    appropriations     will   not be required           until       fiscal     year 1999.

                         Page 28                                      GAO/AF’MJS918Department   of Veterans Affaira
                      Amendh I
                      oplnjon I&t.er


VA’s consolidated         financial       statements      reflect      accrued
expenses aggregating          approximately          $5 billion      at
September 30, 1989, that will                be funded principally            from
future    appropriations.           About one-half        of this amount
represents      losses    incurred     under the housing            credit   program
referred    to in the preceding             section    of this      report.      In
addition,     the present        value of commitments            for compensat on
and pension benefits           to veterans        which will      also have to be
funded from appropriations              in future      years     aggregated
approximately        $135 billion      at September 30, 1989.
Payment of these expenses and benefits              requires
congressional    appropriations        of future    tax revenues          or 0 her
sources,    such as public      borrowing.       The accounting          for
these items is explained         in notes 1 and 4.

Charles     A. Bowsher f-
Comptroller     General
of the United States
April    20,   1990

                      Page 26                                    GAO/AFMD-91-9Department of Veterana Affaira
Appendix II

&port on Internd Control Structure

               We have audited the consolidated financial statements of the Depart-
               ment of Veterans Affairs as of and for the year ended September30,
               1989, and have issued our report thereon dated April 20,lQQO.We con-
               ducted our audit in accordancewith generally acceptedgovernment
               auditing standards. As required by these auditing standards and as part
               of our audit, we obtained an understanding of and assessedVA’S internal
               control structure to the extent we considerednecessaryin planning and
               performing our audit. Our consideration of the internal control structure
               was made to determine our auditing procedures for the purpose of
               expressing an opinion on VA’S consolidated financial statements and not
               to provide assurancesabout the adequacy of the overall internal control
               structure. The consideration of an internal control structure for finan-
               cial auditing planning purposes by itself is not sufficient for expressing
               an overall opinion about the design and operation of an entity’s internal
               control structure as a whole or of any specific elements, but such a con-
               sideration may discloseweaknessesin specific aspectsof the control
               The purpose of this report is to describe VA'Sinternal control structure
               that we considered and to communicate the results of our consideration
               and tests of the policies and procedures comprising the structure. This
               report pertains only to our consideration of VA'Sinternal control struc-
               ture for the year ended September30,1989. Our report on VA'Sinternal
               accounting controls for the year ended September30,1988, is presented
               in GAO/AF'MD-~~-~~,
                                 dated September 16, 1989.
               The managementof VA is responsible for establishing and maintaining a
               system of internal administrative and accounting controls (in effect, an
               internal control structure) in accordancewith the Accounting and
               Auditing Act of 1960 and the Federal Managers’ Financial Imegrity Act
               (FMFIA) of 1982. (Seeappendix VI for a discussionof VA'Sreporting on
               the status of its internal control and accounting systems in accordance
               with the FMFIA'Srequirements.)

               In fulfilling this responsibility, estimates and judgments by management
               are required to assessthe expected benefits and related costs of internal
               control structure policies and procedures. The objectives of an internal
               control structure are to provide managementwith reasonable,but not
               absolute, assurancethat (1) obligations and costs are in compliance with
               applicable laws, (2) funds, property, and other assetsare safeguarded
               against waste, loss, and unauthorized use or misappropriation, and
               (3) assets,liabilities, revenues,and expenditures applicable to agency

               Page 27                            GAO/AFMD-916 Department of Veterana Affairs
    Report on Int4unal Control Structure

    operations are properly recorded and accountedfor to permit the prepa-
    ration of accountsand reliable financial and statistical reports and to
    maintain accountability over agency assets.Becauseof inherent limita-
    tions in any internal control structure, errors or irregularities may nev-
    ertheless occur and not be detected. Also, projection of any evaluation of
    the structure to future periods is subject to the risk that procedures may
    becomeinadequate becauseof changesin conditions, a ‘lapsein the
    degreeof adherenceto the procedures,or a deterioration in the effec-
    tiveness of the design and operation of policies and procedures.
    For purposes of this report, we have classified the VA’S significant
    internal control policies and procedures over accounting applications,
    such as purchases,entitlements and loan processing,payroll, revenue
    and receipts, and life insurance policy premiums and payment
    processing,into the following areas:
. medical care and construction;
l veterans benefits;
l housing credit assistance;
l life insurance; and
l administration and other, including all payroll.

    For all the areas listed, we obtained an understanding of the design of
    relevant policies and procedures that comprise the control structure,
    determined whether they have been placed in operation, and assessed
    control risk. We also performed tests of control proceduresthat were
    sufficient to evaluate their operational effectiveness for all of the areas
    listed above. In the medical care area, the control testing was substan-
    tially performed for us by VA'S Inspector General (IG). The IG also supple-
    mented our control testing in the veterans benefits area. However,
    neither we nor the IG tested control procedures for all functions within
    the areas. For example, in the veterans benefits area, we tested the
    processingof compensation and pension benefits; however, we did not
    test control procedures relative to the national cemetery operational
    component of VA'S veterans benefits. Furthermore, we did not assessthe
    internal control structure in certain miscellaneousfunds, such as the
    General Post Fund and the Supply Fund. For these excluded areas, it
    was more efficient to expand our audit tests to substantiate the balances
    of accounts associatedwith the respective control area. Substantive
    audit tests, which we also performed to someextent for all of the con-
    trol areas listed, can also serve to identify weaknessesin internal control

    Page 28                                GAO/AFMD-91-6Department of Veteram Af’fhhu
    lrppendix rf
    Report on Internal control Structure

    We consideredVA’S FMFIAreports, as well as the IG’s reports on financial
    matters and internal accounting control policies and procedures, in
    making our risk assessment.As previously stated, we also relied on the
    IG’S testing of controls in the medical care area and certainOcontrolsin
    the veterans benefits area.
    Our consideration of the internal control structure, made for the limited
    purpose described in the first paragraph, would not necessarily disclose
    all matters in the internal control structure that might be reportable
    conditions and, accordingly, would not necessarily discloseall reportable
    conditions that are also consideredto be material weaknessesas defined
    below. For this reason, we do not express an opinion on VA’S internal
    control structure, taken as a whole, or within the functional areas listed
    above. However, our study and evaluation disclosedthat, despite imple-
    mentation of certain corrective actions, two matters involving the design
    or operation of the internal control structure disclosed as reportable
    conditions in our fiscal year 1988 report continue to exist and warrant
    disclosing in this report. Thesetwo conditions involve

l   accounting for VA’S property and equipment and related depreciation
l   VA’S controls over automated data processing(ADP) software mainte-
    nance and data integrity.
    In addition, we noted two other matters involving VA’S internal control
    structure and its operation that we are presenting in this report as
    reportable conditions. These matters involve weaknessesin VA’S internal
    control procedures ability to
. prevent erroneous veterans benefit payments from continuing after the
  death of a veteran or other benefit recipient and
. recover erroneous benefit payments made after the death of the benefit

    Reportable conditions involve matters coming to our attention relating
    to significant deficiencies in the design or operation of the internal con-
    trol structure that, in our judgment, could adversely affect VA’S ability to
    record, process,summarize, and report financial data consistent with
    the assertions of managementin the financial statements. Only the first
    condition, VA’S property and equipment and depreciation accounting, is

    Page 29                                GAO/AFM@OlS Department of Veterans Affairs
                              Appendix ll
                              Report on htemal     C4mtrolStmcture

                              consideredto be a material weaknessfrom the standpoint of the poten-
                              tial effect on the fair presentation of the financial statements.’ Under
                              government auditing standards, a reportable condition is a material
                              weaknesswhen the design or operation of specific elements of the
                              internal control structure do not reduce to a relatively low level the risk
                              that errors or irregularities, in amounts that would be material in rela-
                              tion to the financial statements being audited, may occur and not be
                              detected within a timely period by employeesin the normal course of
                              performing their assignedfunctions. Our opinion on VA’s consolidated
                              financial statements was qualified as a result of the material weakness
                              in VA’S ability to account for its property and equipment.

                              Our fiscal year 1989 audit disclosedthat property accounting weak-
Inconsistent                  nessesfound in our fiscal year 1988 audit continued. In our fiscal year
Adherencet0    PrOpefiy       1988 report on internal accounting controls, we reported that VA had
and Equipment                 issued revised instructions to assist VA field units in implementing its
                              capitalization and depreciation policies and had made other improve-
Capitalization and            ments in property accounting. However, we reported that there con-
Depreciation Policies         tinued to be inconsistent adherenceto managementpolicies with respect
Continues                     to the capitalization and depreciation of buildings, which led to inaccu-
                              rate “real” property account balances.This problem was due, in part, to
                              VA’S real property accounting system. This manual system doesnot pro-
                              vide for either a consistent capitalization of improvements to buildings
                              and other structures or a centralized review of the amounts recorded.
                              Our fiscal year 1988 audit and previous audits identified the following
                              problems with VA’S real property accounting:
                          . Items purchased with operating funds were expensedrather than capi-
                            talized in accordancewith generally acceptedaccounting principles2 am1
                            VA’S policy.
                          l Construction project costs were transferred from work-in-process to
                            completed facilities either before utilization or not until a significant
                            period of time had elapsed after a completed facility was placed in use.

                              ‘The consideration of materiality differs under FMFIA from that in an audit of financial statements
                              in accordance with generally accepted government auditing standards. Under the latter, the auditor
                              considers materiality in relation to the financial statement amounts As prescribed in the Office of
                              Management and Budget’s implementing guidance for FMFIA, materiality for FMFIA purposes should
                              be considered in relation to factors such as an actual misstatement of a specified amount ($10 million)
                              or percentage (6 percent) of a budget line item, or nonconformance in a subsidiary or program
                              system that prevents compliance of the primary accounting system with government accounting

                              2Generally accepted accounting principles for federal agencies are contained in title 2 of GAO’s policy
                              and Procedures Manual for Guidance of Federal Agencies.

                              Page 30                                          GAO/AF’MD-0143Department of Veterans Affhh
    Report on hWn8l Control Structure

l   Depreciation was not calculated in accordancewith generally accepted
    accounting principles and VA’S policy.
    During our fiscal year 1989 audit we found that the above problems
    with construction work-in-process costs and related depreciation still
    existed. For example, our tests at the VA Finance Center identified
    $141.7 million in construction appropriations work-in-process costs as of
    September30,1989, on sevenprojects that should have been capitalized
    in fiscal years 1988 and 1989 but were not. Our testing at five medical
    centers also identified $3 1.8 million in other construction projects that
    were not timely transferred from the work-in-process account to the
    buildings account in fiscal year 1989 and $15.2 million in fiscal year
    1989 construction coststhat were transferred prematurely to the build-
    ings account in fiscal years 1987 and 1989. Delays in capitalizing com-
    pleted construction projects causeunderstatements of depreciation
    accounts,while premature capitalization actions causeoverstatements
    of depreciation accounts.
    In addition, consistent with the weaknesseswe identified as a result of
    our fiscal year 1988 audit, we further identified instances of capitaliz-
    able maintenance and repair improvement coststhat were expensed.For
    example, we found instances where capitalizable architectural and engi-
    neering costs and VA contract labor costs were expensed.We also identi-
    fied casesof inconsistent accounting for asbestosremoval costs.For
    example, at two medical centers, two asbestosremoval projects costing
    $2.2 million were capitalized and at three other centers, three projects
    costing about $468 thousand were expensed.
    We believe that these conditions are primarily the result of (1) the lack
    of understanding of VA'S capitalization requirements by both VA medical
    center fiscal and facilities engineering personnel, and (2) VA'S inability to
    ensure that these fiscal and engineering personnel use standard proce-
    dures and guidelines to timely and properly capitalize construction costs
    and related depreciation.
    Our fiscal year 1989 financial audit also disclosedthat differences con-
    tinue to exist between the automated nonexpendable(equipment) prop-
    erty system and the corresponding general ledger control account.
    Although required by generally acceptedaccounting principles, someVA
    medical centers either did not always perform periodic reconciliations of
    these accountsor did not make adjustments to correct discrepancies
    when identified. Also, VA'S nonexpendableproperty system (i.e., the sub-
    sidiary record which supports the general ledger equipment control

    Page 31                             GAO/AFMD-91-6Department of Veterans Affairs
                           Appendix II
                           Report on In~rnal C4mtrol Structure

                           account) continues to contain individual equipment items costing less
                           than $6,000, although the generally acceptedaccounting principle sets
                           the capitalization threshold at $6,000 and above.VA officials have stated
                           that they included items below the $6,000 capitalization threshold in
                           order to improve accountability. However, including these items will
                           continue to causeVA'S reported value for capitalized equipment to be
                           overstated unless a separate system is established to maintain account-
                           ability over items with capitalizable values of less than $6,000.
                           Becauseof these control weaknesses,the $8.4 billion reported value of
                           land, buildings, and equipment as of September30, 1989, is not accu-
                           rate. The deficiencies also affect the accuracy of the reported deprecia-
                           tion expenseallocable to the use of the buildings and equipment.
                           However, we were unable to quantify the extent to which VA'S reported
                           values for property and equipment and related depreciation expense
                           were misstated.
                           VA has included a fixed assetmodule (designedto include both real prop-
                           erty and equipment) in its new financial managementsystem. This new
                           system is targeted for implementation by the end of fiscal year 1992.
                           However, development plans for the new system do not provide for
                           (1) correcting the current recorded values of real property, and
                           (2) improving coordination between field station facilities engineering
                           personnel, acquisition and material managementpersonnel, and finance
                           office personnel. Without first taking these actions, the new system will
                           not be effective in correcting VA'S problems in real property and equip-
                           ment accounting.

Certain ADP Software       GAO/AFMD-89-69, September 16, 1989), our fiscal year 1989 audit disclosed
Maintenance and Data       weaknesseswith ADP software maintenance, data integrity controls, and
Integrity Control          system documentation and application controls at VA'S data processing
                           centers. Specifically, our fiscal year 1989 audit disclosedthe following
WeaknessesContinue         instances in which the sameor similar ADP internal control weaknesses
                           continued to exist.
                       l   At the Austin Data ProcessingCenter (DPC), we found that there con-
                           tinues to be a lack of independent testing of somemodifications to
                           existing application software, In the payroll area, for example, we found
                           that in-house programmers rather than independent system auditors
                           performed tests on about one-third of the software program changes
                           made in the last 6 months of calendar year 1989. In these cases,the

                           Page 32                               GAO/AFMDBl-tl Department of Veterans Affidra
                              Appendix II
                              Report on Internal control Structure

                            system auditors certified program changesbasedon a review of output
                            provided by programmers, tested by programmers, using test files that
                            could be changedby programmers.
                          l We also found that the Austin DPC continued to have inadequate control
                            over accessto payroll, personnel, financial, and loan information. We
                            found, for instance, that ten system programmers and one contractor
                            employee had unrestricted accessto all VA’S computer resourceswhen
                            such accesswas not justified. In addition, we also found that the Austin
                            DPC continued to lack a formal and operationally-tested contingency plan
                            to guide its operations in the event of a catastrophe.
                          . At the Hines DPC, we found continuing inadequate system documenta-
                            tion and weak application controls over benefit payment transactions.
                            For example, during our 1989 audit, we found that transaction counts
                            could not always be reconciled between software programs becausethe
                            various programs used different methods to count records.
                          . At the Philadelphia DPC, we found that only 2 of the 11 ADP control
                            weaknessesthat we identified during our fiscal year 1987 and fiscal
                            year 1988 audits have been corrected. The remainder were not
                            addressedor received only partial correction. Among the examples of
                            control weaknessesthat have not been corrected are (1) the lack of doc-
                            umented, operationally-tested contingency plans, and (2) the lack of a
                            policy requiring recertification of sensitive computer application pro-
                            grams on a regular schedule.

                              VA also identified
                                              many of the samedata processingcontrol problems in
                              its December31, 1989, FMFIA report and plans to take corrective action.
                              (Seeappendix VI).

                              VA has erroneously made compensation and pension payments on behalf
Controls Ineffective in       of deceasedveterans and their survivors becauseits control procedures
Preventing Erroneous          do not provide for the consideration of all sourcesof death information
Benefit Payments on           in determining whether benefit payments should be continued. VA relies
                              primarily on voluntary reporting by relatives or others and notice of
Behalf of Deceased            death information from its other programs without also obtaining death
Recipients                    information from other readily available sources-the Social Security
                              Administration (%A). The death information VA currently relies on is not
                              accurate because(1) voluntarily provided death information is not
                              received in all casesand (2) all recipients of VA compensation and pen-
                              sion payments are not necessarily recipients of other VA services.Conse-
                              quently, VA cannot effectively identify when to terminate benefit

                              Page 33                                GAO/AFMD916 Department of Vetemna Affairs
                       Appendix II
                       Report on Jntmnal Cmtrol Strum

                       payments. Accordingly, VA continued to make unauthorized compensa-
                       tion and pension benefit payments sometimesfor as long as 7 years,
                       until the neededdeath information was received.
                       As shown in VA’S consolidated financial statements, VA provided more
                       than $16 billion in veterans’ benefits during fiscal year 1989, of which
                       more than $16.1 billion was for disability compensation and pension
                       benefits. VA had about 3.6 million casesof such benefit payments during
                       fiscal year 1989. Sinceonly the benefit recipient is entitled to the bene-
                       fits, payments should be terminated promptly when the recipient dies.
                       However, if surviving relatives or other knowledgeable persons do not
                       report benefit recipients’ deaths to the VA in a timely manner, or VA does
                       not obtain death information as a result of the beneficiary’s partici-
                       pating in other VA programs, VA continues making the benefit payments.
                       We analyzed six casesof erroneous benefit payments which one field
                       station had identified and initiated collection action. These erroneous
                       payments, which involved casesunder VA’S service-connecteddisability
                       and service-connecteddeath compensationprograms, totaled $160,663.
                       The two largest payments were $44,466 and $64,800. Of the total,
                       $136,817 has not been recovered by VA. In all six cases,VA did not have
                       timely knowledge of the benefit recipient’s death. This resulted in the
                       benefit payments being continued for various periods-6 years after the
                       death of the benefit recipients in two casesand 7 years in one case.
                       Another recent GAO report discussesthis matter in greater detail.3 In
                       general, this report showed (1) the feasibility of VA obtaining SSAdeath
                       information and the potential for utilizing the information to prevent
                       the continuing payment of erroneous benefit payments after the death
                       of the benefit recipient, (2) the potential total annual erroneous pay-
                       ments to be an estimated $6.7 million, and (3) GAO’S recommendation to
                       resolve the problem. Accordingly, we are not making any recommenda-
                       tions with respect to this weaknessin this report.

                            centralized accountsreceivable division (CARD) has responsibility for
Weak Controls Impede   VA’S
                       collecting compensation and pension accountsreceivable representing
Recovering Erroneous   erroneous benefit payments made after the death of the recipient. The
Eknefit Payments       division doesnot have effective procedures to ensure recovery of such
                       payments made by the U.S. Treasury through checksor the electronic
                       3Veterans’ Benefits: VA Needs Death Information F’rom Social security to Avoid Erroneous Payments

                       Page 84                                        GAO/AFMDolS Department of Veterans Affah
    Appendix II
    Report on Internal Control Structum

    transfer of funds to financial institutions for deceasedrecipient
    Financial institutions (such as banks) are liable4 for all of the payments
    by electronic transfer that are made after the death of the recipient of a
    federal government benefit. To recover such payments, the U.S. Trea-
    sury (after being notified of erroneous payments by the applicable pro-
    gram agency) sendsa Notice of Reclamation (form TFS 133) to the
    respective financial institutions requesting return of the outstanding
    amount.6This action may result in full, partial, or no recovery. If the
    financial institution doesnot return the full amount of the outstanding
    balance,the institution is required to identify for the Veterans Adminis-
    tration the names and addressesof individuals who withdraw from the
    account after the benefit recipient’s death.
    The federal program agency is responsible for attempting the collection
    of any outstanding amount from the withdrawer. If the program agency
    is unsuccessful,the U.S. Treasury may recover the remaining amount by
    debiting the financial institution’s federal reserve account6
    Our test of accountsreceivable at the end of fiscal year 1989 and subse-
    quent inquiries with CARD officials indicate that CARD doesnot have
    effective procedures to
l   initiate initial recovery efforts against financial institutions and
l   take follow-up action for recovery from financial institutions where
    CARD attempts to collect the payments from personswho have drawn
    down the deceasedrecipient’s account have been unsuccessful.
    As a result of centralizing this function at CARD, the division has experi-
    encedproblems becauseit lacks current policy and procedural guidance.
    VA’S central office is aware of the problems and is in the processof
    developing guidance. In addition, approximately 16,000 current
    accountsare being reviewed to determine the status of any amounts
    owed VA, collection efforts taken to date, and the need for any follow-up
    efforts. VA estimates the value of these accountsto be about $3 million.

    431 C.F.R. ilO.   164Fed. Reg. 60,618 (1989)].

    ‘The sum of all payments received after death or 1egaJincapacity, minus any amount returned to, or
    recovered by, the government.
    6The financial institution can limit ita liability if it did not know about the death when the payments
    were deposited.

    Page 35                                           GAO/AF’MD-918Department of Veterans Affah
                      Report on Internfd Ckmtrol Structure

                      VA continues to  experience problems with inconsistent adherenceto
Conclusions           managementcapitalization and depreciation policies. VA has also con-
                      tinued to capitalize equipment items that do not meet managementcapi-
                      talization policies. Theseproblems have led to inaccurate reporting of
                      the value of VA’S equipment and property. VA has also continued to expe-
                      rience weaknessesin its controls over computer software maintenance,
                      data integrity, and test contingency plans at its data processingcenters.
                      Finally, VA lacks sufficient internal control policy and procedural gui-
                      danceto identify and collect erroneous benefit payments made to
                      deceasedveterans. As a result, an estimated $3 million in erroneous ben-
                      efit payments may have been outstanding at the end of fiscal year 1989.

                      We recommendthat the Secretary of Veterans Affairs direct the
                  . Assistant Secretary for Finance and Planning to revise existing internal
                    control and accounting policies and procedures for VA’S property, equip-
                    ment, and related depreciation to meet the requirements of generally
                    acceptedaccounting principles;
                  l Assistant Secretariesfor Finance and Planning and Acquisition and
                    Facilities to jointly develop policies and procedures for properly
                    recording and reporting transactions affecting the capitalization of VA’S
                    construction and maintenance and repair projects to be followed at VA’S
                    Finance Center as well as at all field engineering stations;
                  . Assistant Secretariesfor Finance and Planning and for Acquisition and
                    Facilities to jointly establish policies and procedures to (1) remove all
                    equipment items from the equipment system data basethat do not meet
                    VA’S capitalization threshold, (2) distinguish the capitalized equipment
                    from non-capitalized equipment for accounting purposes,(3) reconcile
                    and make necessaryadjustment for the capitalized equipment compo-
                    nent of the equipment property system to agreewith the general ledger
                    control account balance, and (4) determine an appropriate method for
                    maintaining the general control account and the subsidiary system in
                  . Assistant Secretary for Information ResourcesManagementand the
                    Chief Benefits Director to jointly revise existing automated data
                    processinginternal control policy and procedures to ensure that each of
                    VA’S three data processingcenters provide for (1) independent testing of
                    all software program code changes,(2) limiting programmers’ accessto
                    systems’ operating programs and production programs and data files to
                    that which is necessaryto carry out their job requirements, and (3) a
                    documented and operationally-tested contingency plan; and

                      Page 36                                GAO/APMD-91-6Department of Veterans Affaira
                          Report on Intmnal Control Stroetura

                      l   Assistant Secretary for Finance and Planning and the Chief Benefits
                          Director to jointly issue policy and procedural guidance to ensure the
                          prompt identification and recovery of all erroneous benefit payments.

                          During the course of our audit, we identified other matters involving the
Other Opportunities       internal control structure and its operation which do not affect the fair
for Improvement           presentation of the consolidated financial statements. These matters
                          nonethelesswarrant management’sattention and will be reported sepa-
                          rately to VA.

                          Although we did not obtain formal agency commentson this report, we
Agency Comments           did provide appropriate VA officials with a draft of the report and have
                          incorporated their comments where appropriate. VA officials generally
                          agreed with our findings and recommendations.In addition, VA officials
                          advised us of corrective actions they plan to implement relative to our
                          recommendationsin fiscal years 1991 and 1992. We believe VA’S planned
                          actions, if successfully implemented, will addressthe identified

                          Page 37                               GAO/AFWD-916Department of Vetmans Affaim
Appendix III

Report on ComplianceWith Laws
and Regulations

                   We have audited the consolidated financial statements of the Depart-
                   ment of Veterans Affairs for the fiscal years ended September30, 1989
                   and 1988, and have issued our opinion thereon. This report pertains
                   only to our consideration of VA’S compliance with laws and regulations
                   for the year ended September30,1989. Our report on compliance with
                   laws and regulations for the year ended September30,1988, is
                   presented in GAO~AFMD-89-69,dated September 161989.
                   We conducted our audit in accordancewith generally acceptedgovern-
                   ment auditing standards. These standards require that we plan and per-
                   form the audit to obtain reasonableassuranceabout whether the
                   financial statements are free of material misstatement. The management
                   of VA is responsible for compliance with laws and regulations applicable
                   to VA. As part of obtaining reasonableassuranceas to whether the con-
                   solidated financial statements were free of material misstatement, we
                   selectedand tested transactions and records to determine the organiza-
                   tion’s compliance with provisions of the following laws and regulations
                   which could have a material effect on VA’S financial statements if not
                   complied with:
               . Federal Employees CompensationAct (6 U.S.C.6322) and specific
                 authority for special VA employee rates (38 U.S.C.4107);
               . Anti..Deficiency Act (31 USC. 1341, 1342, and 1611-1619);
               9 legislation concerning recording obligations and balancesavailable for
                 obligation (31 U.S.C. 1601 and 1602) and related regulations;
               l Debt Collection Act of 1982 (31 U.S.C.3302,3711, and 3717), related
                 regulations, and specific legislation relating to collecting amounts owed
                 to VA (38 USC. 3114 and 3116);
               l Prompt Payment Act (31 U.S.C.3901-3906) and related regulations;
               l legislation concerning veterans compensation for service-connecteddis-
                 ability or death (38 U.S.C.310,314,316,331, and 336), pensions either
                 for nonservice-connecteddisability or death or for service (38 U.S.C.
                 602,603,606,621 and 641), and regulations concerning evidence
                 required to establish eligibility for benefits;
               l legislation concerning veterans insurance (38 U.S.C.Chap. 19 and educa-
                 tional assistance(38 U.S.C.Chaps. 32,34-36); and
               l regulations concerning veterans guaranteed home mortgage loans.
                   Becauseof the purpose for which our tests of compliance were made,
                   the laws and regulations tested did not cover all the requirements that
                   VA has to comply with. The results of our tests for fiscal year 1989 indi-
                   cate that, for the items tested, VA complied with those provisions of laws
                   and regulations which could have a material effect on the financial

                   Page 38                            GAO/AF‘MD-914Department of Veterana Affah
statements. With respect to transactions not tested, nothing cameto our
attention that causedus to believe that VA had not complied, in all mate-
rial respects,with those sameprovisions.

Page 89                            GAO/AFMD-916 Department of Veteram Affaim
Appendix IV


Conaoltdatsd Statement8 of Financial Porltlon

                                                                                                                 Aa Of September 30,198s AND 1988
                                                                                                                       (Dollars In Thousands)

                                                                                                                                                                1989                                    ‘R-$j

                     cash wiul U.S. Trmwry                   l nu al hard                                                                         s 4,944,590                                      s 6,3W,884
                     hlvanon,          Awounta, uld Loam rl@o&*,                                     ml (IldO 8)                                        3,030,615                                       3,094,016
                     Imwtmonb             (note 7)                                                                                                 13,160,114                                          12,861,064
                     Forwlaad            Prqmty       H&f     for sat.                                                                                    679,343                                         616,833
                     Land,      Wdings,         and Equ@mont                Nal 04
                        Aowmulatad              Deprodntbn              (nd*        9)                                                                  6,396,514                                       7.72G,G63
                     othuAawts                                                                                                                            164,557                                         156,665

                     Futun       Rnandng          sourcn        (nota      1)                                                                     J 4,796,035                                      $ S,612,S49
                TOTAL          AsslFr5                                                                                                            $35.169.766                                      S35.6S2.157
                UABIUTIES,               TRUST       FUND       BALANCES,                    AND       EQUITY:
                     Aocounb         Payabte.       Prlndpdly           to tha P&lb                                                               $ 1.124,230                                      s 1.099294
                     Auwad          compensatlal            l nrl Pendon                 R.&its                                                            56,700                                         724,086
                     Aocruad        Payrotl    and Payrd          Ralatod            Lla6llltba                                                         1.171.729                                       1 .lG2.511
                     Dkldondo         on Crodll      or Dopdl             (not0 6)                                                                        667,393                                         765,238
                     lnwranca          Dh4dands       Payabk            (not.       6)                                                                  1,030.663                                         697,184
                     othuLhbltiun                                                                                                                         376,214                                         346,127
                     LlabUky      for Fdud          Empbyw                Compuwdiw~                   Ad (note 1)                                      I,21 1,066                                      1.024,309

                     Llabltny     for Losw*        on Gwranbad                      Loam      (note 5)                                                  2.872.667                                       3.063.466
                     lnwranor          PoYcy Rewr                (nti          6)                                                                       9.111.644                                       6,69G.316
                     Rnsrva         lor Putbpdtn~            Pdbyhdda                      Intuod                                                       3.069.419                                       3.126.659
                     BormwIngo           from Tmuury                                                                                                    1.730.078                                       1.730.076
                TOTAL          LIABILITIES                                                                                                         22,421,441                                          23,491,192
                TRUST           FUND      BALANCES                                                                                                        671,670                                         746,443

                EOUtTY           OF THE U.S. QOVERNMENT:
                     Unrwked             App+tbw
                     Inwrted        Cqital                                                                                                              8.563,501                                       8,111,422
                     Defurad        Approprbtlcwrr                                                                                                        263.650                                         275,763
                     Unobligdod           Bdancu                                                                                                        1,210.631                                       1.210.724
                     unddlvomd            orduo                                                                                                         1,999,47S                                       1.816.613
                TOTAL           EQUITY        OF THE U. 8. QOVERNMENT                                                                               12,067,457                                         11.414.622

                TOTAL           LIABILITIES.        TRUST        FUND           BALANCES.               AND EQUITY                                336,166,76S                                      S3tw52.157

               ltm    l uxn+w~ying              note8 an an inh?gralparl                          of them   datemenb.   Sqpk+montalschdulea   include     financial    informdoion   by majorprogram       area

                                                                                             Page 40                                                                  GAO/AFMD-91-6Department of Veterans Affdm
                                                                           Appendix Iv
                                                                           Financial Stntementa

Conrolldated Statements of Operation8

                                                                                                    For Fiscal Years 1989 AND 1988
                                                                                                        (Dollars In Thousands)

                                                                                                                                         1989                  (Rasrated)

                  OPERATING           EXPENSES           AND INSURANCE                PROVISIONS:
                    Operaring        Expenses       by Category:
                       Pemonnel         Compensation         and Frlngo        Benefii                                      $ 7.901.100                   S 7,515,281
                       Veterenr       Benefits                                                                                  16.244.282                    15,939,277
                       Claims      and Indemnities                                                                               1,290,059                     3.276.447
                       DeFeciation                                                                                                 667,344                       412.099
                       Supplies       and Materials                                                                              1,820,715                     1.655.902
                       Contractual       Services                                                                                1.447.612                     1.472,964
                       Rent. Communications,               and Utllitlol                                                           569,723                       532,269
                       other                                                                                                       157,130                        68.350
                  Total Operating       Expensea                                                                             30.117,965                       30,892,569
                    Insurance      Prov~sioris
                       Dividends       to Policyholders                                                                            991,022                       952.507
                       Solvbemen’s         Qroup        Life Inwrsnce       Reaorvos                                                 13,761                         3.416
                  Total Insurance       Provisions                                                                               1.004.763                       955.923
                                                                                                                            $31.122.746                   $31,646.512

                  OPERATING           REVENUE           AND FINANCING               SOURCES:
                    Operating      Revenues:
                       Premium        Income                                                                                $      671.235                $      673.812
                       Interest    In-me                                                                                         1 .l39.742                    1,397,700
                       Loan Oriiginatian         fee*                                                                              141,067                       136.116
                       Reimbursements            and Other                                                                         599,449                       546,242
                  Total Operating       Revenue                                                                                  3,051,463                     2.951,972
                    Financing      by Source:
                       Appropriations        and Financing           Sources     Realized                                    26.905.979                       27.425.521
                       Funds to be Provided              by Future      Financing     Sources                                (1 .017,507)                      1.196.272
                       Tra&~a.          Reimbursements,            and Other                                                       162,793                       214,747
                  Total Finanang        Sources                                                                                 26,071.265                    26.696.540
                                                                                                                            331.122,746                    $31,646.512

                                                                           Page 41                                                     GAO/APMD-91-6Department of Veterans Affairs
                                                                                   Appendix IV

Connolideted Statements of Changes in Financial Position and Reconciliation to Budget

                                                                                                              For Fiscal Years 1989 AND 1988
                                                                                                                  (Dollars In ThousancJs)
                                                                                                                                                     1988                   196.3

                 NET USE OF RESOURCES:
                   oprdhg         Exporlse6                                                                                               $30,117.965              $30.692,569
                   items Requiring            (Providing)      Fundr:
                     Decroaw          (Increase)        in Future       Lbbility      Praviaiono      (Note   1)                                 562.326            (1 s336.772)
                     Deprodrtbn                                                                                                                (687.344)              (412.OQQ)
                     bweaw            in Accounts           Receivable                                                                         (206.312)                (91,713)
                     Dowear           in Accounb            Pay&b        and Accruala                                                            509,010                166.200
                     Revm~r            Aooounled         lor . .
                         Ofkdting       Cdbctions                                                                                          (2,155.413)              (2.141.162)
                   Furwls Used By Opnatlonr                                                                                                26,158,232               27,097,053
                   Nordperdlng             Uses:

                     Dividends        (note 6)                                                                                                   991,022                952.507

                     Acqukutkm            d Land. Buildin9a,               and Equipment                                                       1 .154,466             1.090.664

                     Purchased            Fore&wed            Property       Held for Sale                                                     1.463,169              1.630,545
                     Iuwnce           md Repurdm~               d Loans            and Liens                                                   1.164.916              1.174.472
                     Other,     Net                                                                                                             (50.312)                (23,441)
                  Financing       Adiiiibe:
                     Sale d Foreclosed               PrqMy          Held fof Sab                                                           (1.714.651)              (1.661.606)
                     Sab      d Loarl~.       without       R6coume                                                                            (433,331)              @Qww
                     Loan/Lbn         RepaymenWOptbrul                      Iricwno     Settlements                                            (302,363)              (3=,w7)
                     Revonwr          Cdlected          for Treasury                                                                           (430,269)              (336,924)

                 NET USE OF BUDGETARY                        RESOURCES                (OUTLAYS)                                            30,040,661               29.270,976

                 SOURCES         OF BUDGETARY                  RESOURCES                PROVIDED
                     Current      Year @proprbtii,                  Mjusted                                                                29.260.543               26.363.176
                     Contract       Authority       and Reappropriation                                                                           64.343              (121.192)

                     Proceeds         d Loan Salea with              Recourse                                                                                           369,258

                     Interest     on Oovernment              Securitlier                                                                       1,033.241                996.165
                     Net lrenslom.            Retmburaemonts.               mcl Cthor                                                          (236.492)              (362,838)
                     Funds      Returned         to Treasury                                                                                   (206.040)              (163,662)
                 TOTAL      RESOURCES              PROVIDED                                                                                29.Q31.595               29.062866
                 DECREASE           IN U.S. TREASURY                 AND IMPREST               FUNDS                                           (109.066)              (2Q6.290)
                     Funds       Exchanged          for U.S. Gowmmont                  SeaMties                                                (333,206)              (411,468)
                 NET DECREASE              IN U.S. TREASURY                   AND IMPREST              FUNDS                                   (442.294)              (619.759)
                 U.S. TREASURY            AND IMPREST                 FUNDS:
                     B+ning           d Year                                                                                                   5,366,6&o              6,006,643
                     End of Year                                                                                                           $4,944,5QO               s538Ws4

                                                                                   Page 42                                                      GAO/AF’MD-91-6Department of Veterans Affairs
                                                        APPmdix       Iv
                                                        Flnanclal Btatemente

Note8 to Flnanclal Statements

                        1: SIGNIFICANT
                      EntityandBasisof Consolidation
                      In     fulfilling               its      mission       to    provide        veterans       with      care,         support,       and
                      recognition,              the Department            of Veterans         Affairs      maintains       15 general          funds,     11
                      revolving           funda,        5 trurt funds, 5 deposit                funds,      and 5 clearing             accounts.        The
                      financial            activities            of  these      funds    have been classified                 into      the following
                      functional            areas:         Medical      and Construction;             Veterans      Benefits;          Housing     Credit
                      Assistancer              Life        Insurance;          and Administration.                Some      of      the      trust      and
                      revolving            fund       activities         for     the insurance and housing                      credit       assistance
                      programs          are augmontad by budget                   appropriations.

                      The consolidated        financial      statements   account     for all    funds    for which VA is
                      responsible     and present       on the accrual    basis   of accounting       as required     by the
                      GAO Policy      and Procedures Manual for Guidance               of Federal      Agencies:  Title    2.
                      All significant     intra-agency        balances  and transactions      have been eliminated         in

                              of Financing
                      The current          congressional             budgetary      process      under      which      VA operates            does not
                      distinguish            between           capital       and     operating          expenditures.             For        budgetary
                      purposes,        both      are recognized             as a use of budgetary                  resources          (outlays)         as
                      paidr       however,        for       financial        reporting        purposes        under      accrual         accounting,
                      operating        expenses          are recognized           currently,         while     expenditures             for     capital
                      and other          long-term           assets      are capitalized            and not        recognized           aa expenses
                      until      they      are consumed              in VA’s      operations.            Financing          sources         for    these
                      expenses,         which       derive        from    both     current      and prior         year      appropriations             and
                      operations,          are recognized              on this     same basis.           The consolidated              statement        of
                      changes        in      financial           position        and     reconciliation             to    budget         presents         a
                      reconciliation             of      operating        expenses       on an accrual                basis      with        budgetary

                      For     certain         accrued          expensss       (e.g.,      annual        leave       earned        but       not       taken,
                      insurance       premiums         for disabled          veterans        funded       by appropriations,                   losses        on
                      guaranteed         loans),        current       or prior       year appropriations                are not available                    to
                      fund        the expenses:           however,       such expenses             are     customarily           financed             ( funds
                      appropriated,           or,    for a portion           of the loan losses,                 revenues        received)            in the
                      year       payment     is required.              An amount         due from          future      finaicing             sources         is
                      therefore        recognized          in operations          each year for that year’s                    accrued          amount of
                      such expanses.              The cumulative            amount of these              accruals        io reflected                in the
                      consolidated           statement           of financial         position         as an asset,             future          financing
                      sources.         The total           smount of the future                 financing         sources       account            is also
                      reflected         in     the     liability         section       of     this      statement         as part           of various
                      liability         accounts,          primarily       accrued        payroll         and related             liabilities              and
                      liabilities          for     federal         employees       compensation          act and losses               on guaranteed

                                                        Page 43                                                         GAO/AFMD-91-6Department of Veterana Affah
                                Appendix IV
                                Flnanclal Statements

Intoroet     income,     which  is earned   primarily     from the investments        of VA’s life
insurance     program, is recognized      on the accrual       basis.       Insurance   premiums     are
recognized       as revenue     when due.    Loan origination         fees,     which during    fiscal
year     (PY) 1989 were charged       to veterans      at a rate    of one percent       of the loan
principal,      were recognized    as revenues      at the time of the guaranty.

                 of theTreasury
VA   does not       maintain    cash    in commercial     bank accounts.        Cash receipts       and
disbursements        are processed      by the Department     of the Treasury.       The balance     in
the Treasury         represents     the     right  to draw    on the   Treasury      for  allowable
expenditures.          Cash advanced      to imprest   fund cashiers    totaled    $8.8 million      as
of September        30, 1989, and $9.0 million        as of September    30, 1988.

VA has obligations           remaining     at the end of each year for goods and services
which have been ordered            but not yet received               (undelivered    orders).       Aggregate
undelivered     orders    amounted to $1,999,475,000                and $1.816,613,000         as of
September     30, 1989. and September                30, 1988,      respectively.       Of these      amounts,
$943.535.000      in FY 1989, and $1.011.475.000                  in FY 1988 related        to construction
projects    of both long-        and short-term         duration.         The remainder     was principally
comprised     of obligations         for medical        supplies      and equipment     that were incurred
by VA in the normal         course     of fulfilling        its mission.

The majority            of the reported          property      represents     facilities       and equipment          used
to provide             medical      care     to veterans.            Property       and equipment,            including
transfers         from other         Federal      agencies,       are valued      at cost.         Expenditures         for
major      additions,           replacements,          and alterations           are     capitalized.            Routine
maintenance           is recognized         as an expense         when incurred.          Costs of construction
are      capitalized           as     Construction          in    Progress      until      completed         and      then
transferred          to the appropriate            property      account.

Buildings       are depreciated        using      the straight      line    method over estimated         useful
lives      ranging       from   25 to       40 years,          based     upon     the      American Hospital
Association’s          estimate     of    useful      lives     of    hospital       assets.     Equipment       is
depreciated        using    the straight       line    method over useful           lives,   which,    for most
equipment,       range from 5 to 20 years.

                                Page 44                                                   GAO/APMD-91-9Department of Veterans AfYaba
                                   Appendix IV
                                   Fhandal      Statementa

Compen8ation         And pOnsiOn       benefits       are accrued      when veterans       have                       satisfied
VA’s    eligibility       criteria.        Thio   accrual     pertains     only    to benefits                          due and
pcryable      in a particular       fiscal      year.      (See Note 4 for       a description                          of VA’s
future     liability     under its compensation           and pension     program.)

Upon     foreclosure      of a guaranteed        loan,     VA may be required           to pay the maximum
claim,      acquire    the property,        or acquire        the property        and pAy     less  than  the
maximum     claim    pursuant      to criteria       established        in title       38, U.S.C.    S. 1816.
Thus,   when VA acquires the property,                   the    cost    is    comprised     of the claimed
smount paid       the lender        less   net proceeds         from the sale of the property.              VA
incurs    an additional        cost for direct       home (vendee)         loans.    issued    upon the sale
of foreclosed       properties       that  subsequently        default.

Estimated        losses     on anticipated           defaults        of guaranteed              loans      are recorded            as
expenses       when the loans are guaranteed.                     Simultaneously,                a liability           provision
is     established,          representing          the      estimated           cost        of    defaults           for      those
guaranteed         loans    which     experience        indicates         will      default         in the          future.          A
portion      of this     provision       is subsequently           reclassified             as a reduction             to
(1) direct        home loans       receivable       when such loans             are issued          (see Note 8);
(2) foreclosed           property       held    for sale when property                    is acquired,            in order         to
record      such property           at its       net    realizable          value;         and (3)           investments           in
subordinate securities                to reflect          the estimated              loss       of principal              for    the
securities        due to their         subservient         position.           The remainder            of the provision
for loan losses          is classified         as a liability           for future            loan losses.

                     of Leave
Annual   leave    is accrued     as it              is earned,    and the accrual      is reduced    as leave
is taken.      At least     once per                year,   the balance    in the accrued       annual    leave
account    is adjusted    to reflect                current   pay rates  of cumulative     annual   leave
earned but not taken.         Sick and               other  types of leave    are expensed     as taken.

Insurance     program    liabilities          are recorded      for  unpaid     claims     in process,                           for
experience-based        estimates         of     claims    incurred     but    not     reported,       and                       for
incurred     death and permanent          disability     installment      claims.       These liabilities
are included      in Accounts        Payable.

                                   Page 46                                                       GAO/AF’MD-918Department of Veterans Affairs
                             Appendix N

Dividends    from     VA’s      insurance     programs   are     recorded      as a liability         when
declared    by    the      Secretary       of  Veterans   Affairs.         Dividends       are   normally
declared   when fund balances             are  in excess    of statutorily         required    insurance
claim r*serves.

Trust     fund balances        are comprised            of the Port-Vietnam       Educational      Assistance
Trust     Fund,     Servicemen’s          Group    Life     Insurance    (SGLI)     Trust    Fund,     and the
General      Post Fund.        These funds are accounted              for separately        and can be used
only    for    specified     purposes.          Since     they    are not available        to fund      general
purpose     governmental       activities       they are excluded        from   VA’s equity     accounte.

Invested     Capital      includes        VA’s    investment       in   plant,     property,       and equipment.

Deferred    Appropriations                include     benefit       overpayment         accounts      receivable      for
which outlay    authority            is     not available       until    collection.

Legal     actions     brought     by employees             of VA for        on-the-job         injuries       fall    under
the Federal        Employees     Compensation            Act (FECA),        administered          by the Department
of    Labor      (DOL).     DOL bills         each        Agency     annually        as DOL claims             are paidi
however,       payment    on these      bills       lo      deferred     two years         to allow        for     funding
through      the budget      process.        Using       actuarial      estimates        provided       by the DOL, VA
has recorded         FECA liabilitias            for       balances       billed       to VA by DOL and for
estimates       of the present        value      of      the long-term          payments       related      to cases on
hand at the end of the fiscal                year.

VA’s    financial     activities         interact       with   and are dependent       upon those  of the
Federal      Government       as a whole.          Thus, VA’s financial     statements     do not reflect
the results       of all      Einancial       decisions      and activities   applicable     to VA, aa if
VA were a stand-alone            entity.

                             Page 46                                                     GAO/AFMD-918 Jkqwtment of Veteran6 Affairs
                      Financial Statements

VA's     consolidated
                                                statements       are not intended
                                              share of the Federal            deficit
                                                                                          to report
                                                                                           or of public
                                                                                                          the            1
borrowing,           including           interest         thereon.       Financing           for     budget
appropriations           reported        on VA'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 VA.

Financing      for     major      and minor        construction       projects       was obtained
through   budget      appropriations.          To the extant        that     this   financing      was
derived   from     public    borrowing,       no interest       has been capitalized          because
such borrowings        ace recorded       in total     by the Department          of the Treasury
and are not allocated           to individual       Departments     and Agencies.

Since     the Department           of the Treasury       does not charge          Agencies       interest
on borrowings          from the Treasury,          VA does not recognize              interest        costs
related       to foreclosed          property    in its     financial      records.        In FY 1989,
VA held foreclosed             properties     for an estimated           average     of 6.5 months.
Based on this            estimate       and the average         interest     rate    for     the public
debt     (9.0     percent),       the holding      costs    associated       with    the      foreclosed
property       held for sale were approximately                $59 million       in FY 1989.

VA's Housing          Credit   Assistance        program      has a liability         of $1.7 billion
to     the      Department     of     the     Treasury.           These     funds    were   originally
provided         to    support    the      Direct       Loan      Fund,     but   were    subsequently
transferred         to the Loan Guaranty            Fund and have since             been fully       used.
The liability           which   is owed by the Direct                  Loan Fund bears     no interest
Or     specific        payment    date.         Legislation            has  been   proposed      in     the
"Department         of Veterans       Affairs       FY 1991 Budget           Submission"    consisting
of a technical          amendment to waive this             liability.

During     FY 1989, many of VA's employees                continued         to participate      in the
contributory         Civil    Service    Retirement     System         (CSRS),     to which VA makes
matching       contributions:         however,      VA does          not     report     CSRS assets,
accumulated        plan    benefits,     or unfunded      liabilities,           if any, applicable
to its       employees      because    this    data   in total          is reported       only by the
Office     of Personnel       Management.

On January        1, 1987, the new Federal          Employees      Retirement     System (FERS)
went into effect         pursuant   to Public       Law 99-335.         Employees   hired    after
December 31, 1983, are automatically                 covered      by FERS, while      employees
hired     prior    to December 31, 1983 may elect              to either     join  FERS or
remain       in CSRS.      One of the primary          differences       between    FERS and CSRS
is that         FERS offers      a savings      plan     to which       VA will      automatically
contribute         one   percent    of    basic      pay,      as wall      as,   match    employee
contributions         up to an additional        four percent       of basic pay.

Employees      participating        in FERS are covered   under the Federal
Insurance      Contributions       Act (FICA)   for which VA contributes
a matching      amount to       the Social  Security   Administration.

                     Page 47                                                   GAO/AFMD-91-6Department of Veterans Af’fdre
                               Appendix Iv
                               l%ancial Stntemenm

          VA's total    contributions      for  CSRS and FERS participants.                             including
          contributions      to the Social     Security Administration,                           during     FY 1989 and
          FY 1988 were as follows:

                                                                 19a9                            1908
          CSRS                                             s266,504,389                    $274,869.684
          FERS                                               284,554,646                     221,139,124
          FICA                                               142,646,157                     120,831,572
             Total     VA contributions

          While VA 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    Certain        legal      matters          to which        VA may be a named party                    are administered
     and,      in some          instances,            litigated           and paid      by other        Federal      agencies.
     These       primarily           relate        to allegations              of medical        malpractice         but    also
     include        other      tort       claims       and contract          disputes.       Generally,         amounts (more
     than     $2,500         for       Federal       Tort       Claims       Act cases)       to be paid            under     any
     decision,          settlement,            or award pertaining                to these     litigations         are funded
     from a special              appropriation             called       the Judgment       Fund, which          is maintained
     on deposit            with        the Department               of the Treasury.              Since       VA, except      for
     contract         dispute         payments,          is not required            to reimburse         the Judgment       Fund
     for payments            made on VA's behalf,                     the amount of payments              from the fund for
     VA are not reflected                     in VA's statements.                  Amounts paid         from the Judgment
     Fund on behalf             of VA were $42 million                     and $35 million         in FY 1969 and
     FY 1988,          respectively.               Amounts         requiring       reimbursements           to the Judgment
     Fund by VA for contract                       dispute        payments       were $6.1 million           and $.8 million
     in FY 1969 and FY 1968, respectively.

The FY 19813 consolidated              statement         of financial       position       and consolidated
statement     of operations        and changes           in financial      position      and reconciliation
to budqet      have been restated              to present          VA Life     Insurance      Reserves      on a
Generally      Accepted      Accounting        Principles         (GAAP) basis.         These    reserves     had
been presented       on a statutory         basis.        The principal       change was to introduce           a
new liability       entitled     Participating           Policyholders      Interest.        (See Note 6 for
a complete     explanation      of this      change.)

Veterans     or their    dept idents    receive      compensation    benefits     if the veteran     was
disabled     or died from military        service-connected       cause.      War veterans    or their
dependents      receive   pension     benefits      if the veteran     was disabled      or died   from
nonservice-connected         :auses or is age 65 or older.            Certain    pension
benefits     are subject    to specific       income limitations.

                               Page 48                                                      GAO/APMDBlS Department                  of Veterana Affairs
                                   lbandal      Statement0

The compenration             and pension        benefits      for    FY 1909 and FY 1988 were:

Plraal         Yanr                      Compensation                                Pension

        1989                        $11,210.351.000                           $3,845,134,000

     19lR                           $10,864,549,000                           $3,826,974,000

VA      has a future       liability           for benefits             expected      to be paid           in future     fiscal
yoara          to
               vototans       and, if applicable,                     their    survivors          who have met         or     are
l xpocttid to meet defined                  eligibility            criteria.         The future          liability      of the
compensation         and ponrion          programs         is not currently                funded,      nor is there          any
intent      to     do 80,            Rather,         payments          for    benefits          that   become       due in       a
particular       fiscal     year are financed                from that year’s              appropriation;          in effect,
on (1 pay-ar-you-go            basis.         Payments         of the future           liability        as it becomes due
rely     on congrosrional             authorization             of     future    tax revenues           or other       methods
such a8 public         borrowing         for their        financing.

The CUtuto       liability            for
                                     compensation       and pension        benefits       represents        the
pra$Oat  value,      wing          an 9.0
                                     percent   discount     rate.    of projected          annual    benefit
pmymentr .      Projected    benefit     payments     were based on assumed cost                  of living
inmoaner     ranging    from     3.6 percent       to 4.7      percent      for     1990-1994       and 3.3
percent    tO 4.0 porcoat       for succeeding       years.       In addition,       the mortality          and
l ccosrion   ratw    used in calculations            were    based     on trends        in    the    current
veteran population.

giaco          calculation      was     not    based   on an independent       actuarial                    study,       there
&xirtr     a risk    that          the     assumptions    and methods    underlying                     it    may      not    be
reflective     of actual           economic     and demographic   trends   affecting                   veterans.

Tb       preront       value     of the         estimated        future        liability        for    compensation      and
pension       bonofits       payable      for   the next five             fiscal        years   and   succeeding    fiscal
yeara      are a8 follows         (dollars       in thousands):

                                 1990                                      $ 14,021.180
                                 1991                                        12,652,843
                                 1992                                        11,450,555
                                 1993                                        10,383,477
                                 1994                                          9,462,396
                                 1995 and succeeding                         77,276,309

Wo liability     for         future    compenration    and pension                benefits      has    been    included        in
the Consolidated             Statement    of Financial    Position.

                                   Page 49                                                       GAO/AFMD-918 Department of Veterans Affairs
                               Appendix IV
                               Flttancial Statements

                       - COST
Activities         under     the VA housing        credit      assistance       program      primarily      involve
the partial         guaranty      of residential       mortgage        loans   issued    to eligible      veterans
by private          lenders.        In addition,       VA originates           direct      loans      to veterans,
60116       foreclosed         property      on credit          terms      (vendee     loans)        and monitors
foreclosure         settlements       for ultimate      claims      reimbursement      to VA.

Residential         loans   guaranteed         by VA are originated               by private        lenders     and are
not recorded          in the financial           statements      of VA.         The face amount of such loans
outstanding         as of September           30. 1989 and September                30, 1988 was $152 billion
and $150 billion.            respectively,          and the guaranteed             amount of outstanding            loans
as of both          September      30, 1989 and September                  30, 1988 was approximately                   $60
billion.          The guaranty,           in effect,        transfers          some     or    all  of the      risk       of
default      from     the lender      to VA.        At the time         of default,          VA has the option            to
either      pay the        guarantee         amount or pay a reduced                    amount     and acquire          the
property       from the lender.             VA assumes this           risk      to provide        a benefit       to the
veteran     who obtains         a mortgage        with interest          rates     that    are usually      lower     than
conventional         mortgage     rates     and with no downpayment.

The total       amounts of vendee            loans    and loans   of the direct                loan    program      as of
September      30. 1989 and 1988,            (dollars    in thousands)  are:

             Vendee    loans                 $1.177.452                 $1,056,100
             Direct    loans                       60,343                    71.312

       for Losses
One element      of the cost         of the mortgage            loan    benefit       that    VA provides          to
veterans    is the present            value     of the cost          VA will       bear     as loans       already
guaranteed    default     in the future.             This    cost     is reflected          in the     financial
statements     as a liability          Eor losses       on guaranteed        loans      and as an offset           to
the value    of certain       related       assets.      The unfunded        portion       of this     liability
is also    reported     in the Consolidated               Statement      of Financial         Position         as an
amount due from Future          Financing       Sources.


                               Page 60                                                   GAO/AF’MD-916 Department of Veterans Affairs
                                    Appendix IV
                                    FYnancial St&.ements

The provision         for    lesser      on guaranteed       loans    is based   upon historical            loan
foreclosure        results       applied     to the      average     loss   on defaulted        loans.        The
provision     calculation         is also based on the use of the average               interest       rate    of
the U.S.     interest-bearing            debt as a discount        rate   on the assumption         that VA’s
outstanding      guaranteed         loans will   default      over a twelve-year       period     as follows
(dollars    in thousands)r

                        1990              $   837,065
                        1991                  639,024
                        1992                  485,247
                        1993                  351,027
                        1994                  251,600
                        1995 and
                        succeeding            416,291

The discount           rate   used in the         computation          was   8.9     percent         for   FY 1989 and 8.8
percent     for   FY 1988.

The components           of   the    provisions     are     as follows       (dollars          in    thousands):

                                                     Year      ended     September       30,

                                                              1989                   1986

Offsets     against      loans receivable            $      116,352            $     156,077
Offsets     against      foreclosed
   property      held for sale                              100,407                  144,081
Offset     against     investments                           90,638                   45.824
Liability      for losses        on
   guaranteed       loans                                 2,672.857                3,663,488

    of Provision
The projected            cost    of guaranteed         loan defaults       will  not necessarily       reflect
VA’s     future        appropriation        requests       over      the next   12 years,    because       those
requests       will     also    include    anticipated        inflows    and outflows     of resources         for
nonoperating           use such as for          transfer,       purchase    and sale   of properties,          and
issuance       and     repayment       of loans,      sale    of loans,      and the receipt     of the one
percent      funding       fee.

To the extent            that    revolving        fund revenues    are not sufficient        to                    fund        future
costs,    financing         will    have to be obtained         from   future  appropriations                             or     other
congressionally           approved       sources.

                                    Page 51                                                         GAO/APMD-B16 Department of Veterans Affairs
During      FY 1988, VA sold               approximately       $379 million      in loans      with  recour8o
marketing        agreements         for $365 million.         Under the terms of the agreement@.               VA
will     repurchase        the loans sold if default             occurs.    Any losses     from defaulta       of
repurchased          loans      are borne by VA, which has estimated                the potential      lors    on
the amount of such loans outstanding                      and has recorded     this    loss as a composeat
of     the    provisions          for   loan     losses    at approximately        $568 million     and $647
million      as of September            30, 1989 and September           30, 1988. respectively.           There
were no recourse             loan sales during          FY 1989.

        loansales                                                                    *
During   FY 1989 and FY 1986. VA conducted       five                     nonrecourse           loan salea.            The
components  of the sales are susxsarized as follows                        (dollars   in        thousands):

                              -----Fy   1988----e-         ------my             igag--------
                              American    American         American           American
                              Housing     Housing          Housing            Trust             whole
                              Trust   I   Trust    II      Trust    III       Trust      IV     Loans           Totpl

Loans receivable
   sold                       $308,937         $234,346    $276,103        $364,670            $58,134       $1,244,190

Proceeds       from Sale:
   Cash*                      185.557           134,284     171,165           236,208           49,432           776,646
   Investment       in
      certificates      of
      securities               105,059           91,391      94,557           116,695                    0       407.702
                               290,616          225,675     265,722           352,903           49.432       $1,184,34&l

Loss on loans
   receivable sold            $.L&321$8.6711612.381$11.767Z

*Information     presented       does    not    reflect   the   transaction          expenses       incurred      to
sell   the loans.

                              Page 52
                                   Appendix IV
                                   Financial Statimente

On June 29,          1988 VA completed            its   first        sale   of non-recourse           loans     to the
American         Housing      Trust      (AHT I).        Under         the   terms      of     the  sale,     VA sold
approximately          $309 million        of its     vendee loans          to AHT I, which          in turn,      sold
the      loan6     a6 mortgage        pass-through        certificates.             The mortgage        pass-through
certificates          consisted       of    seven     senior        classes      of    certificates        that    were
offered       to the public         and subordinate         certificates          that were assigned          to VA as
partial       proceeds     from the sale of the loans.

The      face value          of     the     subordinate       certificates            at   the   time     of    sale   was
approximately             $105 million.             Principal        and interest          payments     on the senior
certificates           are guaranteed          by the American            Loan Guarantee        Association.         Under
the       securities           structure,          principal         and     interest        payments        to   VA are
subordinate          to payments          to ths senior       certificate         holders.

On September          23. 1988, VA completed                 its     second    sale of nonrecourse         loans    to
the American          Housing    Trust      (AHT II).            Under the terms          of the sale,      VA sold
approximately          $234 million       of its       vendee loans          to AHT II,      which in turn,      sold
the loans       as     mortgage     pass-through           certificates.            The mortgage     pass-through
certificates         consisted     of two senior            classes       of certificates       that were offered
to the public         and subordinate         certificates            that were assigned         to VA as partial
proceeds     from     the sale of the loans.

The face          value     of     the  subordinate     certificates           at   the    time    of sale    was
approximately            $91 million.        Principal     and interest           payments      on the    senior
certificates           are guaranteed      by the American         Loan Guarantee        Association.      Under
the      securities         structure,       principal       and     interest        payments       to VA     are
subordinate         payments       to to the senior    certificate         holders.

On February       23. 1989, VA completed          its third         sale of non-recourse         loans     to the
American       Housing     Trust      (AHT III).        Under        the terms     of the     sale,      VA sold
approximately        $278 million       of its vendee loans to AHT III,                 which  in turn,        sold
the loans       as mortgage         pass-through      certificates.           The mortgage        pass-through
certificates        consisted       of    four   senior       classes      of   certificates         that      were
offered      to the public         and subordinated         certificates       that     were assigned        to VA
as partial      proceeds      from   the sale of the loans.

The face         value    of     the   subordinate      certificates            at    the   time     of    sale     was
approximately           $95 million.          Principal       and interest           payments     on the        senior
certificates         are guaranteed       by the American           Loan Guarantee         Association.          Under
the      securities         structure,        principal        and     interest         payments        to   VA are
subordinate         payments      to to the senior      certificate         holders.

                                   Page 53                                                   GAO/AFMD-91-6 Department of Veterans Affairs
                                  Appendix IV
                                  Flnanclal Statement33

On August         24, 1969, VA completed                its   fourth       sale of nonrecourse           loans    to the
American         Housing      Trust    (AHT      IV).        Under       the     terms    of     the sale,      VA sold
approximately          $364 million      of its         vendee loans           to AHT IV, which         in turn,     sold
the      loans     a6 mortgage        pass-through           certificates.             The mortgage       pass-through
certificates          consisted     of three         classes       of certificates           that    were offered       to
the public          and subordinated          certificates            that     were assigned        to VA as partial
proceeds       from    the sale of the loans.

The face          value     of     the   subordinate       certificates            at   the   time     of    sale   was
approximately            $117 million.           Principal        and interest          payments     on the senior
certificate6          are guaranteed        by the American            Loan Guarantee        Association.         Under
the       securities          structure,        principal         and     interest        payments        to   VA are
subordinate          payments       to to the senior       certificate         holders.

On March    23, 1969.            VA    sold    more        than   $56   million      in    seasoned     vendee     loans
without  recourse.

AS     of September        30,   1969,    and September       30, 1966,       an allowance    has been
recorded     to reflect        the   estimated    loss     of    principal       as  a result   of  the
subordinated       position.       The estimated       allowance        computation    was based   upon
historical     loan defaults.         The net investment       balances     are as follows:

                                                As    of    September     30,     1969

                                American        American           American         American
                                Housing         Housing            Housing          Trust
                                Trust   I       Trust   II         Trust   III      Trust   IV        Total

Investment      in
   certificates        of
   securities                   $104.887        $91,391             $94.557          $116,695         $407,530

Allocation     of
    loss provision                  24,473        17,221            I 21 753              27,191         90,638

     Net investment             uuuu$74.170

                                 Page 54                                                     GAO/APMD91-6 Department of Veterana Affaira
                                                                            As of          September      30,      1988

                                                                            American           American
                                                                            Housing            Housing
                                                                            Trust I            Trust   II            Total

                                  Inveetmont in
                                     certificates                 of
                                     wcurities                              3105,059            $91,391               $196.450

                                  Allocation   of
                                     low provirion                                18,786         27,036                    45,624

                                       Wet inveltmeat                       uudzA$64.355                             $150.626

Tbo invontmentr                     are carried                 at cost,           adjusted   for         the     estimated         foreclosures,
becaure the fair                       market      value          cannot         be determined.

              heldfor sale
Tbo VA acquires                     property             from homeowners               who default               on guaranteed      or       vendee
loans.              An        allowance           for         losses       has     been recorded                based on historical             loss
data,    ar follow8                    (dollars          in thousands):

                                                                                           As of September            30,

                                                                                      1989                          1988

Forecloled               property          held         for     sale               $779,750                      $962,914

Allocation               of     loas      provision                                  100,407                       144,081

Net                                                                                6579.34-3

AS of        September             30, 1988, VA had outstanding              commitments      to guarantee      loans
which        will         originate     in PY 1990.           The number       of commitments       could     not be
determined,                as VA has granted          authority      to various      lenders     to originate       VA
loans    that            meet established    criteria        without   prior     VA approval.

                                           Page 55                                                                  GAO/AFMD-916 Department of Veterans Affairs
                                    Appendix IV
                                    Nnanclal Statements

During      FY 1968,            the  final    series     of Federal     Asset     Financing       Trust    (FAFT)
Participation           Certificates        (PCs) mature&          A final    principal        payment   of $146
million       was made         to the sinking        fund administered      by the Government           National
Mortgage         Association           (GNUA),      in   order    to   end VA’s         involvement      in     the
Participation          Sales Act of 1966 (P. L. 89-429).

Over    the life   of FAIT, VA transforred        interest    payments   to GNMA for     coverage
of the   periodic     intorest   payments    on the PCs.      GNMA invested   funds not needed
to meet    current     interest   payments    on behalf     of VA.     When the    final    series
matured   in August        1988, VA received     $165 million     from  GNMA as VA’s share of
interest   income    to the investment.

         - GUARANTY
On December         18,     1989.     legislation             was enacted             (Public     Law 101-237)            which
established        a new fund            (the        Guaranty         and Indemnity            Fund)     to finance           the
operation    of VA’s loan guaranty                    program       for     loans     made on or after            January       1,
1990. except        manufactured          (mobile)         home loans          and most administrative               co6ts      of
operating      the program.             This        legislation,            which,       among other         things,        also
increased       the      required       loan        origination           fee      in    cases    where       there     is      no
downpayment       on a loan           and decreased               the     fee for         guaranteed       loans       with       a
downpayment,        will      change     the operating               results        and cash flow        requirements           of
not only the direct              and loan guaranty              funds but also            the overall       loan guaranty
program.       This       legirlation          will       not      change       the     unfunded      loss      (about      $2.7
billion)     incurred           on the      outstanding              direct        and guaranteed            loans      as of
September    30, 1989.

                                   Page 58                                                      GAO/AF’MD-91-6 Department of Veterana Affaire
                                      Appendix IV
                                      Flnanclal Statementa

VA administers           the following         life    insurance’programs           that      provide     permanent
(whole    life)       and term        coverage:         National       Service     Life      Insurance       (NSLI):
United      States       Government       Life      Insurance         (USGLI):      Veteran5         Special    Life
Insurance        (VSLI);     Veterans      Reopened         Insurance       (VRI);      and Service-Disabled
Veterans       Insurance       (SDVI) .      Data on insurance              in force       for     each of these
programs     is as follows2

                                                     Insurance     In Force

                                     As of      September        30,   1989 and 1988

                                   Number       of                        Amount of                       Principal
                                   policies                               insurance                    veterans     group
                                  (thousands)                             (millions)                        covered

Prourem                      1989                yJ                    1989              1988

NSLI                        2.737               2,624             $21,025           $21,317                           ww II
USGLI                           43                  48                  159               178                         WWI
VSLI                           306                 327              2.839              2,909                        KOREA
VRI                            124                 127                  041               869               WW II/KOREA
SDVI                           173                 176               1,572             1,599              WW II/KOREA/
TOTAL                       u&i                 2&l&i             $26,442$26.952

In CY 1989,         VA adopted         the policy         of presenting           insurance      reserves        in the
financial       statements          in     accordance        with       generally         accepted         accounting
principles      (GAAP)     for the federal           sector      (GAO Policy        and Procedures         Manual     for
Guidance of Federal           Agencies:      Title    2).     The FY 1988 financial               statements        have
been restated         to make the change               retroactive         to that       year.       Prior     to this
change,    the insurance          reserves       as reflected        in the financial             statements        were
based on assumptions              prescribed        by Federal         statute.         Thus,    the reserves           as
presented     in FY 1988 and earlier               statements       were based on statutory                 standards
and were called        "statutory        insurance      reserves,"

Insurance        reserves         for     NSLI,        USGLI,     VSLI,       VRI,       and SDVI are designed                    to
earmark      funds      that     will     be required           to pay guaranteed                policy       benefits        over
future     premiums        and investment             income.      The reserves            are based on an actuarial
computation        of the present             value       of amounts        that    will      be required           to pay the
guaranteed        policy       benefits.          The two most            important         factors        used to compute
t&ore     reserves         are     assumed        investment         yields        and mortality              rates.        Under
statutory       standards,          which are oriented              toward       solvency        considerations,            these
factors     are generally            very conservative,            thereby        resulting         in a higher          reserve
requirement        and smaller           profits         for distribution            to owners         or,     in VA's case,
policyholders          prior      to claims          for    the guaranteed             policy      benefits.           For VA's
insurance       programs,         these      factors        are prescribed            by Federal           statutes       and VA
will     therefore          continue        utilizing          the     statutory           determined           reierves        for
policyholder        dividend         considerations.

                                     Page 57                                                       GAO/AFMD-918 Department of Veterans Affairs
                                   Appendix N
                                   Pinandal St&ementa

GAAP-determined              reserves           are oriented             toward         allocation           of revenues,              costs,
and expenses              and are             computed           based       on recent            mortality           experience            and
interest         assumptions.                 For       VA's       GAAP insurance                  reserves,            interest          rate
assumptions           ranged        from        1.0 percent             to 8.5 percent;                  these       percentages            are
expected       to hold          true       for      at least          the next           10 years.             The GAAP mortality
assumptions            are      based         on actual              mortality           experience             of    VA’s        insurance
programs,         with      a provision                for     adverse         deviation.              The statutory                required
interest        rates       range        from        2.3 percent             to 4.5         percent,          while       the statutory
mortality          assumptions               include          the       American           Experience             Table,         the       1941
Commissioner's             Standard           Ordinary          (CSO) Table,              and the 1958 CSO Basic                       Table.
(Actual       average         investment             yield       for     VA’s       insurance           program        securities           was
9.69 percent            as of September                    30, 1909, and 9.67 percent                          as of September              30,
1988.)       Aa a result             of these differences,                      the insurance              policy       reserves         under
GAAP      are       lower        than         insurance            policy         reserves          computed          with        statutory
assumptions.             The difference                   in the GAAP insurance                        reserves          aAd statutory
reserves       for VA's whole life                      policies        with       participating             rights        (NSLI.      USGLI,
VSLI,     and VRI) represents                      future        benefits          (dividends)           that      inure       to program
participants           based on statutory                     requirements              and practices.                This difference
is called         Participating                Policyholders'              Interest          in Accumulated                Participating
EarniAga,          commonly           referred            to as          Participating              Policyholders'                Interest.
Since      the difference                will        inure       to policyholders,                  it     is presented               in    the
liability         section         of the Consolidated                       Statement          of Financial              Position         as a
liability        to participating                 policyholders.

The GAAP insurance    reserve                    balances         as of      September          30,     1989,      are    shown       below
(dollars in thousands):

                                                     Death          Income and                                                 GAAP
                              Death              Benefit              Waiver   of                                          Reserve
Proqram                    Benefits            Annuities                 Premium                   Other                     Total

NSLI                   S6.207,685               9409,994                $704,965              $176,144               S7,576,7aa
USGLI                       92,449                 25,963                   1.678                    981                 121,071
VSLI                       578,620                  3,132                114,546                  3,914                  700,212
SDVI                       273,593                  1,486                129,038                                         404,117
VRI                        280,033                  1,247                  26,376                                        307,656
TOTAL                                           $441.8.22                                     AiAL!u

The GAAP insurance     reserve                    balances         as of      September          30,     1988,      are    shown      below
(dollars in thousands):

                                                     Death          Income and                                                 GAAP
                               Death             3enefit              Waiver   of                                          Reserve
Prosram                    Benefits            Annuities                Premium                    Other                     Total

NSLI                   $5,915.734               $432.333         $836.172                     $190, a74               $7.375,113
USGLI                      103,629                 20,697            2,234                        1,090                   135,650
VSLI                       534,224                  3.484         119,481                         3,362                   660,551
SDVI                       266,395                  2,294         148,269                                                 416,958
VRI                        273,744                  1,289           27,013                                                302,046
TOTAL                                           $468,097L1.133.169$195.325-

                                    Page 68                                                            GAO/AFMD-916 Department                    of   Veterans Af’faim
                                          Appendix N
                                          Financial Statements

the       Participating             Policyholders'             Interest            as   of September 30, 1969,                          and
September        30,      1966,     in the five          insurance        programs        are shown below (dollars                       in

                            Participating             Policyholders'           Interest

                          Proqram                           9./30/89                          9/30/88

                        NSLI                           $2,445,533                         $2,504,541
                        VSGLI                                 42,743                             46,896
                        VSLI                                424,402                            416,462
                        VRI                                 156,661                            160,660

The statutory              insurance        reserve        balances        as of        September             30,   1969.     are     shown
below (dollars             in     thousands):
                                                     Death        Income and                                           Statutory
                               Death           Benefit             Waiver    of                                             Reserve
Proqram                    Benefits          Annuities                Premium                     Other                       Total

NSLI                   $6.527.424             $409,994                 $704,965              $176,144                $9,090,527
USGLI                       130,221              25,963                     1,678                    981                    156,843
VSLI                        954,650                3,132                 114,546                  3,914                1,076,242
SDVI                        273,593                1,486                 129,036                                          404,117
VRI                         414,573                1,247                  26,376                                            442,196
TOTAL                                         i2ls&2z-s181.039~

The statutory             insurance     reserve            balances        as of        September             30,   1986,     are shown
below      (dollars        in thousands):
                                                  Death           Income and                                           Statutory
                                  Death        Benefit              Waiver   of                                           Reserve
Program                    Benefits          Annuities                Premium                     Other
                                                                                                  --                         Total

NSLI                   $6,311,932             $432,333                 $836,172              $190,874                $9,771,311
USGLI                       144,990              26,697                     2,234                 1,090                  177,019
VSLI                        904,009                3,484                119,481                   3,362                1,030,416
SDVI                        266,395                2,294                148,269                                             416,958
VRI                         414,976                1,289                  27,013                                            443,280
TQTAL                 &&?.0“2.392             6468.097-169m

berating          expenses   as          reflected      in   the  Schedule      of Expenses,                                 Dividends,
Revenues,        and FiAanCing           Sources     are also affected       by the use of                                  GAAP rather
than       statutory         principles.          Under   GAAP, the     operating    expenses                                 were    $103
million       higher       in FY 1989, and $104 million          higher    in FY 1986.

                                          Page 69                                                             GAO/AFMD-918 Department of Veterans Affairs

                                 ApmmUx     IV
                                 Ifhndal    Statementa

Certain   premium item0 are also accounted        for differently     under GAAP than under
statutory     principles.    Specifically,       the   liability     for   unearned   advance
premiums and the receivable      that      is set up for uncollected       premiums  are all
lower under GAAP principles.

The Secretary            of   Veterans     Affairs       annually     determines        the    excess     funds
avai lab10  for        dividend       payment.       Dividends      to     be paid       are    based    on an
actuarial     analysis       of the individual         programs    as of the end of the preceding
calendar     year.      Dividends       are declared        on a calendar       year   basis    and are paid
on policy      anniversary        dates.      Policyholders       may    receive      their    dividends       in
cash,     use them to pay premiums                 in advance,       repay     loans,     purchase     paid-up
insurance,     or place       them in an interest         bearing   account.

Dividends      payable      shown in the Consolidated             Statement       of Financial    Position
represents       the    amount   of dividends       potentially          payable     in the next      twelve
months.      Dividends      shown in the Consolidated           Statement       of Changes in Financial
Position     and Reconciliation        to Budget represents             the amount of dividenda          paid
in     the   last      twelve    months.      Dividends         to    policyholders        shown    in     the
Consolidated        Statement    of Operations       represents        the amount of dividends           paid
in the preceding         twelve  months plus the change in the SGLI trust                   fund balance.

A provision         for dividends       is charged    to operations       and an insurance        dividend
payable     is established           when gains     to operations        exceed    those   necessary        to
maintain      the solvency         of the insurance      programs.        These excess      earnings      are
distributed        to policyholders        in the form of divibends.          During    FY 1989 and
FY 1908,        total    dividends       declared   for   all    insurance      programs     amounted       to
$1.004,930       and $960,600,       respectively.

Dividends       paid      during       FY   1989    and      FY    1988       were   as    follows    (dollars   in

                                                 Dividends        Paid

                                                                         -.1989                1988

                       NSLI                                       $855,243                $823,485
                       USGLI                                         11,133                  12,132
                       VSLI                                          91,906                  83,769
                       VRI                                           32,740                  33,121

The payment     of termination        dividends      in the VRI program     began    in 1985 to
ensure    that those   whose insurance         was terminating    receive an equitable     share
of   surplus.     Termination      dividends      are    included  in the  above   figures    and
amount to approximately        $250,000     paid in FY 1989 and $250,000     paid in FY 1988.

All   whole    life     policies         build  cash surrender     values   equal     to policy     reserves
ply6 any dividends           held     on account.    Policyholders       may borrow     up to 94 percent
of the cash         surrender          value   or use it      to purchase     paid-up     insurance      at a
reduced    amount.

                                 Page 60                                                   GAO/AFMD-918 Department of Veterans Affeh
                                         Appendix IV
                                         Finadd   Statements

   Life Insurance
VA     supervises         the   administration           of the Servicemen’s                Group Life        Insurance
(SCM)        and     Veterans       Group        Life     Insurance         (VGLI)       programs       and     directly
administers         the Veterans’           Mortgage        Life     Insurance         (VMLI)    program.        SGLI is
supervised         by Vh but          directly         administered          by     Prudential       Life     Insurance
Company of America,              which provides          group     life     insurance       coverage      and pays all
claims     and expenses         associated        with   the program.            This    coverage     is provided         to
active        members        of   the      Military         Services,         to     cadets     attending         service
academies,        and to active        members of the Armed Forces                    Reserves,      National      Guard,
and Reserved         Officer     Training        Corp.

VA’s      responsibilities               are    to establish            premium       rates     and to act          as    the
transfer       agent      for     premiums       paid     by payroll         deductions        and for      extra    hazard
costs      paid     by the         service       organizations           involved.          VA also      determines       the
adeguacy       of the SGLI insurance                  policy      reserves       maintained       by Prudential.            If
excess reserves               exist,      VA can both          lower      premium      rates     and withdraw        excess
funds.        To date,           VA has        withdrawn         approximately           894 million           from    these
reserves.         These funds,            together      with     investment        interest      earned,      are held in
a trust      fund.      which on September             30, 1989, had a balance                 a $165.3 million.            On
Soptembsr        30, 1988, this             balance      was $151.5 million.                This balance         is used as
a premium         stabilization             fund    to augment           premium       payments      remitted       by the

SGLI Insurance              In   Force                    1989                              1988

Number of        Policies                           3,475,004                       3,509,029

Amount     (in    millions)                        $172.855.9                      $174.537.1

VGLI     provides          S-year    term insurance    to all     servicemen       separated     from active
duty,      usually        at the end of their       120-day   free     SGLI coverage.        At the end of
the     term     period        of VGLI insurance,        the veteran      has the right        to obtain     an
individual          life       insurance    policy    at    a standard        rate      Erom    any   company
participating            in the SGLI program.

VGLI Insurance              In   Force                     1909                              1988

Number    of     Policies                              298,552                          282.195

Amount     fin    millions)                         $13.335.7                       $12,066.8


                                     Page 61                                                GAO/AFMD9143 Department of Veterans Affairs
                                    Appendix      Iv
                                    Finandal      Statement4

The Veterans        Mortgage        Life     Inrurance       (VMLI)      program      is administered           directly
by VA.       Utiar     this program. severely                 disabled       veterans      can obtain         insurance
coverage      of up to $40,000              on the outstanding            balance      of their      home mortgage.
Cov4rage       ceases at age 70.                Premiums      are based on standard               mortality         tables
and     are      deducted          from       the      veteran’s          monthly        compensation           payment.
Administrative            exponsos           and     the      additional          cost      Of     insuring           these
medically-impaired           lives       are borne by the Government               through      appropriations.

WI.1      Insurance           In Force                         1989                          1988

Number      of     Policies                                5,190                            5,416

Amount      (in      millions)                           $171.1                            $165.5

Except       for the     SGLINGLI      and VRI programs,             administrative       costs     are    not
charged       to
               VA life       insurance     programs,       Administrative           costs charged      to the
SGLINGLI program were $324,000                in 1989 and $306,000            in 1988.     Administrative
coots   charged      to the VRI program            were $1,156,000        in 1989 and $1.304.000             in
i98a.     Administrative         costs   for     the other      insurance        programs   (USGLI,      NSLI,
VSLI,    SDVI) borne        by    VA   appropriations        totaled       $27,212,000       in   1989     and
$25,980,000 in i98a.

Insurance      program        investments,          which     comprise    most    of VA’s investments,             are in
non-marketable          U.S.      Treasury        special      bonds and certificates.                 Interest      rates
for Treasury         special         securities       are based on average           market     yields       for similar
Treasury     issues.         The special          bonds,     which mature      during     various        years   through
the     year    2002,       are       generally       held      to maturity        unless      needed        to  finance
insurance      claims     and dividends.              The certificates         are short-term            in nature      and
are either        redeemed         or replaced        at maturity,       depending       upon the cash needs of
the insurance         program.         As of September           30, 1969, investment           securities       consist
of the following           (dollars          in thousands):
                                                          Insurance          Other
Security                        Interest        Ranqe       Programs         Proqrams           Total

Special       Bonds                6.375-13.750            $12,764,482                         $12,764,482
Bonds                              7.875-8.5s                                $     2,251               2,251
Notes                              6.75-14.25s                                    26,433              26,433
Treasury          Bills            7.9-8.37s                                      40,000              40,000
Other                              Various                                       316,948            316,948

                                    Page 62                                                 GAO/AFMD-91-6 Department of Veterans AtYaks
                                  Appendix IV

       As of       September    30,   1988.    investment      securities        consisted       of     the   following
    (dollars        in thousands):
                                                        Insurance           Other
    Security                    Interest      Range       Proqrams          Proqrams            Total

    Special        Bonds        5.87!i-13.75%           $12.304.372                           $12,304,372
    Certificates                8.75-10%                     140,743                               140,743
    Bonds                       7.875-8.5%                                  $     2,251               2,251
    Notes                       B.375-14.625%                                    21,006              21,006
    Treasury        Bills       6.7-7.5s                                         32,000              32,000
    Other                       Various                                         150,682            150,682

    Other      VA programs    with   investments       are Housing    Credit      and Medical      Programs.
    All Insurance        and Medical    program     investments    are in securities        issued     by the
    Department      of the Treaoury.          Houoing     Credit program     investments      are in trust
    certificates       that  were issued      by the American      Housing     Trust,    a private     entity
    not associated        in any way with the Government.

    Non-Federal       accounts      receivable        principally          represent        amounts     due    from
    individuals        for     Education         Loan        defaults,         Compensation         and    Pension
    overpayments.       and amounts       due from       third      party    insurers     for   health    care    of
    veterans.      The latter    totaled       to $176,758,000          and $157.224.000       as of
    September     30. 1969, and September           30, 1988.

    Federal    accounts       receivable   are mostly           accrued      interest         payments        due   on    VA
    investments,     from     the Department   of the         Treasury.

    Although    VA is an active        participant          in Federal       Debt Collection         programs       such
    as the     IRS Income       Tax    Refund       Offset,      Federal       Salary      Offset,      Litigation,
    Referral     to Credit      Reporting         Agencies,      and Referral            to Private      Collection
    Agencies,     there    are still     a number of accounts              where     all    possible      collection
    actions    will     be unsuccessful.            Based on VA’s           experience,        an allowance          for
    losses    ha8 been established              at    approximately          50 percent          for    outstanding
    Medical    and Benefit       Program       debts     from    individuals         and at 100 percent              for
    Housing Credits       debts reported        for individuals.

 Non-Federal        advance     payments      are,    principally,        advances    to VA construction
vcontractorsI         grant   recipients,        beneficiaries,         and VA employees        engaged     in
 official     travel.       Federal     advance    payments        are mostly    to the General    Services
 Administration         for the procurement         of supplies       and equipment.

                                  Page 63                                                    GAO/APMJIb91-6Department of Veteran8 Affairs
                                  Appendix IV
                                  Pinaneial Statements

Current      loans      receivable         are amounts due under VA's Housing                Credit     Assistance
Program,       including       Home Loan Guaranty           and Direct       Loan defaults,         amounting        to
$2.511,453,000           and $1,971,100,000           as of September       30, 1989, and
September          30,     1988,      respectively.         Allowances        for     loss     on    these      loans
receivable         resulting        from defaults        were $2,508,942,000            and $1.969.072,000           as
of September           30. 1989,         and September       30, 1988,      respectively.          The remaining
allowance        for    loss    relates       to active    home loans      and is based on the Provision
for Losses computation                 (see Note 5 for a full          disclosure         of the Provision         for
losses     computation).

Non-current         loans      receivable         represent        amounts     due from       loans      and liens
against      VA-issued        life      insurance       policies       and also       amounts     owed to VA's
Housing     Credit     Assistance         Program     beyond the next 12 months.               Insurance     policy
loans do not have a fixed                       repayment        schedule.       Home    loans      have    a firm
repayment       schedule      over     the life       of the loans,        which    is generally        30 years;
however,      it is VA practice             to sell     these home loans          rather    than hold them to
maturity.        (See Note 5 for a complete                explanation      of VA's loan sales.)

Home       loans   authorized        but not closed   amounted  to $96,719,000                                and     $138,239,000
as of        September     30,    1989, and September   30, 1988. respectively.

The tables   below   recap the receivables                          and allowances               after   a reclassification
OP the Housing    Credit  program defaults                        from accounts             to     loans  receivable.

The receivables           as of     September        30,      1989,   consist         of:
                                                    Current               Non-Current                         Total

Accounts       :
 Individuals/Corporations                       $      985,780            $     -o-                     $     985,788
 Federal      Government                               387,576                  -o-                           387,576
 Less: Allowances          for      Loss               510,041                  -o-                           510,041
 Accounts      Receivable,          net                863,323                  -o-                           863,323

 Individuals/Corporations                               52,464                  -o-                            52,464
 Federal      Government                                92,681                  -o-                            92,681
    Total     Advances                                 145,145                  -o-                           145,145

 Individuals                                        2,872,029                 1,793,241                     4,665,270
Less:    Allowances         for    Loss             2,540.447                    102,676                    2,643,123
    Loans,     Net                                     331.582                1.690.565                     2,022,147

Net    Receivables


                                  Page64                                                            GAO/AF’MD-91-6Department of Veterans Affnirs
                                        Appendix      N
                                        Financial     Statements

    The receivables              as of September               30,     1988,      consist          of:

                                                              Cur rent                Non-Current                           Total

    Accounts        :
     Individuals/Corporatfons                             $      940,079              s                  132         $      940,211
     Federal      Government                                     368,401                                 461                368,862
     Less: Allowances          for          Loss                 494,048                                                    494,048
     Accounts      Receivable,              net                  814,432                                 593                815,025

    Advances I
     Individuals/Corporations                                      53,432                    -o-                              53,432
     Federal      Government                                     133,660                     -o-                            133,660
        Total     Advances                                       187,092                     -o-                            187,092

     Individuals                                              2.587.658                   1.644.686                      4,232.344
     Lesst Allowances               for     Loss              2.015.799                      124 644                     2,140,443
        Loans, Net                                               571,859                  1,520,042                      2,091,901

    Net Receivables

      9: PROPERTY
    The majority           of the reported          property       represents       facilities        and equipment         used
    to    provide          medical       care     to veterans.             Property          and equipment,         including
    transfers         from    other     Federal      agencies,        are valued         at cost.        Expenditures         for
    major      additions,           replacements,           and alterations              are    capitalized.           Routine
    maintenance           is recognized         as an expense           when incurred.           Costs     of construction
    are      capitalized           as     Construction          in      Progress       until      completed         and     then
    transferred          to the appropriate            property       account.

    Buildinqs     are         depreciated       using the straight          line     method over estimated           useful
    live6     ranging            from        25  to     40 years,      based        upon    the      American     Hospital
    Association's               estimate     of     useful    lives    of      hospital      assets.        Equipment       is
    depreciated             using     the straight       line   method over useful           lives,     which,    for most
    equipment,            range from 5 to 20 years.                 Current       year    depreciation        amounted      to
    $687,344,000             in FY 1989 and $412.100.000             in FY 1988.

    Property             and equipment            consisted           of    the    following               as   of   September                30,   1989
    (dollars            in thousands):

                                                                                     Accumulated                            Net Book
                                                               cost                  Depreciation                            Value

               Land                                   8      100,624                                                        $       100,624
               Buildings                                  6,600,981                   1,950,577                                 4,650,404
               Equipment                                  3,313,322                   1.871.124                                 1,442,198
               Other                                         866,746                      337,392                                   529,354
w              Construction
               in Progress                                1,673,934                                                             1,673,934

                                          Page 66                                                               GAO/AFMD-814 Department of Veteran8 Affaira
                              Flnaneial Statements

Property        and eqUipm@nt        consisted       of     the   following          as   of   September      30,   1988
(dollars       in thourands)r

                                                                    Accumulated                   Bet Book
                                                 cost               Depreciation                   Value

           Land                            8       91,955           0                             8       91,955
           Buildings                           6,201.962                1,888,078                     4,313.884
           Equipment                           3.059.15s                1,543,620                     1.515.535
           Other                                  802.186                  313,077                       489,109
           in Progress                       1.319.480                                            _1_.319,480
                             TOTAL        $11.474.738               ti3.744.7115                  97-729.961

VA    leases       facilities,           primarily     office     space      and medical      facilities,           from
General       Services         Administration        (GSA).     These     leases    are cancellable           without
penalty.         In addition,            VA has operating          leases      with  the public         for   office,
data processing,               and other      equipment.       In FY 1989 and FY 1988,               rent    expenses
for    such     leases          from GSA amounted           to approximately         $90 million          each year;
while     leases         from       the   public    amounted       to    $68 million      and         $65 million,

Rurricane       Hugo     caused wind,        rain,      and flood      damage to VA Medical              Centers        on
the east       coast.        Particularly         hard hit       was the Medical          Center    in Charleston,
South Carolina.              The California            earthquake      caused       structural       damage      to VA
Medical     Centers        in the Northern            California      area.       The Medical       Center     in Palo
Alto,   California          suffered      the most severe           damage.       Public      Law 101-130      brought
relief     in     the     form of funds            from The President's               Unanticipated        Needs      for
Natural     Disasters         Account.       The FY 1990 Medical                Care Appropriation            received
$16.6 million          to offset        immediate       repairs     and emergency         operating     costs      ($1.0
million     for hurricane            and $15.6 million           for earthquake          relief).      The FY 1990
Najor     Construction             Projects         Appropriation           received         $41.2    million         for
earthquake       related      projects.

                              Page 66                                                      GAO/AFMD-@l-gDepartment of Vetew   Affah
                              Appendix IV
                              Financial Stat8menta

VA   is a party       in various        administrative            proceedings.            legal     actions,    and tort
claims     brought     by or against          it,     primarily        relating        to allegations        of medical
malpractice:        however,       such legal        settlements          of tort         claims     awards   in excess
Of $2,500, as well               as,    contract         disputes       are paid           from    a Government        wide
Judgment Fund appropriation                maintained         by the Department               of the Treasury,         with
an agency        having     to reimburse           the fund for            only    contract         dispute    payments
(eee Note 2).         Contract       dispute      act cases that were pending                     as of
September       30, 1989,         and which         will     ultimately         result        in payment     out of VA
appropriations,          if    the     cases      are      decided       against         the     government,      totaled
approximately        $12.5 million.

VA is involved         in several    legal    actions,     which.      if decided     against   VA, would
Ultimately      be charged     to VA Appropriations.            Although       VA is unable   to predict
the final       outcome     of the lawsuits,        VA's ultimate         liability    could   be in the
tens of millions         of dollars.       If such judgments          were to occur.       VA would  most
likely     be required     to seek supplemental        appropriations          from Congress.

In the opinion        of VA’s       management      and Office      of General      Counsel,    the ultimate
resolution    of legal        actions     still     pending    as of September 30. 1989. will               not
materially     affect       VA’s      operations       or   financial     position,        especially     when
consideration      is given        to the availability          of the Judgment        Fund appropriation
to pay some court        settled      legal     cases.

                              Page 67                                                   GAO/AFMD-916 Department of Veterana Affah
Supplemental Schedules

                     The following      four     schedules    provide     further  detail, by major     program area,        of
                     (1)    assets,   liabilitiecl,        and      Government    equity3   (2)    revenue,       financing
                     source8,     and expenses?        (3) sources       and uses of funds     by major     program      area2
                     and (4) budgeted       and actual     outlays.

                            0       Ihe medical           program     area includes        financial     data       for     the   medical
                                    care      progwun,         including       VA’s    172 medical         facilities,            medical
                                     research      and administration,              and construction.             The      construction
                                    program       was included            because     most     of its    activities           relate      to
                                    medical      facilities.

                            0       The veterans       benefits     area     includes          compensation,              pension,      and
                                    education    programs       as well    as burial          and miscellaneous              assistance
                                    and veterans     job training       programs.

                            0       Housing    credit  assistance            includes       both    VA’s      loan        guaranty      and
                                    direct  loan programs.

                            0       The administration      area includes     costs  of managing      the Department
                                    as a whole      and the National     Cemetery   System.    Also      included       are
                                    costs of managing      the Supply     Fund and automated        data     processing

                    Except     the cost    charged    to three      of the life       insurance      programs   (SGLI/VGLI    &
                    VRI)     personnel     compensation         and fringe     benefits       for   employees    involved   in
                    veterans benefits,        housing     credit   assistance,      and life      insurance   have not been
                    allocated      to these major       program     areas and are included            in the Administration
                    and Other section.

                                               Page 68                                                  GAO/APMD-918 Department of Veterans Affairs
                                                                                 Appendix Iv
                                                                                 Finandal Statements

Schedule of Aeretr, Llabilitler,                      and Equlty by Mejor Program a8 of September 30,1999

                                                                                                          (Dollars In Thousands)

                    cmh with U.8. Tr4uury WI6 a) h4md                                           s3.644.94s      5895,677      $219,028            $18,658     3367,182       $4944,590
                    Mv4mr.             Aomunb,         4nd Lolln        nowhblo.         Nu        335.418       232.611       993.419          1,331.975       87.192        3,930,615
                    I-b                                                                              m684                      31Q,948         12,764,462                    13,15&l       14
                    Fwodo.4d           Prcqmy         Ha&l for srk                                                             679,343                                          879943
                    tan4       Bundhp,          ud     Rqqnwlt          Not of
                          Acoumubbd             Dqmddon                                          8,392,493                                                        4,111       6,398,614
                    cttiwAaob                                                                        23,341                                           1,049    130,167           154,567
                    Futun          An4ndng       &uraa                                            1,776.732                  20484,717            386,707      188,879        4,795,035
                  TOTAL        ASSET                                                           $14.240.622      $978,288    $4.693,456        $14,482,871     $75s,531      s35.159,768

                  LlASIUflES.          TRUST FUND
                  SAIANCES,            AND EQUITV:

                    Aomunb           Pay&la,         PrlndfMy      to the PWb                     5844,957            $16      $88,541           $167,242     3223.481       Sl,124,236
                    Acuud~uuonuldPoMbn~                                                                           56.700                                                          56,700
                    Aacwod          Payrdl      Md    P4yrdl Rehtod         Lhwuln                1.074,471                                                     97.250        1 ,I 71,729
                    Wd4ndoonCr4dit4rD4pdt                                                                                                          867.393                       e67,393
                    Inwr4nce          Dluld4nd8        Pay&a                                                                                    1,030,8&3                     1,030,963
                    cthuLi4bwn                                                                     249,028                       14,225             70,772      50.191           376,214

                    Udtlffty       for Faderal       Em@oyem        Coqmrtbn              Ad      1.102.090                                                    198,999        I,21 1 pee

                    lJ&llyy        for Lone4         on Quamnbad          LOMS                                               2872,057                                         2,w2.857
                    Inwr4nw           Pdloy Reuwm                                                                                               9.111.844                     9.111.844
                    ftwuw           for Putb!@ng             Pdbyiwklm           Itiu&                                                          3.069,419                     3.989.419
                    BormwlngI          tram Tnuuly                                                                           1,730,078                                         1.739.078
                  TOTAL        LIABILITIES                                                       3,061,544        56.715     4,505,701         14.317.553      479.928       22.421,441
                  TRUST        FUND      BALANCES                                                    28.782      477,TIo                           186,318                       571.870
                  EOUIW         OF THE U.S. QOVERNMENT:
                    Untulhed           &+rqnidbn:
                          Invrbd       CIplbl                                                    8,427,788                                                     155,713        8,593,501
                          odwruf       A#mprbtbn*                                                                263,860                                                         263.059
                          UndrHgabd          Sahncu                                                 840,999      174.318       1 a7.763                           7,574        1,210,631
                          urxbywrufchrbm                                                          1,991,621         5.637                 1                    112,316         1 s99.475
                  TOTAL        EOUITY        OF THE
                    U.S. OOVERNMENT                                                             11,159,297       443,803       187,764                         275,893       12,067,457
                  TOTAL        LlA8ILlTIES.          TRUST       FUND
                    SALANCES.            AND EQUIN                                             $14,249,623      $978,288    34.693.455        $14.482.871     $7W,531       $35,159,76B

                                                                                 Page 69                                                        GAO/~916                 Department of Vetemne Affaira
                                                                                    Appendix Iv
                                                                                    Financial Statements

Schedule of Assets, Liabilities, and Equity by Major Program as of September 30, 1988

                                                                                                                      (Dollars In Thousands)

                  Csah with U.S. Trouury                      and on hand                               $3,524,677        $1,213,776            $316.747             $    16,328   $311,156     $5,366.664
                  Advawss,            Accounts,          and Loans        Ftecehr&le,         Net           325,132            266,020          1 ,015,793            1.357.625      109.246      3.094.016
                  Invadmsnts                                                                                 55,257                               150,662            12.445.115                  12.661.054
                  Forwlowd                Property      Held tar Sale                                                                             616.633                                            616.633
                  Land,       Euiidinge.         and Equpment             Net of

                      Accumulated                Depreciation                                             7.727.063                                                                     2,660     7.729.963
                  othu       Auots                                                                           23,102                                                        1,225     134,536         156.665
                  Futum        Fin#mcin(l         Sources                                                 1,751,5T7             67,259          3.450.553                376.717     146,434      6.612.540
                TOTAL        ASSETS                                                                 $13,407.028           $1.567.056        $5.754.606           $14.196,210       $704,256     335MQ.157

                UABIUTIE5.  TRUST                      FUND        BALANCES,
                  AND EOUITV:


                  Acmunts          Payable.          Principally      lo the Public                 $       622.631        $           44   $     103,351        $       172,447   I 200,621    $ 1,099,294
                  Aouusd         CoqsnaaUon                 and Pen&w          BeneMs                                          724.066                                                               724,066
                  Aermsd         Payroll         and PDyroll
                     Ae*ld           Liabilitk                                                            1,010.436                                                                   82.075       1.102.511
                  Dlvklendr         on Credit          01 Deposit                                                                                                        765,236                     765.236
                  Inrumnco          Dhrionds            Payable                                                                                                          997.164                     997.164
                  CXhr       Liabiliiir                                                                     190,492                                34,005                 73.954      47,676         346,127
                  Ulbility      for Federal            Employees
                     Compensstion                 Ad                                                        932.121                                                                   92,166       1,024.309
                  LhbMty        for Loas             on Guaranteed          Loans                                                               3,66!3,466                                        3.663.466
                  lnwnnce            Policy Reserve                                                                                                                   6,690.316                   6.660.316
                  Rowwe          for Partic@tion              Pokyholdom           Interest                                                                           3.126.559                   3.126.659
                  soortowirlgs            from Trsesury                                                                                         1,730,076                                          1,730.076
                TOTAL        LIABILITIES                                                                  2.755.660            724,130          5.530,922            14.047,700      432,560     23,4ei.i92
                TRUST        FUND         SAUNCES                                                            24.108            570,625                                   151,510                     746,443
                EOUITY        OF THE U.S. GOVERNMENT
                Unrealked         AFgropriatlons:
                  Inveatai       Capital                                                                  7,941,342                                                                  170,060      6.111.422
                  Dotamd          A~rc+wiatnna                                                                                 275,763                                                               275,763
                  Uncbllgad               Salancos                                                          967.041                               223.663                                          1,210.724
                  Und&wad                 Ordam                                                           1,696.657             16,337                       3                       101,616       1.616.613
                TOTAL        EOUI’W          OF THE U.S. GOVERNMENT                           -         10~327,040             292,100            223,666                            271,696     11.414.522
                TOTAL        LIABILITIES,            TRUST         FUN0
                  BALANCES,                AND EQUITY                                               $13.407.026           $1.567,065        $5.754,606           $14,199.210       $704.256     $35.652.157

                                                                                    Page 70                                                                              GAO/AFMD-916 Department of Veterana AfMrs
                                                                      Appendix N

Schedule of Expenaea, Dividends, Revenue, and Flnanclng Sources by Major Program for Fiscal Year 1989

                                                                                             (Dollan in Thouundr)

                                                                                                                      Cf82                         Admin.          Cons&
                                                                                                     “z%z        Assbt8nc8        I”W”E         utdothw              &t&i
                  OPERATIN               EXPENSES AND DIVIDENDS:
                     Ex@8nNs By cm8goly:
                     Pwwnn6lCompanutionandFrlr?goBwuflta                        $7,266.797                                    s        1.061    563%222     s7,901,100

                     v-             emelils                                                      SlS.244,292                                                 16,244282
                     clama Md ImnlIioa                                                   274                      Sloe,@56        1.179.565           243        1.290.059

                     CkprroLtron                                                    596,525                                                           819          6S7,344

                     &p@uN         uul     M8t8flals                              1.603354                                                         17.161        1820.715

                     cantrNlud           s8nrlan                                  1.370.966                                               133      76.491        1.447.612

                     Rmnt.Communlo8llonr.              6nd Utllltir                 416,692                                               266     150.765          569.723

                     ant                                                             126.565                                                       28.565          157,130

               TMJ Opmthg                Expwm                                   11,676,395       16244,262        109.956    1.161.c65          997.266     39,117,965


                                                                                                                                    991,022                        991,022

                  8QuRN8Nb                                                                                                           13,761                          13.701

               lot6lDlvldwd                                                                                                       1.004.763                      l.cu4.7S3

                                                                                511.875,395      sie.244.262      $109.956    S2.165.649        $907.266    531.122.746

               OP&;WlN$            REVENUE AND               RNANCINC

                     0@8r8ung RwMlcn:
                           Prrmtumlncome                                                                                            871.235                 S      671.235

                           Inter*#Incoma                                                                          $165,336     1.274.404                         lA39.742

                           LoanOri@wkmFwa                                                                           141,057                                        141,057

                           Rehbura8m8nls           and Other                     S 302.812        S 132,356           6.466          42.461      s115.331          599,449

               ToWCwatingfievenue                                                    302.612           132.350      312,881       2,188,103       115.331        3.051.463

                  fltunang        by sourca:

                     Appropr*Uonr6ndRnrncin0Sou~6Ralliud                         11347.429         lfJ,Ol6,392     762.911             7.756      771.491    2&905,979

                           byFuturoFlnancingSour~                                     25,154          (67,259)    ol6wW             (10,010)       20,444    (1.017,507)

                     Tmn6f6m,R6hbur66mmt6.andOth6r                                                     182,793                                                      182,793

               Tol8lRMndrlQsourws                                                 11,372.333       16.111.926     6?02,925~ w54)                  791.935       268.071.265

                                                                                $11,675,395      $16.244.262      5109.956    S2.lS!w49          S907,286   S31,122,748

                                                                      Page 71                                                 GAO/AF’hD9lS Department of Veterans Affdra
                                                                         Appendix XV
                                                                         Finrndal Statementa

Schedule of Expenses, Dividends, Revenue, and Financing Sources by MaJor Program for Fiscal Year 1988

                                                                                                  (Dollars In Thousands)

                                                                                         hwlwl                               Hod                              Admin
                                                                                                                               Cd#                  l.ua
                                                                                 conat&                     “s2s       Aaristance           lnauranoa          &l”,    Consolidated
                OPERATINQ                EXPENSES        AND     DIVIDENDS:
                   Exponao~         By catagory:
                   Por84nrwl        compenution
                       and Frlnga         SmHb                                   s 6$03,251                                             $      1.176       $6lO,W5     S 7,516,261
                  votuana'          Banatlb                                                            $16.939,277                                                         16,939.277
                   Clahlr        and Indunnitlr                                                  124                   62.031.637       1,244,416                308        3,276,447
                   oqwadatbn                                                            411,796                                                                  301          412.009
                   mgplin          and Matsrlub                                       1.639,364                                                              18,648         1,656.902
                  cor4raotual            suvlwa                                       1,399.564                                                  145         73,255         1,472.96.4
                   R*re. oommu~uorla,                   and ulllltlu                    393.764                                                  200        136.215           632.269
                  0ul.r                                                                   mm                                                                 26,780             66.360
                Totdoparaung               Erpnur                                    10.607.41s         15,w9,277          2,031,537    1,246.026           666.332        30.692.669

                   Dkiduwla         lo   Pdbyilm                                                                                            962.507                           052,507
                   6Ql.l Rwwva                                                                                                                3,416                              3,416
                Total Dh‘ldanda                                                                                                             856S23                            956,923
                                                                                 510807.416            S16.WQ.277      62.031.537       62,201.961         5668.332    631.646.612

                OPBRATINQ                REVENUE   AND
                  FINANCINQ               SOURCES:
                  opuallwJ Rwanuar:
                       PrmhrmIncwl.                                                                                                     3 673,012                      $      873.812
                       Intarrt      income                                                                             5     166,143    1229,557                            1.397.700
                       LoclnOd@natbnFees                                                                                     135,116                                          135.116
                       R*lmburNm.nta                and ahu                      s      314.643         s   106.133          . . ,
                                                                                                                             168.161\        76.646        5109.799           645.242
                ToWCswaUmRwww~                                                          314.643             106.133          237.060    2.162.317           109.739         2.B51.672

                                                                                     10.211.4Kl         15.6OQ.366           040.194         14,066         750.434        27.426521

                                                                                        261,322               47,012         664,263           5,676           a.ow         1.196,272
                                                                                                            274,747                                                           274.747
                TohI      Fimdng          Swrcee                                     lO,402.n2          15.w1.144          1.794.467         lw34           766.533        26,696,640
                                                                                 $10,607,416           61S,WQ,277      62.031.537       32,201,861         3666,332    $31,646,512

                                                                       Page 72                                                          GAO/AFMD-916 Department of Veterans Affdra
                                                                                    Appendix N
                                                                                    Finfmdal Statements

Schedule of Sources and Uses of Resource8 and Reconciliation to Budget by Major Program for Fiscal Year 1989

                                                                                                         (Dollar8 in Thousands)
                                                                                              A&dwlmd                               Cd%                           Admin.            COnwli-
                                                                                              cwfmmtb             “E&         Aadstama         I”SU”~         UldtMw                  datad
               NET USE OF RSSOURCU):

                    *r*iw             -                                                       $11.675.395     $16,244,282       3109.956     51.161066        5907.288      330.117,965
                    l~mu       fbqulrlng       (ProMding)            Fur&z
                          (Inueue)         Decmam          In Futun
                             u6Mky         Proviwu                                               (16w69)                          mo.631       (221.528)        (16.610)            562,326
                          Deproclmkm                                                             W6,5~s)                                                            W@         (667.344)
                          IrKmaN          (rhomaN)         In AcwunN            Recmv~r           wi526)            (6.879)     (167.290)           2.444       (20,SSB)       (206,312)
                          Doura~           (Incmme)        In
                             Accoum8         Plyable       and Accrue8                            (89.3(5)         874,399         34.576       (66.6S6)        (31.922)            509,010
                          Rwrnurr          Acoounlad           for u
                             ottMnlllg       cdlaclloM                                           (302.612)       (315,149)      (312.661)    (1,109,240)      (115.331)      (2.155.413)
               Rerourcar        UNd        (Provided)      by op+rauoM                         10.401.118      16.596853          654,992      (215,954)        721,425      269156,232
                 Non-oparcm~                lJse8:
                    Dlv~nda                                                                                                                      891.022                            991.022
                    AcquirJtionr           ol Land.     Bulklingr.        6nd Equipmrnl          1.127.907                                                        26.559       1.154466
                    Purchaw           04 Foreclored            Property       Held for SU6                                     1,463,169                                       1,463.w
                    lwumw l d               Rrpurchuo            of LOM~        UKI Lbu                             (2.566)    1.073.002         114,504                       l.l64,Bl6
                    Other.      Nal                                                                      W)                      (45,355)                        (4.372)            W,W
                 Flrunclng Acwhiaa:
                    58h      ol Foreclowd             Pro~wly          Hold for Sal.                                          (1,714.851)                                    (1,714.851)
                    Sak      ol Loma.         wllhout     Racoutu.            NOI                                               (433.331)                                      ww31)
                    LowLien              Rop6ymrnWOpl                lncom6     S6tllem6M8                                      (139.624)      (162.559)                       (302.353)
                    Rwonwr               Collecbd       for Trouury                              w5,lw           (264,266)                                                     (430.269)

               NET USE OF
                 SUWETARY                  RESOURCES              (OUTLAYS)                    11.362.438      16,309,799         677.619        727,013        743.612      30,040.561
               SOURCES   OF SUDQSTARV
                 RESOURCES    PROVIDED
                 InM4gewy                 Tmnetm                                                   (15,000)         (4.250)                         4,250         15.000                       0
                 Cuwom         Year Agpropdatlon.                Adjusted                      11.663.957       16.996.060        776,100           9x20        793.216      b.260.543
                 ccnlmcl        hlhorny                                                                             84.343                                                     ’      s4343
                 lntrrom       on Qovemmont              S6a~rlUn                                                                              1 B33.241                       1 sO33.241
                 NI( Trandem.              Rolmbursonwnto,                6n-d OIhor                46215        w4.288)                                            WI             (236,492)
                 Funda       Rdumad          to Trruuy                                           (199.726)            (175)                                       (8,139)          WMW
               TOTAL        RESOURCES                PROVIDED                                  11,515,445       16,7W,700         776.100      1.046.711        799.636      29,961,505
               INCREASE            (DECREASE)             IN
                 U.S. TREASURY                 AND      IMPREST            FUNDS                   133.008       (51 WQW          (99,7lQ)       31B,695          55,028           w*w
                 Funda       Exchanged          for U.S. Qovernmrnl                 SowIth         (13,840)                                    (319.388)                           (333,206)
               NE7 INCREASE                (DECREASE)              IN
                 U.S. TREASURY                 AN0      IMPREST            FUNDS                   119,166       (516.099)        (09,719)              330       56.026           (442.204)
               U.S. TREASURY                AND       IMPREST           PUNDS:
               Soginnlw        ol Year                                                           3,524.W         i ,213.m         310.747          16,326       311.156        5.366.664

               End 01 YOU                                                                      $3844.045          6695.677       6219.026        $16,656       6367,162       64$44.590

                                                                                    Page 73                                                  GAO/AFMD91-6 Department of Veterans Affah

                                                                                     Appendlr Iv
                                                                                     Plnanclal Statements

Schedule of Sourcer and UDOSof Re8ourcer ancl Reconciliation to Budget by Major Program for Fiscal Year 1988

                                                                                                           (Dollam In Thousands)

                                                                                                                   VStUSfW   “2          uh                       al          cmsu
                                                                                                                    Bmeftts Assbtmcs hlsursncs
                      opwa~ng Eywn-                                                            $10,eo7,416     $16,839.277    32,031,637      31,24e.o29    3899,332     630,892,sw
                        Mm.       Rqulrlq         (Provkhg)             Fmdc
                              hcroass       In FUIUW LhbiMy              Prov&brm                  (7W74)                       (OWJW)          (312,769)      (7.149)    (1,33w72)
                             Dsprsdaltcn                                                          (411,798)                                                       Pw        (412,099)
                              lncmas4 (Dscruu)               in
                                 AcocwlsRowlwbb                                                        6.643       (23#71)      (10%~)             (1.W        37.624         (91.713)
                             Dowuu          (l-)             In
                               Aowmls           Payablb      and Aauuab                           (133,613)         568,960     (138.871)        (@ww        (13299)          186.200
                              otbdungcollactkms                                                   (314.643)       (382.9w       (237,080)     (1,096,751)   (109,799)     (2,141,152)
                rlosoUrws          tJud       (Prwkbd)        by oprdm8                          9.880.830      16.098,878        603,127       (261.002)    776,422      27.097.063
                     t4on4pwallng              usos:
                        DMdmds                                                                                                                    962.507                     962,#)7
                        %Il Idhgl, u-d EWmsnt                                                    1,070,337                                                     12,327       1 .ow.w4
                        Purchma          d Famobud
                           Prqxrty        Held for Sal*                                                                         1,63o,s46                                   1 .ww46
                        bswnco           md R~rdlass               d Losns       and Llem                          (13,492)     1 ,oao,psl,       107,300                   1 .I 74.472
                        Other,     Nst                                                                 w4                         (36.662)                     13.961         (23.441)
                     Rnsnoing        Adlvlth
                        &Is      d Forwbud               Frqady         Hold tar Sala                                         (1.es1,608)                                 (I ,661.809)
                        &lad        Loam        wilhoul     R~~~IuBo.          Nal                                              (-%W                                        P==+)
                                                                                                                                (179,645)       (173,781)                   (353,w)
                        Rsvmws            cotlsdsd        tar hasury                              (119.751)       (220.173)                                                 (339.924)
                     NET USE OF
                       WWETARY                  RESOURCES                (OUTUYS)               lO,W9,572       16,856.Oll      1.139,039         035.643    991,714      2%27O,Q78
                     BUWETARV               RESOURCES               PROVIDED
                     Inlra-sgmcy           Trandon                                                   21,730       wA~0)           173,270                                                 0
                    currml        Ysar Apprcprisuon,              +sled                         10,932,746      16,724,930        916,400          14,290    774.810      28.3e3.176
                    Conlrad        Adhorlly       snd Rea~fw+tion                                  (2484q          (81.343)                                  (12.909)       (121,192)
                     Proawls         d    Loan Salu         Wlh     Rocouru                                                       389,269                                     389,269
                     Inlsrssl     on Qovarnmml             SooudUa                                                                                998,165                     996.186
                     Nd Transtom,           Ralmbumml             mu,     sd    olhor                11,704       (220.173)     0 wJ*e)                      cam            (362,638)
                     Fumls       Rolunnd       lo Trassury                                        (177,323)             W’                                     PW?          w,882)
                                     OURC IE9                                                   10, 94,009                                     1.012.4         2n.wo         .002.688
                  U.S. TRFE=-‘IN URY AND IMPREST                           FUNDS                   (7wJ4)         www             198,846         378,812    mw             c-.=9
                     Funds Exohangad for
                       U.S. Qovmunmt Secwitloa                                                     W*lTI)                                       (379.292)                   (411,489)
               -6                 @muBE)      IN
                    U.S. TREASURY   AND IMPREST                            FUNDS                  (108.741)       @36,~~)         198,846          (lm’      mrsr)          (619,750)
                U.S. TREASURV                  AND IMPAEST               FUND&
                Bsglnnlng         d Year                                                         3.633,618        1.849.306       119.902          19.808    394,010       8,006,643
               %nd      St Year                                                                 33,624.W        $1,2l3.7%       3318.747          $18.329   $311 .l SB    $Li.386.@34

                                                                                     Page 74                                                  GAO/AFMD-91-6Department of Vetmans Affairs
                                                                           APpendlr N
                                                                           Plnandal Statmnente

Budgeted and Actual Outlays by Function and Program for Fiscal Year 1989

                                                                                                  (Dollam In lhouaanda)

                                                                                                           Prvsldmtb                                           Aotwl
                                                                                                                  BUd#4l          awz                         oul*ys
                  HOSPITAL          AND MEDICAL                  CARE:
                    Mutld         Can                                                                      3102DB.22Q           $10,334,433              s10,5t4.533

                    MuJidudProdhdbReoo4mh                                                                         202.134            206.096                  194,840
                    Msdlcsl       MmhbtraUm                                                                        46.966             46,721                   45,004
                    construction                                                                                  644,fm             em,teo                   799,019
                    Propned          L+lJlon                                                                       2mQQ
                    All Othr                                                                                     (79Pm’             (61 mw                    (W1113)
                  Tctat Hapil4l         md Mdbsl            cua                                             11.034.203           1 t 351,749               11*32,433

                  lnwms       Swwily          tar VUuans:

                    caqmr4tkm                                                                               10.371.ooa           10,799,209                11,349.333
                    PMdWU                                                                                       a,wamo            3,814.390                 4.924.002
                    Burbl and CRhsr 0mdUs                                                                         144,300            149,616                  142,133
                    ProPond         Lqidalion                                                                    329,433
                    Rslntllsd          EnMJmtod for Suwlvors                                                                            9,799                       939
                    sutwal         Illsawl.     3aady                                                       14,999,333           14.379,907                16.818.4W
                  Educdon,         Tmln!ng,       and RahnblWlom
                    Ro@Mm4r6                  smdns       (Q.I. Sal)                                             008.100             37moo                    a79,i66
                    Poet-ViMurn               Em Eduoetbn                                                          8m46               72,530                  lOS.118
                    Votwmr         Jab Training                                                                     4.961             to.ws                    14,311
                    AllOlhU                                                                                     (216,832)             (9,919)                  (6.797)
                    PrapoedL4@dkil                                                                                   (203
                    8ublMl         Edudon,            Trdnlng,      and RehablUtaUon                              us.882             499,197                  49aso7

                  Total fh.Hb                                                                               16.483.496           15,339,194                t 0,300,700
                  MOUSINQ         CREDIT          ASSISTANCIE:
                    Loan Qusrmly                                                                                  eu3.~            1.111,300                  997,782
                    PfoPo@W~                                                                                      330,123
                    Dlrwl      Loans                                                                             w.@9               caw                       (19,943)
                 Total Mowing           Cd?       Assbtwm                                                       1.333,323          1 .o3woo                   (177,819
                  INSURANCE             PROQRAMS                                                                  a71,134            73e.tm                   727,ota

                    PropocHdWJorkm                                                                                  4.230
                 Tow      InwmM           Progruns                                                                676.394            738,190                  727,013

                    othar8mdhsmd&rvloss                                                                           776,696            770,354                  74a.et     2
                 T&l      Mmlnbtraion                                                                             778,696            779.364                  743,812
                  TOTAL       VETERAN           ADMINISTRATION                                             929,69w94            323.133.337              8m0~0,~1

                 tWumwtwfoutl~ucwdedwik                                   b    ~h~~~bl%Iwk~~~~;hon,~v~~~ou~~b                                   lY~ia&esndamthtea
                 bfLd4timdthsAnbUklW*wyAd~                                 “2C. 1341).


                                                                          Page 71                                             QAO/AFND-91-6Department of Veterana Affaira
                                                                        Appendix IV
                                                                        FYnmdal Statementa

Budgeted and Actual Outlay, by Function and Program for Fiscal Year 1988

                                                                                       (Dollars In Thousands)

                                                                                             Pmldmt’a               EM&d                  AOtUd
                                                                                                 BudaN                  Bill            ouu~y*
                 HOSPITAL         AND       MEDICAL        CARE:
                                                                                             $9247,794          $10,083.229        $10~048.310

                                                                                                207.076              208.703            191230
                                                                                                 43,991               4%u3                40.483
                                                                                                618.263              671.313            uWe8

                   All olhr                                                                   (199.781)             W,les)              (%ocn)
                 Tohi    WospiW      ud      Mdbal       Cam                                 10.615.333          10,849,643         10,839,573
                 lnomw      5wurny        tar vuums:

                   -JvJ.ndm                                                                  10,369,000          10,367,9oO         1t,2ei1,wll
                   PWl9kUU                                                                    3,839.soo           3,(536,8oO         a,934,32i
                   Burlal    md Olhr         Bmdlb                                              141,687              141.688            141,674
                   PmFoaed         ~alauon                                                      236,46o
                   -ti               EnlMmmd for
                                                                                                                       8.034                (ms)
                                                                                             14.68L637           14343.422          t 6327.699
                 EduwUcn,      frslnllng,      and Rdwbilhatbn:
                   Raadjtlslnmnl          Buldlb       (CM. eq                                  646,000              664.100            7oo,ooe
                   Po8bViobum             Era Eduaatbn                                            17.74o              sMoo                28.6w
                   Votsrms      Job Training                                                       5.498              31.7a7              262I
                   All Ohr                                                                     (=2@w               (217320)           P.404)
                   pew&                                                                         202,134
                   Subwd       Eduodlon,           Training,   and Rehdlith                     643,074              626,717            527.412
                TOWEWldlb                                                                    16228.711           14.870.139         11,W6,011
                 HOUSINQ       CREDIT          ASSISTANCE:
                   Loan Qusrsnly                                                                263,soo              568.100         t ,218,842
                   Frapoud         LqlrlaUon                                                  (389.823)
                   lxrsd     Leans                                                              (2ww                (nmo)               cro*eo4)
                 TOW Hcudng          CrdiI     Adst~ncm                                        (I W923)              m1,too          t.139,038
                 INSURANCE           PROORAMS                                                   668,298              699,297            696.64

                   pmpoudw-                                                                        425o
                 TOW I~~MOB             Programs                                                mzM8                 599.297            w&6(3
                   OlhU-udSONb4S                                                                w4,me                803,088            sot ,714
                Total Mmln*b~                                                                   804,698              603,088            aol.714

                                                                        Page 76                                 GAO/m9143      Department of Veteran Affairs
Appendix V

Statementof VA’s Appropriation Authority

                     To provide an annual accounting and reporting of appropriations, we
                     are presenting statements which show the status of VA’S (1) appropria-
                     tions authority, including “M” accounts,and (2) unobligated surpluses,
                     including merged surplus, during fiscal year 1989. We believe that the
                     Congressand agency managementneed a greater assurancethat unused
                     and unliquidated appropriations are accountedfor properly, Part of
                     achieving such an assuranceis to report summary activity and year-end
                     balancesof agencies’appropriation authority with the audited financial
                     statements. We have utilized VA as an example of the model report struc-
                     ture that we believe should be included as part of the basic statements
                     in federal agencies’financial statements.

                     In order to streamline a cumbersomeprocessfor certifying separate
What Are Expired     payments from appropriation account balancesthat were being main-
Appropriation,       tained forever, the Congress,in 1966, established the current system of
Surplus Authority,   expired appropriation, surplus authority, “M”, and merged surplus
                     accounts for federal agency use in recording and accounting for transac-
“M”, and Merged      tions affecting appropriations which are no longer available for new
Surplus Accounts?    obligations.
                     At the end of the period that an unexpired appropriation is available for
                     new obligation (1 year for annual and 2 or more years for multiple-year
                     appropriations), two separate actions take place. First, with respect to
                     the obligated appropriations that remain unliquidated (obligated bal-
                     ances),the balancesare reclassified as expired appropriation accounts
                     in the agencies’records. Second,the portion of the appropriation that
                     has not been obligated (unobligated balances)is withdrawn to the US.
                     Treasury, where it is designated as surplus authority.
                     The expired appropriation and surplus authority balanceseach retain
                     their fiscal year identity for 2 years. After 2 years, any remaining
                     expired appropriation balancesare transferred to “M” accounts,and
                     any remaining surplus authority balancesare transferred to merged sur-
                     plus accounts.Surplus authority balances,however, are available
                     during the 2 years for restoration to an expired appropriation for
                     funding an increase in a valid obligation or an unexpected related
                     charge that can be clearly associatedwith the given fiscal year and
                     “M” accounts are accountsinto which obligated balancesunder appro-
                     priations are transferred at the end of the secondfull fiscal year fol-
                     lowing expiration, The obligated balances,however, remain on an

                     Page 77                            GAO/AFMD-91-0Department of Veterans Af’f’ah
                          8tntament of   VA’r   Appropr&don   Authority

                          agency’sbooks. The “M” accounts allow for the payment of obligations
                          charged, or chargeable,to appropriation accountsthat are over 2 years
                          Merged surplus accounts are part of Treasury’s general fund. They
                          represent the undisbursed and unobligated balancesof prior year appro-
                          priations that have been transferred from surplus authority or that
                          have resulted from downward adjustments of obligations in the “M”
                          accounts.The merged surplus accounts are maintained by appropriation
                          type without regard to the fiscal year in which the appropriation was
                          made. Under limited circumstances,merged surplus funds are available
                          for restoration to the applicable agency’s “M” account to pay upward
                          adjustments in obligations or previously unrecorded prior obligations.

                          VA accountsfor  all of its funds to show availability and usagefor opera-
Accounting for VA’s       tions and capital assetsduring a year. However, year-by-year transac-
Appropriations   During   tion data have not been easily available to date. VA, similar to most
Fiscal Year 1989          federal agencies,begins each fiscal year with (1) obligated appropria-
                          tion balancesthat were reserved in the prior fiscal years to pay for
                          undelivered orders and (2) multiple-year and no-year appropriations
                          that are unexpired (still available for initial obligations). In addition,
                          new appropriations are provided for the current fiscal year. VA may also
                          obtain restoration of funds from surplus authority or merged surplus
                          accounts.The total appropriations, depending on purpose, are applied to
                          finance operations and capital assets.Any amount not required is with-
                          drawn to surplus accounts at Treasury. At year-end, the excessof
                          appropriation amounts available over the amounts applied or with-
                          drawn remains in VA’S records.
                          We have developedtwo statements, included in tables V.1 and V.2,
                          which show unexpired expired, and no-year appropriations, as well as
                          surplus authority and “M” and merged surplus accounts available to VA.
                          As such, managers and the Congresswill be provided a vehicle to better
                          track and monitor these accounts.
                          As shown in table V.l under the column labeled totals, VA began fiscal
                          year 1989 with $3.0 billion in appropriations, comprised of $1.8 billion
                          in unliquidated, obligated balances(undelivered orders) and $1.2 billion
                          in unobligated and unexpired appropriations. In addition, VA received
                          new annual, multiple-year and no-year appropriations to finance the
                          majority of its operational and capital needs($29.3 billion in fiscal year
                          1989) and a restoration of certain amounts from its merged surplus

                          Page 70                                         GAO/AFMLb91-6 Department of Veterans Affairs
                                                       Appendix V
                                                       Statement of VA’sAppropriation Authority

                                                       account with the U.S. Treasury ($3,4 million), Accordingly, VA had total
                                                       appropriations available for its use of $32.3 billion during fiscal year

Table V.l: Statement of VA Appropriation8 Ueed and Remaining Available for Obligation or Expenditure During Fiscal Year 1989
Dollars   in thousands
                                                                Annual and multiple-year
                                                                 appropriation accounts
                                                             Unexpired          Expired
.I-. .,.-I_...I--         --.                                       1989       1988      1987               M Account            No-year              Totals

.---.- .._..--- _-_provided:
   Balance of undelivered
._--.-_ ---. - -.--..---_~--
                                orders   at 1O-l -88               $72,586     $448,134        $87,868          $72,325        $1 ,135,701        $1,816,614
   Balance of..__~
               unobligated amounts at 10-l -88                      14,629          N/A            N/A              1798        1,195,916          1,210,724
   1989 appropriations (net of increases and
     decreases)                                                12.020,060            N/A           N/A              N/A        17.240.483         29.260.543
   Restorations                                                        N/A              0             0           3,439              N/A               3,439

Amounts       available
-_...---.._ ---.. .- --.. I_._-
                             .-_-        ---                  12,107,275        448,134        87,868            75,943        19,572,100        32,291,320

Less appropriations applied:
    Operations                                                 11,123,174        97,659        (12,788)           (6,058)b 16,659,285             27,861,272
    Capital assets                                                165,262       252,043         40.912           34,896           661.353          1 ,154,466
    Withdrawals to surplus accounts with Treasury
      at year-end --.__-                                             2,297        25,295        21 ,011          16,873               N/A             65,476
    Undelivered orders transferred to M account                        N/A           N/A        38.733          138.733)              N/A                N/A

Amounts remaining                                                $818,S42       $73,137             $0         $68,965         $2,251,482        $3,210,108

Distribution   of amounts
-__- ll_---...^_...--  ..-__ remaining:
  Balance of undelivered orders at g-30-89                       $793.581       $73.137           $N/A          $68.965        $1 aO63.792        $1,999.475
  Balance of unobliaated amounts at g-30-89                        22,961            N/A           N/A              N/A         1,187.670         $1,210,631

      Total                                                      $816,542       $73,137             $0         $68,985         $2,251,462        $3,210,106
                                                       Note: The entry N/A (not applicable) indicates that amounts are not normally reported for these
                                                       Ttepresents an unobligated balance of an appropriation resulting from an excess of receivables over
                                                       payables and is unavailable for new obligations.
                                                       bRepresents refunds and deobligations   of previously expensed items.

                                                       Table V. 1 also shows the application of the appropriations authority
                                                       available during fiscal year 1989 and the amounts available at year-end.
                                                       Thus, the statement accounts for the total appropriation authority
                                                       available to VA during fiscal year 1989. Of the $32.3 billion appropria-
                                                       tion authority available to VA during the fiscal year, VA used $27.9 billion

                                                       Page 79                                            GAO/APMD-914 Department of Veterans Affaira
                                                 Appendx V
                                                 Statement ot VA%Appropriation Authority

                                                 to finance operations and $1.2 billion to finance acquisition of capital
                                                 assets.In addition, $66.6 million was withdrawn to VA’S surplus
                                                 authority and merged surplus accountswith the US. Treasury, resulting
                                                 in an amount remaining at year-end for carryover to the subsequent
                                                 year of $3.2 billion. Also shown is the required transfer to VA’S “M”
                                                 account of $38.7 million obligated appropriations that remained unliqui-
                                                 dated 2 years after the appropriations expired in 1987.
                                                 The $3.2 billion remaining available at the end of fiscal year 1989 was
                                                 comprised of $2.0 billion of obligated appropriations covering undeliv-
                                                 ered orders and $1.2 billion of unobligated balancesin unexpired
                                                 multiple-year and no-year appropriations that remained available to VA
                                                 for new obligations subsequentto fiscal year 1989.

Table V.2: Statement of VA’8 SurDlu8es From Expired Aoorooriations-Fiscal                 Year 1989
Dollars   in thousands
                                                            Annual and multiple-year expired
-~-                                                                1989         198W              1987”          surplus      No-year              Totals

Balance 1O-1 -88
---~                                                                 N/A        $4,141        $120,594        $1,249,567            N/A      $1 ,374,302b
Amounts withdrawn        current   year-end                        2,297        25,295           21 ,011           16,873           N/A            65,476
Reduction    for amounts restored      in 1989                       N/A              0                  0         (3,439)          WA             (3,439)
-_              to merged
                        .-.- surplus                                 N/A           N/A         (141,605)          141,605           WA                 N/A-

Balance g-30-89                                                  $2,297       $29,436                 $0     $1,404,607             N/A     $1 ,436,33gb
                                                 Note: The entry N/A (not applicable) indicates that amounts are not normally reported for these
                                                 aFigures for 1988 and 1987 represent surplus authority.

                                                 bDoes not include a total amount of $917,127,364 for certain other appropriations and funds such as
                                                 personal funds of patients, miscellaneous benefit and insurance expenses, and trust funds that are
                                                 unidentifiable by appropriation number.

                                                 ‘Equals the cumulative amount of unobligated appropriations in surplus authority that was transferred
                                                 to VA’s merged surplus account at the end of the year as legally required.

                                                 Table V.2 shows the status, including fiscal year transactions, of VA’S
                                                 unobligated appropriations surpluses with the U.S. Treasury for fiscal
                                                 year 1989. The amounts withdrawn at current year-end of $65.6 million
                                                 reflect the portions of appropriations that were withdrawn from VA at
                                                 the end of fiscal year 1989. These amounts were added to VA’S surplus
                                                 authority and merged surplus balanceswith the U.S. Treasury accounts,
                                                 as shown on table V.1. In addition, the merged surplus balance was
                                                 reduced for the $3.4 million that was restored to VA’S “M” account,

                                                 Page 60                                           GAO/AFMD-91-6Department of Veterans Attdra
                       Appendix V
                       Statement of VA’sAppropriation Authority

                       resulting in a year-end total surplus authority and merged surplus
                       account balance as of September30, 1989, of $1.4 billion. The table also
                       includes a transaction which shows the cumulative amount of unobli-
                       gated appropriations in surplus authority that was transferred, as
                       legally required, to the merged surplus account after 2 years in expired

Relationship of        The $3.2 billion remaining available at the end of fiscal year 1989-
                       undelivered orders of $2.0 billion and unobligated balancesof $1.2 bil-
Appropriation Tables   lion-is reported in the equity section of the consolidated statement of
With Audited           financial position. In addition, the appropriations used to finance capital
                       assets($1.2 billion) and VA’S 1989 adjusted appropriations of $29.3 bil-
Financial Statements   lion are reported on the consolidated statement of changesin financial
                       position and reconciliation to budget for fiscal year 1989. As indicated
                       in our opinion on VA’S financial statements, our audit of the statements
                       of financial position and changesin financial position and reconciliation
                       to budget disclosedthat these balancesare fairly presented in the finan-
                       cial statements in accordancewith generally acceptedaccounting
                       We believe that statements of the status of agencies’appropriations sim-
                       ilar to tables V.1 and V.2 need to be included as basic statements in fed-
                       eral agencies’annual financial statements. These statements of
                       appropriations would then be within the scopeof a financial audit of the
                       agencies’financial statements and as such the auditor’s opinion would
                       provide the Congressand agency managementformal assurancethat
                       amounts and transactions affecting undelivered orders and unobligated
                       balancesare fairly presented on the statements.

                       Page 81                                    GAO/APMD91-9 Department of Veterana Affti
Appendix VI

Summary of VA’s Federal Managers’F’inmcial
Integrity Act Reports

                  This appendix summarizesthe open internal control and accounting
                  system weaknessesand related corrective actions information contained
                  in VA'S 1983 through 1989 Federal Managers’FinanciaI Integrity Act
                  (EMFIA) reports. The act requires that the reports reflect the results of VA
                  management’sassessmentsand detailed reviews of the internal control
                  systems operating within all department programs, activities, organiza-
                  tions, and functions; and of the agency’sfinancial managementsystems’
                  conformance with accounting principles, standards, and other require-
                  ments established by the Comptroller General of the United States.
                  With regard to the relationship between our audit and the financial
                  managementsystem review and reporting requirements of FMFIA, our
                  audit primarily focused on the internal control and accounting systems
                  neededto produce VA'S financial statements. As such, we did not
                  examine all of the financial managementsystems that VA must consider
                  when planning and conducting its FMFIA reviews and when preparing its
                  annual FMFIA report. We are, therefore, not in a position to attest to the
                  adequacy of all financial managementrelated disclosuresin the F’MFIA

                  In the future, however, we believe that auditors, when conducting finan-
                  cial audits, should examine all of an agency’sfinancial managementsys-
                  tems and attest to the adequacy of the financial managementsystem
                  representations made in the FMFLA report. This additional audit reporting
                  will provide the Administration and the Congresswith a more complete
                  picture of the integrity and reliability of an agency’sfinancial systems,
                  reports, and other related information.

                  The Federal Managers’ Financial Integrity Act was enacted in September
Background        1982 to strengthen internal control and accounting systemsthroughout
                  the federal government and help reduce fraud, waste, abuse,and misap-
                  propriation of federal funds. The act provided, for the first time, the
                  requirement for agency managersto identify and remedy long-standing
                  internal control and accounting systems problems.
                  Section 2 of the act requires that agency systems of internal control
                  comply with internal control standards prescribed by the Comptroller
                  General and provide reasonableassurancethat
              . obligations and costs are in compliance with applicable laws;
              l funds, property, and other assetsare safeguarded against waste, loss,
                unauthorized use, or misappropriation; and

                  Page112                             GAO/AFMD-916DepartmentofVeteraneAfYah
                                                         Smmnary of VA’sFederal Managed IQancial
                                                         Integrity Actlteporta

                                                     l   revenuesand expenditures applicable to agency operations are properly
                                                         recorded and accountedfor to permit the preparation of accounts and
                                                         reliable financial and statistical reports and to maintain accountability
                                                         over the assets.
                                                         Section 4 of the act requires that the agency head’s annual Financial
                                                         Integrity Act report include a separate report on whether the agency’s
                                                         accounting systems conform to the Comptroller General’s accounting
                                                         principles, standards, and related requirements.

                                                         The weaknessesreported by VA over the past years encompassgeneral
VA Reports Annually                                      managementactivities as well as specialized servicesor programs. We
on Material                                              have categorizedthe material weaknessesVA has reported in its annual
Weaknesses                                               reports to the President and the Congress,as follows.

Table VI.1: Categories of Reported Material Weaknesres-1983                 Through 1989
                                                                                    1983     1984       1985    1988     1987    1988     1989
&t&&Hed         data processing                                                         X          X       X                X       X        X
Eligibility“. and
              _. entitlement
                    _....___ ..-.----                                                   X          X       X
Cr.&Jit    management
._~..._... . .     _. . ..__..
                            -_I_--                                                      X          X       X        X       X        X
Personnel and organizational management                                                 X          X                X                        X
Pro&remeni’-                     -~ __-..--.-.-_--                                      X          X       X        X       X        X
Propert\, management                                                                    X          X       X        X       X        X       X
Cash management               . --                                                      X          X       X        X       X        X
Accountina and financial svstems                                                        X          X       X        X       X        X       X

                                                         In its fiscal year 1989 report, VA (1) disclosednew material weaknesses,
                                                         (2) listed previously identified internal control and accounting system
                                                         weaknesseswhich remain to be corrected, and (3) reported having cor-
                                                         rected weaknesses.A total of 28 material weaknesseswere reported as
                                                         uncorrected in 1989 under Sections2 and 4 of the act. Eleven of these
                                                         were identified during the 1989 review. Of the remaining 17 previously
                                                         identified weaknesses,14 were reported between 1983 and 1986. In
                                                         addition, in its 1989 report, VA reported completing corrective actions
                                                         during 1989 on four previously reported material weaknesses,and it
                                                         downgraded the credit managementcategory weaknessto an area of
                                                         “significant concern.”

                                                         Page 83                                   GAO/AFMD-916 Department of Veterans Affairs
                      Summary of VA’sFederal Manix@m’ Financial
                      Intelpfity   Act l@orta

                      In its 1989 Federal Managers”‘Financia1Integrity Act report, VA identi-
Material Internal     fied 20 material internal control weaknessesrequiring correction under
Control Weaknesses    Section 2 of the act. Four of the weaknesseswere reported in such func-
                      tional categoriesits ADP, Property, and Personneland Organizational
                      Management.The remaining 16 weaknesseswere reported within the
                      category entitled Program or Project Management.The following is a
                      brief discussionof someof the weaknessesin each category and the
                      planned corrective actions.

Automated Data        Two weaknesseswere identified. The first related to a need, first
Processing            reported in 1984, for backup processingcapacity at an alternate site if a
                      catastrophic event were to occur. VA noted that although neededfunding
                      had not been approved, the agency had identified the applicable systems
                      and necessaryrequirements and anticipated developing a detailed plan
                      for backing up critical systems by the beginning of fiscal year 1992.

                      The secondweakness,first reported in 1988, was that VA neededto
                      improve its operating system and security software controls at its
                      Austin Data ProcessingCenter. This finding was identified earlier by
                      GAO, the VA Inspector General, and the President’s Council on Integrity
                      and Efficiency. VA reported that it had completed 65 of 66 actions
                      neededto correct this weaknessand expected to complete the remaining
                      actions by November 1989.

Property Management   One uncorrected weaknesswas unsatisfactory internal controls over
                      linen inventory, which led to lossesestimated at approximately $4 mil-
                      lion for the first 6 months in 1988. For corrective action, VA planned to
                      analyze the 1988 linen inventory to contact those sites with the highest
                      lossesand then develop an action plan to addressthe internal control
                      problems related to the linen losses.

Personnel and         In 1989, VA identified a new material weaknessin this category. VA cited
                      GAO and IG reports which identified a number of payroll problems at VA
Organizational        field stations. Examples of problems cited include failure to comply with
Management            VA policy in making cash payments and problems ensuring that all
                      authorized loans are received and processed.VA managementbelieves its
            Y         inability to retain competent payroll clerks becauseof grade restrictions
                      further inhibits its ability to ensure controls are properly executed.
                      Their action plan to correct the weaknessincludes complying with

                      Page 84                                     GAO/AFMD-918 Department of Veterans Affkh
                                   Appendix VI
                                   Libmmaq of VA’s Federal   Managed   Flnanti

                                   existing VApolicies, preparing reconciliations, processingloans, and
                                   improving accuracy and completeness.

Program/Project                    This category contained 14 material weaknesses,9 identified in 1989
Management                         and 6 identified from 1983 through 1988. Examples of weaknessesin
                                   this category include (1) undocumented construction changesresulting
                                   in one project being 6 years late and incurring $19 million in extra costs,
                                   (2) ineffective ADP support resulting in loan servicing problems and
                                   excessiveforeclosure rates, (3) ineffective monitoring of lenders making
                                   loans guaranteed by VA under its home loan program, (4) the failure to
                                   obtain authority to obtain income data from the Internal RevenueSer-
                                   vice and the Social Security Administration in order to reduce the
                                   number of beneficiary overpayments, (6) failure to verify physicians’
                                   credentials and state licenses,and (6) failure to reconcile general ledger
                                   accounts and perform related follow-up activities for three financial

                                   VA reported that  corrective actions for each of these weaknessesare in
                                   various stagesof completion. Corrective actions range from conducting
                                   reviews and audits, obtaining more up-to-date software, submitting cer-
                                   tifications that policies and procedures are being implemented, to
                                   revising existing policies. VA anticipates that corrective actions will be
                                   completed between fiscal year 1990 and fiscal year 1995.

Accounting and Financi .a1 In its 1989 report, VA reported that its financial managementsystems
Management System          had achieved overall compliance with the requirements specified in the
                           act, They reported a total of 44 financial managementsystems in opera-
Weaknesses                 tion involving activities such as payroll/personnel; administration; con-
                                   struction; financial reports and budget formulation; compensation,
                                   pension, and education activities; loan guaranty activities; and insur-
                                   ance activities. VA reports 42 of these systems are accounting systems.
                                   During 1989, VA identified no new accounting system weaknesses.It did,
                                   however, report that eight previously identified weaknessesunder Sec-
                                   tion 4 of the act had still not been corrected, five of which had been first
                                   reported in 1986. Weaknesseswere reported, in priority order, in six dif-
                                   ferent systems. Examples of weaknessesand proposed corrective
                                   actions are as follows:
                               l   Personnel and Accounting Integrated Data System. As early as 1986, VA
                                   reported that this system was not easily adaptable to meeting changing

                                   Page 86                                       GAO/APMD9143Department of Veterans Affdm
    user needsand that there were no clearly defined and well-documented
    audit trails and processingcontrols. To correct these problems, VA is
    redesigning the system and expects that full corrective actions will be
    implemented by fiscal year 1992 or 1993.
l   Loan Guaranty System. This system had two uncorrected weaknesses.
    The first, reported in 1986, was that VA'Sdecentralized funding process
    for loan guaranty programs failed to provide VA'Scentral office with
    adequate fund control over the $3.6 billion project obligations in the
    program. In its 1989 report, VA stated that its new Disbursing,
    Accounting and Budgeting System (DABS), which is part of a larger mod-
    ernization initiative at VAtargeted for completion in 1996, will provide
    centralized fund control when implemented in 1991.
  The secondweaknesswas related to controls over the estimated $1.3
  billion in disbursementsprocessedby the loan guaranty system. VA
  reported that controls over disbursements have been essentially manual
  and that becauseit operates in a decentralized environment, the ability
  to detect duplicate payments is questionable. VA believes that implemen-
  tation of the DAIWsystem, in 1991, will correct this weakness.
l Centralized Accounting System for Constructing Appropriations. In
  1986, VA reported that this system was unable to easily adapt to
  changing user requirements and external requirements during the
  system’s life cycle. The system was designedin the 1960s and lacks fea-
  tures which facilitate prompt system maintenance. VA plans to replace
  this system with its new Financial ManagementSystem in 1992.
. Centralized Accounting for Local ManagementSystem. Two weaknesses
  were reported for this system. The first weakness,first identified in
  1986, was similar to the problem of inflexibility reported for the Cen-
  tralized Accounting System for Construction. VA expects that the new
  Financial ManagementSystem, scheduledfor completion in 1992, will
  correct this weakness.

    The secondweaknesswas first identified in 1988 and concernsthe need
    for controls over assets.VA stated that controls over real property are
    essential to the production of reliable financial statements and that its
    failure to consistently implement capitalization and depreciation policies
    had resulted in a qualified GAOopinion on its consolidated financial
    statements for 1986 and 1987. To illustrate, due to the lack of docu-
    ments supporting the cost of many items and the lack of consistent
    adherenceto managementpolicies relating to the capitalization and
    depreciation of buildings, account balanceswere inaccurate. VA reported

    Page 86                            GAO/AFMD-916   Department of Veterans Af’fahm
                         lE4wmmy of VA’r Federal Managed Finandd
                         rntegrlty Act Reports

                       that its new Financial ManagementSystem, scheduled for 1992 imple-
                       mentation, will include a fixed assetsmodule to standardize real prop-
                       erty recordkeeping on a departmentwide basis.
                     l Compensation,-Pension,and Education System. VA reports identifying,
                       for the first time in 1986, problems in this system which processesover
                       $16 billion annually. In its 1989 FMFIA report, VA cites weaknessesidenti-
                       fied by GAO during financial statement audits. For example, VA referred
                       to a 1989 GAO conclusion that VA had not developed basic controls in its
                       benefits systems to help ensure that payment transactions were prop-
                       erly processed.It also stated that someof those problems have existed
                       for years. Corrections to this system are included in a larger plan to
                       improve the delivery of veterans benefits and servicesthrough tech-
                       nology. VA believesthat although the entire project and system conver-
                       sion to an integrated environment will not occur until 1996 or 1997, two
                       milestones for the Compensation and PensionSystem will be the conver-
                       sion of its master files to disk by 1991 and implementation of new mod-
                       ernized systems at all Department sites by the end of fiscal year 1994.
                     . Insurance System, In 1986, VA first identified this system, which
                       accounts for five government insurance programs totaling about $28 bil-
                       lion in coverageto 3.6 million policyholders, as having material weak-
                       nesses.It reported that this 1960ssystem is coded in an obsolete
                       computer language and, as recently as 1988, was found to lack formal
                       documentation supporting the Department’s life insurance statements.
                       VA reported in 1989 that by the middle of 1990 the documentation
                       problem should be corrected. However, it reported that full correction of
                       all material weaknessesin this system is not expected until 1992 or

                         In addition to reporting material internal control and accounting system
Additional Special       weaknesses,VA’S 1989 FMFIAreport also disclosedsevenareas identified
Concerns Also            by the Office of Managementand Budget (OMB) and VA officials as highly
Reported                 vulnerable to fraud, waste, or abuse.These “high risk” areas include the
                     . Physician Employment Screening.This issue concernsthe need to verify
                       physicians’ credentials and certifications and was reported as a material
                       internal control weaknessunder the program managementcategory in
                     . Drug Control. Drug stock managementand inventory control problems
                       were identified in 1983 and were reported by VA as a material internal
                       control weaknessin the program managementcategory.

                         Page 87                                   GAO/AFMD-91-6Department of Veterans Affaira
               Appendix VI
               Summary of VA’sFederal Managers’ F’inancial
               Integrity Act Reports

           9 Departmental Follow-up Systems.This issue concernsVA’S lack of an
             adequate follow-up system to track the correction of problems identified
             in audits and internal control assessments.
           l Oversight and Review in VA Loan Guaranty Program. OMBseesthis as a
             high-risk area becauseof the program’s similarities to the Department of
             Housing and Urban Development’s Federal Housing Administration pro-
             gram and has urged the Secretary to consider a concentrated review of
             the VA program’s internal controls and operations.
           9 Proceduresfor Constructing Health Care Facilities. VA reported this
             high-risk area as a material internal control weaknessin its 1989 report
             under the program/project managementcategory. In its 1989 report, VA
             stated that the weaknesswas first identified in 1983 and corrected in
             1989. However, it goeson to say that contracting and contract adminis-
             tration remains a material weaknessand that VA has developed a correc-
             tive action plan for this area.
           . Compensationand Pension.OMBhas indicated that the integrity of VA’S
             compensation and pension programs requires further assurance.VA
             reports in 1989 that it has recognizedthe need to establish a nationwide
             income verification system to eliminate or significantly reduce benefit
             overpayments causedby misreporting of income by pension benefi-
             ciaries, This concern was reported as a material internal control weak-
             nessin VA’S 1989 report under the program/project management
           l Review of Internal Controls. The internal controls review processis
             viewed by both OMBand VA as a high priority. VA reports that the review
             processis being redefined to provide reasonableassurancethat proper
             attention is paid to each of VA’S problem areas and that a linkage is
             established between material weaknessesand their legislative, bud-
             getary, or other resource solutions.

               As previously stated, we are advocating that, similar to a discussion and
               analysis of operating results, agenciesinclude summaries of their annual
               FMFIA reports in their future annual reports. We believe it would be ben-
               eficial to the Congress,the President, and other users to receive an
               annual report complete with an independent auditor’s attestation of
               management’srepresentations in the form of an opinion on the financial
               statements and on the FMFIA report. Finally, as a result of our audit, we
               are not aware of any information which would contradict the matters
               included in VA’S FMFIA reports and summarized in this appendix.

(B17079)       Page 88                                   GAO/AF’MD-91-6Department of Veterans AfYdra
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