oversight

Financial Audit: District of Columbia Highway Trust Fund's 1996 Financial Statements

Published by the Government Accountability Office on 1997-12-15.

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

                 United States General Accounting Office

GAO              Report to Congressional Committees
                 and Subcommittees



December 1997
                 FINANCIAL AUDIT
                 District of Columbia
                 Highway Trust Fund’s
                 1996 Financial
                 Statements




GAO/AIMD-98-30
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division

      B-278524

      December 15, 1997

      Congressional Committees and Subcommittees

      This report presents the results of our efforts to audit the financial
      statements of the District of Columbia Highway Trust Fund (the Fund) for
      the 14-month period ended September 30, 1996, and to examine the 5-year
      forecasted statements of the Fund’s expected conditions and operations.
      These financial statements and the 5-year forecasted statements are the
      responsibility of the District’s Chief Financial Officer, the administrator of
      the Fund. This report also presents the results of our efforts to evaluate
      the Fund’s internal controls as of September 30, 1996, and its compliance
      with laws and regulations during that 14-month period.

      We conducted our work pursuant to the provisions of section 3(e) of the
      District of Columbia Emergency Highway Relief Act and in accordance
      with generally accepted government auditing standards.

      We are sending copies of this report to the Chairmen and Ranking
      Minority Members of the Senate Committee on Appropriations and its
      Subcommittee on the District of Columbia; the House Committee on
      Appropriations and its Subcommittee on the District of Columbia; the
      Senate Committee on Governmental Affairs and its Subcommittee on
      Oversight of Government Management, Restructuring and the District of
      Columbia; and the House Committee on Government Reform and
      Oversight and its Subcommittee on the District of Columbia. In addition,
      copies will be sent to the District of Columbia’s Mayor, Chief Financial
      Officer, and Acting Inspector General, as well as the District of Columbia
      Auditor and the District of Columbia Financial Responsibility and
      Management Assistance Authority.

      If you have any questions regarding this report, please contact me at
      (202) 512-4476.




      Gloria L. Jarmon
      Director, Civil Audits




      Page 1                                    GAO/AIMD-98-30 D.C. Highway Trust Fund
B-278524




List of Congressional Committees and Subcommittees

The Honorable John H. Chafee
Chairman
The Honorable Max S. Baucus
Ranking Minority Member
Committee on Environment and Public Works
United States Senate

The Honorable John W. Warner
Chairman
Subcommittee on Transportation and Infrastructure
Committee on Environment and Public Works
United States Senate

The Honorable Bud Shuster
Chairman
The Honorable James L. Oberstar
Ranking Minority Member
Committee on Transportation and Infrastructure
House of Representatives

The Honorable Thomas E. Petri
Chairman
The Honorable Nick J. Rahall, II
Ranking Minority Member
Subcommittee on Surface Transportation
Committee on Transportation and Infrastructure
House of Representatives




Page 2                                GAO/AIMD-98-30 D.C. Highway Trust Fund
Page 3   GAO/AIMD-98-30 D.C. Highway Trust Fund
Contents



Letter                                                                                           1


Opinion Letter                                                                                   6


Financial Statements                                                                            24
                       Balance Sheet                                                            24
                       Statement of Revenues, Expenditures, and Change in Fund                  25
                         Balance
                       Notes to the Financial Statements                                        26

Appendix I                                                                                      29

Comments From the
District of Columbia




                       Abbreviations

                       AICPA     American Institute of Certified Public Accountants
                       CAFR      Comprehensive Annual Financial Report
                       CE        construction engineering
                       CFO       Chief Financial Officer
                       DPW       Department of Public Works
                       FABS      Federal Aid Billing System
                       FHWA      Federal Highway Administration
                       FMS       Financial Management System
                       LADS      Labor Acquisition and Distribution System
                       LAN       local area network
                       OIS       Office of Information Systems
                       OTR       Office of Tax and Revenue


                       Page 4                                GAO/AIMD-98-30 D.C. Highway Trust Fund
Page 5   GAO/AIMD-98-30 D.C. Highway Trust Fund
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division

      B-278524

      To the Mayor of the
      District of Columbia

      This report presents the results of our efforts to audit the financial
      statements of the District of Columbia’s Highway Trust Fund (the Fund)
      for the initial 14-month period ended September 30, 1996, and to examine
      the 5-year forecasted statements of the Fund’s expected conditions and
      operations, as required by section 3(e) of the District of Columbia
      Emergency Highway Relief Act.1 This report also presents the results of
      our efforts to evaluate internal controls as of September 30, 1996, and
      compliance with laws and regulations during the 14-month period.

      In 1995, the U.S. Department of Transportation’s Federal Highway
      Administration (FHWA), expressed concerns about the District’s ability to
      provide matching funds for federal aid highway projects and maintain its
      existing highway system.2 To address these concerns, section 2 of the act3
      temporarily waived the requirement for the District to provide matching
      funds for federal aid highway projects for fiscal years 1995 and 1996. In
      addition, section 3(a) of the act4 required the District to establish by
      December 31, 1995, a dedicated highway trust fund whose revenues are to
      be used to repay the temporarily waived amounts and provide matching
      funds for the District’s federal aid highway projects financed by FHWA. This
      dedicated trust fund is required to include amounts equivalent to receipts
      from motor fuel taxes5 and to be separate from the District’s General
      Fund.6

      The District reported motor fuel tax revenues of $35 million from
      October 1, 1995, to September 30, 1996. Until May 1996, the taxes collected
      were not segregated from the General Fund, as required by the act.
      However, on May 24, 1996, the District established the Highway Trust

      1
       Public Law 104-21, 109 Stat. 257 (1995), D.C. Code Ann. section 7-134.2(e) (1997 Supplement).
      2
      Approximately 423 of the 1,020 miles of streets and highways and most of the bridges under the
      District’s jurisdiction are eligible for federal aid.
      3
       D.C. Code Ann. section 7-134.1 (1997 Supplement).
      4
       D.C. Code Ann. section 7-134.2 (1997 Supplement).
      5
       Motor fuel tax is an excise tax imposed at the wholesale level on motor fuel sales (including gasoline,
      diesel fuel, kerosene, heating oil, and all combustible gases and liquids suitable for the generation of
      power for motor vehicles) to retailers or directly to end users—such as construction, bus, and other
      companies—who consume that fuel within the District.
      6
      Unless prohibited by law, the District’s cash from all funds is combined into the General Fund’s cash
      management pool, which is used to make transfers to all the District’s checking accounts as needed.
      Any cash not needed for immediate disbursement is invested.



      Page 6                                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
B-278524




Fund account and transferred to it $18.3 million—representing the amount
equivalent to motor fuel taxes collected from October 1, 1995, through
April 25, 1996—from the General Fund.7 Subsequently, the remaining
monthly motor fuel tax collections were deposited into the General Fund
and equivalent amounts were transferred to the Highway Trust Fund
account.

The act establishes priorities for using the Fund’s revenues to pay the
District’s portion of federal aid highway project costs. The first priority of
the Fund is to repay FHWA for the District’s share of federal aid highway
project costs temporarily waived during fiscal years 1995 and 1996. For
fiscal years 1995 and 1996, the District will have to repay temporarily
waived amounts of approximately $2.2 million and $8 million, respectively.8
 The remaining priorities of the Fund are to reimburse the District for local
capital appropriated expenditures, which are (1) the District’s share
(normally at 20 percent) of federal aid highway project costs, (2) the
salaries (estimated at $6 million per year) of District personnel and excess
overhead costs (construction engineering cost overruns that exceed
15 percent) associated with federal aid projects, and other non-FHWA
participating costs,9 and (3) the funding for local (100 percent District)
capital and maintenance projects. All federal and local capital
appropriated expenditures are to be paid out of the District of Columbia
Department of Public Works’ (DPW) Capital Operating account and then
reimbursed by either FHWA or the Fund.

In addition to the Highway Trust Fund required by section 3(a) of the act,
section 4(b)10 required the District to establish an independent revolving
fund account, separate from its capital operating account, to make prompt

7
 The District enacted emergency legislation that was effective for only 90 days on December 8, 1995, to
establish the Fund. The Fund’s existence was continued through a series of emergency acts and a
temporary law until a permanent provision of the law was adopted and became effective on April 9,
1997—D.C. Law 11-184, section 102, 43 DCR 4265, 44 DCR 2379, D.C. Code Ann. section 7-134.4 (1997
Supplement). The District has been required since the adoption of the first piece of emergency
legislation to deposit into the Fund, on a monthly basis, an amount equivalent to all receipts from
taxes, fees, and civil fines and penalties collected by the District after September 30, 1995, pursuant to
the motor vehicle fuel tax law set forth in D.C. Code Ann. sections 47-2301 et seq.
8
 As required by section 3(c) of the act, D.C. Code Ann. section 7-134.2(c) (1997 Supplement), half of
the balance of these amounts is to be repaid in each of the two fiscal years following those in which
the amounts were temporarily waived. For example, one-half of the $2.2 million waived in fiscal year
1995 was due and repaid as of September 30, 1996, and the remaining half was due and repaid at the
end of fiscal year 1997. Likewise, of the $8 million waived in fiscal 1996, half was due and repaid at the
end of fiscal year 1997 with the remaining half due at the end of fiscal year 1998.
9
 These include the District’s expenditures for costs not eligible under the federal aid highway program,
such as the costs for cleaning sewers, storm drain improvements, and retaining walls.
10
    D.C. Code Ann. section 7-134.3(b).



Page 7                                                   GAO/AIMD-98-30 D.C. Highway Trust Fund
    B-278524




    payments to contractors working on federal aid highway projects. On
    May 28, 1996, the District established the Revolving Fund account by
    transferring $5 million from the Capital Operating account. The transferred
    amount is part of the Fund’s liability to the District’s Capital Operating
    account as of September 30, 1996.

    We are required by section 4(e) of the act11 to (1) review and report on the
    District’s establishment of the designated Highway Trust Fund and related
    independent Revolving Fund account and (2) audit the Fund and submit a
    report to the Congress by December 31 of each year, beginning with the
    period ended September 30, 1996. The audit is on the Fund’s financial
    condition and results of operations for fiscal years ending September 30
    and the Fund’s 5-year forecasted statements. We previously reported to
    the Congress in November 1996 and April 1997,12 that the first audit of the
    Fund’s financial condition and 5-year forecasted statements could not be
    completed by the due date because the District would not have critical
    financial data for us to audit until the completion of the fiscal year 1996
    District’s Comprehensive Annual Financial Report (CAFR), dated
    January 20, 1997. In addition, the remaining requested information (final
    compiled financial statements and responses to issues we had raised) and
    the 5-year forecasted statements were not received until July 1997. The
    District’s Chief Financial Officer has already informed us that these critical
    financial data, which include year-end closing entries13 and the
    subsequently prepared financial statements, will not be available for the
    1997 fiscal year audit until February 1998 at the earliest. For this reason,
    we will continue to be unable to perform the annual audits in time to meet
    the future December 31 reporting deadlines required by the act.

    In our attempt to audit the Fund for the 14-month period ended
    September 30, 1996, we found the following:

•   We are unable to give an opinion on the financial statements of the Fund
    because the lack of adequate documentation limited the scope of our


    11
      D.C. Code Ann. section 7-134.3(e).
    12
     Highway Fund Audit (GAO/AIMD-97-14R, November 4, 1996) and Status of Information Needed to
    Complete Financial Audit of the District of Columbia’s Dedicated Highway Fund for Fiscal Year 1996
    (GAO/AIMD-97-73R, April 3, 1997).
    13
      In order to perform the year-end closing process, first expenditures and then revenues must be
    considered because grant revenues are dependent on the expenditure levels. Only after receiving all
    pertinent vendor data (invoices and other documentation that can take as long as 6 weeks after the
    fiscal year-end to receive) can District staff complete the process of calculating earned revenues and
    the related federal receivables and posting all adjustments and accruals. District officials stated that
    these steps have taken from 2 to 3-1/2 months after receipt of vendor data.



    Page 8                                                   GAO/AIMD-98-30 D.C. Highway Trust Fund
                            B-278524




                            work. Specifically, the District did not provide evidence for $3.7 million
                            (36 percent of the $10.3 million) in capital appropriated expenditures and
                            the related liability to the Capital Operating account.14 Thus, the financial
                            statements may be unreliable.
                        •   Material weaknesses in internal controls resulted in ineffective controls
                            over (1) safeguarding assets, specifically revenue cash receipts, and/or the
                            related accounts receivable, from material loss and (2) assuring that there
                            were no material misstatements in amounts reported in the financial
                            statements, specifically capital appropriated expenditures, the liability to
                            the Capital Operating account, and revenue. In addition, we identified a
                            material weakness in computer system general controls over (1) physical
                            and logical security, (2) segregation of duties, and (3) service continuity.
                        •   We are unable to report on compliance with laws and regulations because
                            the District’s lack of adequate documentation, which is discussed later in
                            this report, limited the scope of our work.
                        •   Also because of the lack of adequate documentation, we are unable to give
                            an opinion on whether the underlying assumptions and methodology used
                            to develop the Fund’s 5-year forecasted statements provide a reasonable
                            basis for such statements or whether the statements are presented in
                            conformity with guidelines established by the American Institute of
                            Certified Public Accountants (AICPA).

                            The following sections provide additional detail concerning our
                            conclusions and the scope of our efforts.


                            We are unable to give an opinion on the financial statements of the Fund
Disclaimer of Opinion       for the 14-month period ended September 30, 1996, because the District
on Financial                could not provide detailed supporting documentation for $3.7 million (36
Statements                  percent of the $10.3 million) in capital appropriated expenditures and
                            24 percent of the related liability to the Capital Operating account. As a
                            result, we are unable to determine if the financial statements’ presentation
                            of the capital appropriated expenditures and the related liability to the
                            Capital Operating account is reliable. A more detailed discussion of the
                            documentation problem is provided in the next section.


                            We gained an understanding of internal controls designed to
Statement on Internal
Controls
                            14
                              Once non-FHWA federal aid or local highway project costs are paid by the District, the amount to be
                            reimbursed by the Fund is charged to capital appropriated expenditures and a liability to the District’s
                            Capital Operating account is established.



                            Page 9                                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
                           B-278524




                       •   safeguard assets against loss from unauthorized acquisition, use, or
                           disposition;
                       •   assure the execution of transactions in accordance with management’s
                           authority and with selected provisions of those laws and regulations that
                           have a direct and material effect on the Fund’s financial statements; and
                       •   properly record, process, and summarize transactions to permit the
                           preparation of reliable financial statements and to maintain accountability
                           for assets.

                           The purpose of our work was to determine our procedures for auditing the
                           financial statements, not to express an opinion on internal controls.
                           However, internal controls were ineffective as a result of material
                           weaknesses found over (1) safeguarding assets, specifically revenue cash
                           receipts and the related accounts receivable, from material loss and
                           (2) assuring that there were no material misstatements in amounts
                           reported in the financial statements, specifically capital appropriated
                           expenditures, the liability to the Capital Operating account, and revenue.
                           In addition, we identified a material weakness in computer system general
                           controls over (1) physical and logical security, (2) segregation of duties,
                           and (3) service continuity.

                           A material weakness is a condition in which the design or operation of one
                           or more of the internal control elements does not reduce to a relatively
                           low level the risk that errors or irregularities in amounts that would be
                           material to the financial statements may occur and not be detected
                           promptly by employees in the normal course of performing their duties.
                           Our internal control work would not necessarily disclose all material
                           weaknesses. The following deficiencies identified in internal controls may
                           adversely affect the quality of data on which management decisions are
                           based. Unaudited information reported by the Fund, including the 5-year
                           forecasted statements, may also contain misstatements resulting from
                           these deficiencies.


Capital Appropriated       The District did not provide adequate documentation to support their
Expenditures               $3.4 million year-end closing adjustment15 and $266,000 for six




                           15
                             At year-end, an adjustment was made to match FHWA revenues with federal aid capital appropriated
                           expenditures. The net amount of federal aid capital appropriated expenditures that exceed FHWA
                           reimbursable amounts is charged to the Fund’s capital appropriated expenditure account. This is
                           needed since federal capital appropriated expenditures are limited to amounts billable to FHWA, and
                           excess amounts are to be reimbursed by the Fund.



                           Page 10                                              GAO/AIMD-98-30 D.C. Highway Trust Fund
B-278524




intra-District voucher payments16 charged to capital appropriated
expenditures. Without detailed supporting documentation, the validity of
$3.7 million (36 percent of the $10.3 million) in capital appropriated
expenditures, as well as the related liability to the Capital Operating
account, could not be determined. Even though procedures for
maintaining documentation for all payments existed, DPW officials stated
that the support for the six intra-District voucher payments could not be
located.

The District does not have procedures for maintaining detail-level support
for the year-end closing adjustment and officials stated that the process
for going back to trace these costs back to the detailed transaction level is
cumbersome. As a result of our attempt to audit the Fund, DPW
acknowledged the need to establish procedures to ensure that more
detailed transaction information is available to support future audits of the
Fund.

In addition, the District did not seek FHWA reimbursement for construction
engineering (CE) cost overruns17 of $2.6 million included in the above
mentioned year-end closing adjustment. CE cost overruns of up to 15
percent of the annual aggregate federal aid project construction costs are
eligible for FHWA reimbursement. Any amounts above the 15 percent
reimbursement ceiling would be charged to the Fund. However, the
District only sought reimbursement for budgeted costs and did not seek
FHWA reimbursement for the CE cost overruns of up to the above 15
percent. On July 8, 1997, FHWA notified the District that it could seek
reimbursement of the $2.6 million of CE cost overruns pursuant to section
106 (c) of title 23, United States Code, and its implementing regulation in
23 C.F.R. 140.205. Since no CE cost overruns were submitted for FHWA
reimbursement, the District charged the Fund CE costs that could be
reimbursable by FHWA. Without adequate documentation as to the validity
of the $2.6 million of the above adjustment, the amounts eligible for FHWA
reimbursement or chargeable to the Fund cannot be determined. This
occurred because District procedures did not address CE cost overruns,
and District officials were unaware of the FHWA criteria for the
reimbursement of CE cost overruns.



16
  An internal voucher is used to charge a particular District fund, for the services rendered, that were
paid by another fund. For example, the General Fund is used to pay all District salaries and an
intra-District voucher is used to charge the Fund for hours that District employees actually worked on
federal-aid projects.
17
  CE cost overruns are individual project amounts in excess of budgeted amounts.



Page 11                                                 GAO/AIMD-98-30 D.C. Highway Trust Fund
              B-278524




              We also found that the District lacked basic internal control procedures to
              ensure the proper segregation of duties related to cash disbursements.
              One DPW person had overall responsibility for processing and approving
              costs associated with the Fund. We found that 114 of the 142 expenditure
              journal entry transactions that we tested were prepared, authorized, and
              recorded into the District’s Financial Management System (FMS) by the
              same person without independent reviews or approvals. The lack of
              supervisory review increases the possibility of unauthorized or ineligible
              costs and errors not being corrected for amounts recorded and paid.

              As a result of the lack of documentation and failure to segregate duties
              related to cash disbursements, the risk of misappropriation, errors, and
              irregularities related to capital appropriated expenditures is increased.


Revenue       Weaknesses in revenue procedures resulted in motor fuel tax payments
              that were not recognized in the proper accounting period and deposited in
              a timely manner. We found that revenue was recorded when received, not
              when receipts were both measurable and available,18 and deposits were
              made an average of 14 days after receipt, resulting in over $3.6 million of
              revenue that was recognized in the wrong accounting period and
              approximately $74,500 in potential lost interest income.

              The following revenue recognition problems that we identified for the
              14-month period were subsequently corrected by the District:

          •   Motor fuel tax revenue for September 1996 totaling $2.5 million was
              received in October 1996 and the District incorrectly recorded it in fiscal
              year 1997 instead of fiscal year 1996. Fuel tax receipts received by the due
              date, the 25th day of the following month, and deposited within another 14
              days were incorrectly recorded as revenue on the deposit date instead of
              the tax due date. Since the tax receipts were both measurable and
              available as of September 30, 1996, the District should have recorded this
              amount as part of the Fund’s fiscal year 1996 revenue. The failure to do so
              reduced assurance that revenue was reflected in the proper period and
              recognized under the modified accrual basis. The District adjusted its
              records and included the $2.5 million as part of the fiscal year 1996
              revenue.

              18
                The District uses the modified accrual basis of accounting for the Fund. Under this basis, the District
              recognizes revenues when they become both measurable and available—the District considers
              revenue receipts available if they are collected within 60 days from the tax due date. For example, an
              amount reported as due to the Fund as of September 30, 1996, should be treated as fiscal year 1996
              revenue if the amount was actually collected by November 29, 1996.



              Page 12                                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
    B-278524




•   The District deposited and recorded $1.1 million of July 1996 motor fuel
    tax revenue from a wholesaler as a fiscal year 1997 transaction in February
    1997. This wholesaler typically delivered checks to a mailing service for
    forwarding to the cognizant taxing authority. The wholesaler had
    confirmation of receipt dated August 26, 1996, by the mailing service, but
    there was no evidence that the District had received that check. The
    wholesaler stopped payment on the original check on January 17, 1997,
    and reissued a replacement check on January 31, 1997. To reflect the
    proper recognition of this missing check, the District adjusted its records
    and included the $1.1 million as a fiscal year 1996 revenue transaction.

    The delays caused by untimely revenue processing and depositing resulted
    in the loss of interest income. These delays also increased the risk that
    cash and revenue were exposed to loss from misappropriation, error, and
    irregularities. We found that the District did not have procedures for
    depositing receipts. It took the District an average of 14 days from the time
    monthly fuel tax payments were received with tax returns until they were
    logged, endorsed, and deposited into the bank. One payment was not
    deposited for 5 months. Sound cash management practices require cash
    receipts to be deposited daily, which is consistent with U.S. Treasury
    requirements for all federal agencies. According to our analysis, revenue
    processing delays (1) resulted in approximately $74,500 in potential lost
    interest income (calculated using an average rate of 5 percent for
    short-term Treasury bills in which the District invests any excess cash) for
    the audit period and (2) could have contributed to the missing wholesaler
    check for July 1996 that was not received until February 1997.

    As the District considers options to upgrade its internal receipt processing
    to establish adequate controls and prudent cash management practices, a
    lockbox system19 is an alternative for reducing processing delays and
    untimely deposits. The District currently uses a lockbox for the prompt
    deposit of tax collections for the Sports Arena to reduce the risk of lost
    funds, increase interest income, and improve the timeliness of deposits.
    Under a lockbox system, customer payments to the post office box are
    accessible only to the bank, and cash flow is improved. District employees
    have no contact with cash remittances deposited directly into a lockbox,
    and the risk of mishandling or misappropriation is significantly reduced.
    Even though the banks charge a monthly fee for such services, those costs
    could be more than offset by the additional interest earned on investments
    promptly deposited.

    19
     A lockbox system is a banking service under which the bank assumes responsibility for receiving,
    examining, and processing incoming receipts from a customer.



    Page 13                                               GAO/AIMD-98-30 D.C. Highway Trust Fund
                              B-278524




                              In addition to these revenue recognition problems, the following issues
                              significantly reduced the effectiveness of controls over revenue and cash
                              receipts, and further increased the risk of cash manipulation:

                          •   The District does not know whether all motor fuel taxes are collected
                              since it relies on an honor (self-assessment) system. According to the
                              District’s Office of Tax and Revenue (OTR) officials, the last verification of
                              motor fuel taxes occurred approximately 7 years ago and revealed that
                              construction companies underreported the number of gallons consumed
                              within the District. As a result of following the honor system (given the
                              problems identified from the last verification, as well as the absence of
                              procedures to verify fuel used and the related taxes), the District cannot
                              determine whether wholesalers and construction, bus, and other
                              companies have reflected the total actual quantity of fuel sold to retailers
                              and consumed, respectively. Accordingly, the possibility exists that some
                              wholesalers and/or construction, bus, or other companies do not pay
                              either motor fuel taxes or all amounts due to the District.
                          •   The District does not have procedures to ensure the segregation of duties
                              related to recordkeeping and the physical handling of cash receipts. One
                              OTR employee was the sole person responsible for processing tax returns
                              and the related remittances. The person received and reviewed the tax
                              returns, recorded all deposits on a spreadsheet (log), endorsed checks,
                              and prepared standard deposit tickets and Revenue Cash Receipt forms.
                              The person also hand delivered the checks to the District’s cashier for
                              deposit. There was no evidence of supervisory review of the cash receipt
                              process, and no other staff person was assigned or trained to prevent
                              further delays or processing errors when this person was absent or ill.


Computer System General       DPW relies on computerized information systems to process and account
Controls                      for the Fund’s financial activities. General controls over the systems are
                              intended to prevent or detect unauthorized access and intentional or
                              inadvertent unauthorized modifications to the data and related computer
                              programs. Our audit revealed that general controls over the systems were
                              ineffective.

                              DPW’s Office of Information Systems (OIS) operates a local area network
                              (LAN) with 70 servers20 located at two data centers. Four servers on the LAN
                              are used to process the five financial applications that relate to federal aid
                              and local capital projects, including the Fund. The applications that

                              20
                               A file (or network) server is a high-speed computer in a network that stores program and data files
                              shared by users on a network.



                              Page 14                                                GAO/AIMD-98-30 D.C. Highway Trust Fund
    B-278524




    involve the Fund include the (1) Overhead Distribution System,
    (2) Federal Aid Billing Systems (FABS), (3) Labor Acquisition and
    Distribution System (LADS), and (4) Vehicle Usage System. For the most
    part, these applications obtain data from FMS (the central system and the
    original point of entry for capital project transactions) or distribute job
    cost data to the capital projects in FMS. For example, FABS is a reporting
    system that obtains information from FMS and organizes the data in a
    different format for billing to FHWA. In addition, LADS and the Vehicle Usage
    System distribute payroll and vehicle usage costs, respectively, to the
    appropriate capital project in FMS. The various users and multiple
    application systems are part of a decentralized computer environment
    where strong controls are vital.

    The OIS computer environment lacked basic system controls to prevent or
    detect unauthorized access and intentional or inadvertent unauthorized
    modifications to the data and related computer programs. We identified
    the following significant weaknesses in the controls over (1) physical and
    logical security (access to facilities, systems, and data), (2) segregation of
    duties, and (3) service continuity:

•   Security over the system and its data was not adequate to protect against
    unauthorized access to sensitive systems for personal gain or destructive
    purposes. Physical access to both data centers was not controlled. For
    example, the door remained unlocked at one data center, and backup files
    were not protected at the other data center. In addition, logical access to
    computer and application systems was not monitored. For example,
    current security risks were not analyzed, access to security functions was
    not restricted, security access files were not maintained, and LAN
    modifications were not adequately controlled, resulting in updates that
    were not uniform across the four servers. Further, written security policies
    and procedures had not been formalized and distributed. Without
    assurance that security procedures are adequate, the integrity and
    reliability of financial data face a greater risk of being compromised.
•   DPW did not adequately practice segregation of duties. Seven employees
    with supervisory access had control over the entire computer environment
    (including data files, production software programs, systems software, and
    utilities). Generally, no one person should have complete access to the
    entire computer environment without supervisory review by another
    person. In addition, another employee performed all phases of application
    modifications. The lack of segregation of duties provides the opportunity
    for controls to be circumvented, which can result in unauthorized access
    and changes to systems and software applications.



    Page 15                                   GAO/AIMD-98-30 D.C. Highway Trust Fund
                           B-278524




                       •   Service continuity is at risk since there was no current written and tested
                           disaster recovery plan. Contingency disaster plans are needed to ensure
                           that financial and other management information can be maintained if
                           data processing operations are unexpectedly interrupted due to a
                           disruption of electrical power or other events that might cause operations
                           to halt. An interruption of computer services can significantly reduce the
                           District’s ability to meet users’ needs for products and services and
                           maintain control over District operations.

                           In addition, a Year 2000 program21 evaluation and conversion plan had not
                           been established. District systems are time dependent with databases and
                           programs created to store and process the year as a 2-digit field (for
                           example, 1997 as “97”). Without promptly assessing concerns and
                           strategies for addressing this issue, the advent of the year 2000 will pose
                           significant problems, and processing codes, interfaces, and multiple
                           processing environments may not operate.


                           We were unable to test the laws and regulations we considered necessary;
Compliance With            accordingly, we are unable to report on the Fund’s compliance with laws
Laws and Regulations       and regulations. The lack of adequate documentation limited the scope of
                           our work for 36 percent of the capital appropriated expenditures. For
                           example, as discussed earlier, the District could not provide detailed
                           support for the year-end closing adjustment for $3.4 million in federal aid
                           project costs that were charged to the Fund. Thus, we could not examine
                           supporting documentation to determine whether the transactions
                           recorded in the Fund’s accounting records complied with laws and
                           regulations deemed significant to the financial statements.


                           The act requires the District to prepare 5-year forecasted statements of the
Disclaimer on 5-Year       Fund’s expected conditions and operations. These forecasts are required
Forecasted                 to determine the District’s ability to meet future local matching
Statements                 requirements under the federal highway program for capital improvements
                           to the District’s transportation system. In June 1997, the District prepared
                           the Transportation Program’s Capital Improvement Plan for fiscal years
                           1998 through 2003 (the 5-year forecasts) and submitted it to the Congress
                           for review and approval.

                           21
                            A Year 2000 program addresses the problem caused by the way dates are recorded and used in many
                           computer systems. Many systems use two digits to represent the year. As a result of this ambiguity,
                           system or application programs that use dates to perform calculations, comparisons, or sorting may
                           generate incorrect results when working with the years after 1999. Systems that are Year 2000
                           compliant do not have this date problem.



                           Page 16                                               GAO/AIMD-98-30 D.C. Highway Trust Fund
    B-278524




    We attempted to examine the Fund’s 5-year forecasted statements that the
    District prepared and submitted to the Congress. We could not complete
    our examination because the District did not have adequate
    documentation related to the preparation and presentation of the
    forecasted statements. For example, the District lacked adequate
    documentation to support the underlying assumptions and the
    methodology used to develop the forecasts. As a result, we are unable to
    and do not give an opinion on whether the underlying assumptions and
    methodology used to develop the forecasts provide a reasonable basis for
    the Fund’s 5-year forecasted statements or whether such statements are
    presented in conformity with guidelines for presentation of a forecast
    established by the AICPA. And since significant differences between the
    1996 base year forecasts and the reported expenditures were not
    reconciled, we did not include the 5-year forecasted statements in this
    report.

    The AICPA Forecast/Projection Guide establishes presentation and
    disclosure requirements, and accounting and auditing guides published by
    the AICPA have been identified as sources for determining generally
    accepted accounting principles for prospective financial statements.
    Under the guide, the forecast process should consist of (1) a formal
    system for preparing forecasted statements, (2) performance of a work
    program that outlines the steps followed in preparing the statements, or
    (3) documented procedures, methods, and practices used in preparing the
    statements. It also states that good faith, appropriate care, accounting
    principles, best information, consistency of information, key factors,
    appropriate assumptions, assumption sensitivity, documentation,
    comparison of results, and review and approval should be incorporated
    into the forecasted statement preparation process.

    Even though District officials gave us the Fund’s 5-year forecasted
    statements, a brief description of the revenue assumptions and estimates
    from 1998 through 2001 (provided by transmittal dated September 3, 1997),
    and gasoline consumption statistics for each month from 1981 through
    1996, they did not provide adequate documentation to support the
    assumptions made and methodology used. Our review of the previously
    mentioned information revealed the following:

•   Gasoline consumption statistics for past periods could not be verified
    since source documentation was not provided. We also noted two
    instances in which the same amounts were reported in the same month for
    two consecutive years. Specifically, 14,229,073 gallons of gas consumption



    Page 17                                 GAO/AIMD-98-30 D.C. Highway Trust Fund
                         B-278524




                         were reported for December 1995 and 1996, and 13,443,221 for
                         August 1980 and 1981. In addition, the District stated that they assumed a
                         10 percent decline in consumption for the 5-year projection based on a
                         comparison of 1993 and 1996 usage. Our analysis of the actual gasoline
                         consumption schedule reflected only a 7.3 percent decline between those
                         years. District officials did not explain why 1993 was used as the base year
                         for projected consumption.
                     •   Recalculation of the 1996 tax receipts based on reported consumption at
                         $0.20/gallon ($32.56 million as reported for the 12-month period) did not
                         agree with the amount reported in the forecasted Cash Flow Statement
                         ($31.84 million). In addition, interest income of $580,000 for fiscal year
                         1996 was not considered in the forecasts.
                     •   The line item “local share of uses” in the Cash Flow Statement
                         ($22.4 million), used as the 1996 base year for the forecasts, had not been
                         reconciled to the 1996 reported expenditures ($19 million). We found that
                         the net $3 million difference is from (1) a $9 million overstatement of
                         reported expenditures for temporarily waived amounts that had not yet
                         been paid to FHWA and (2) an unexplained $12 million of other forecasted
                         cash uses which resulted in understated reported expenditures by that
                         amount.
                     •   The projected repayment of the waived local match for fiscal year 1997
                         ($4.5 million) did not agree with the actual amount due for the 1996
                         temporarily waived amount ($3.95 million, 50 percent of $7.99 million, see
                         footnote 8). Local and federal-use forecasts for project management,
                         nonparticipating costs, and design, site, construction, and equipment costs
                         were not supported and no explanations were provided. In addition, local
                         street costs that should have been projected were not and no explanation
                         was provided.


                         Management is responsible for
Objectives, Scope,
and Methodology      •   preparing the Fund’s financial statements in conformance with generally
                         accepted accounting principles;
                     •   establishing, maintaining, and assessing the Fund’s internal controls to
                         provide reasonable assurance that the internal control objectives are met;
                     •   complying with applicable laws and regulations; and
                     •   preparing 5-year forecasted statements of the Fund’s expected conditions
                         and operations in accordance with standards established by the AICPA.

                         We are responsible for obtaining a sufficient understanding of internal
                         controls to plan the audit and for performing limited procedures with



                         Page 18                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
                      B-278524




                      respect to certain other information appearing in these financial
                      statements. In order to fulfill our responsibilities, we

                  •   assessed the design of controls and whether they had been placed in
                      operation and
                  •   tested relevant internal controls over safeguarding, compliance, and
                      financial reporting.

                      We limited our internal control testing to those controls necessary to
                      achieve the objectives outlined in our statement on internal controls.
                      Because of inherent limitations in any system of internal control, losses,
                      noncompliance, or misstatements may nevertheless occur and not be
                      detected.

                      Except for the limitations on the scope of our work on the financial
                      statements and compliance with laws and regulations described above, we
                      did our work in accordance with generally accepted government auditing
                      standards. We completed our fieldwork on September 4, 1997.


                      To address weaknesses in capital appropriated expenditures identified in
Recommendations       this report, we recommend that the Director of the Department of Public
                      Works take the following actions:

                  •   Enforce procedures that call for maintaining documentation for all
                      voucher and intra-District payments made on federal aid and local
                      highway projects.
                  •   Revise procedures to require maintaining detailed support for all
                      adjustments to capital appropriated expenditures. This should include
                      detailed records to support (1) year-end closing adjustments and (2) any
                      necessary schedules and reconciliations needed to provide an adequate
                      audit trail from the financial management systems.
                  •   Establish procedures to (1) obtain detailed documentation for
                      construction engineering cost overruns, (2) bill FHWA for those overruns up
                      to 15 percent of aggregate annual construction costs, and (3) charge the
                      remaining overruns to the District of Columbia Highway Trust Fund’s
                      capital appropriated expenditures.
                  •   Obtain the detailed documentation to determine the validity of the
                      $3.4 million year-end closing adjustment. If any portion of the $2.6 million
                      of construction engineering cost overruns is valid, seek reimbursement
                      from FHWA for amounts that do not exceed 15 percent of annual aggregate
                      construction costs and reduce these amounts from those originally



                      Page 19                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
    B-278524




    charged to the capital appropriated expenditures. If any portion of the
    $3.4 million is not valid, reduce the amounts charged to the capital
    appropriated expenditures.
•   Ensure the segregation of duties in the preparation, processing, and
    approval of journal entries and disbursements.
•   Perform supervisory reviews of journal entries and disbursements related
    to capital projects.

    To address weaknesses in revenue identified in this report, we recommend
    that the Director of the Office of Tax and Revenue take the following
    actions:

•   Enforce procedures to ensure the recognition of revenue in the month the
    tax is due if the revenue is measurable and available (that is, the amount of
    revenue can be determined and is collected within 60 days of the
    month-end due dates).
•   Revise procedures to require daily logging, endorsing, and depositing of
    fuel tax receipts received by the District or establish a lockbox system for
    the processing and depositing of such receipts to improve cash
    management and enhance the control environment.
•   Establish procedures to verify the completeness of motor fuel tax receipts
    from wholesaler fuel sales to retailers or for fuel consumed by
    construction, bus, and other companies who buy at the wholesale level
    and consume that fuel within the District. On-site inspections and reviews
    of wholesaler shipping documents and confirmation with retailers and
    construction and bus companies annually or on a scheduled but
    random-sample basis are examples of such procedures.
•   Segregate incompatible duties, if the District elects to administer
    collections in-house, by assigning separate individuals to deposit motor
    fuel tax receipts and perform recordkeeping functions.

    To address weaknesses we identified in computer system general controls,
    we recommend that the Director of the Office of Information Systems take
    the following actions:

•   Strengthen physical security over the facilities, system, and data by
    controlling all physical access to local area network (LAN) centers and
    protecting all backup files.
•   Strengthen logical security and better control the access to data and
    systems by conducting a security risk analysis, restricting access to
    security functions, maintaining security access files, and applying LAN
    modification updates uniformly.



    Page 20                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
                         B-278524




                     •   Segregate incompatible duties and provide the appropriate supervisory
                         review and, if it is deemed necessary that any one person maintain
                         complete access, establish controls to ensure that such activities are
                         monitored.
                     •   Ensure service continuity by completing disaster recovery plans and
                         testing at both LAN centers.
                     •   Assess the Year 2000 vulnerabilities and develop an evaluation and
                         conversion plan.


                         We requested comments on a draft of this letter from the Mayor of the
District Comments        District of Columbia. The District’s Chief Financial Officer (CFO) provided
and Our Evaluation       us with written comments that are reprinted in appendix I.

                         The CFO generally agreed with our findings regarding material weaknesses
                         in internal controls for capital appropriated expenditures, revenue, and
                         computer system general controls. He explained a number of measures
                         that they intended to take in order to improve their operating control
                         environment and automated systems.

                         Regarding the capital appropriated expenditures, the CFO’s comments
                         focused on general reasons for the year-end closing cost reclassification
                         adjustment and the subsequent collection of $1.7 million of construction
                         engineering cost overruns from FHWA and stated that the District had
                         provided all but 6 of the 500 requested documents.

                         However, the material weakness we reported relates to the District’s
                         inability to provide adequate support and specific reasons for the
                         $3.4 million year-end closing adjustment and the six missing disbursement
                         transactions, which represented 36 percent of the $10.3 million in capital
                         appropriated expenditures. The District agreed that it would modify
                         procedures for year-end closing adjustments, stating that future
                         adjustments will be generated by journal vouchers and appropriate
                         supporting documentation. In our opinion, had the appropriate
                         documentation been available, some of the uncertainty regarding billing
                         FHWA for the CE cost overruns and the associated problems in accounting
                         for those costs could have been avoided. In his comments, the CFO stated
                         the District had asked for FHWA approval to recover the $2.6 million in CE
                         cost overruns. FHWA responded in July 1997 that the District can seek
                         reimbursement based on federal regulations in existence since 1991. The
                         District’s Chief Financial Officer stated that $1.7 million has been
                         subsequently collected from FHWA, and DPW stated that the remaining



                         Page 21                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
B-278524




$900,000 will be submitted for reimbursement during fiscal year 1998.
Notwithstanding the reimbursement from FHWA, which was based on
summary-level reports, the amount charged to the Fund for the
$3.4 million year-end closing adjustment and for the 6 intra-District
voucher payments cannot be validated without appropriate supporting
documentation. Until these accounting practices are modified—as the
District states it plans to do—this will continue to be an audit issue.

The CFO agreed with the reported revenue findings and stated that the
Office of Tax and Revenue has implemented procedures for processing
motor fuel tax collections as of October 24, 1997. He also said that the
District will (1) establish procedures to ensure that its accounting policies
for revenue recognition are followed, (2) institute an audit program for
motor fuel wholesalers, and (3) conduct a comprehensive audit of major
wholesalers within 24 months to verify the quantity of fuel consumed.

Concerning computer system general controls, the CFO stated that the
District is developing a new or revised Financial Management System,
with the Department of Public Works as one of the selected pilot agencies.
He also stated that (1) his office will conduct an independent quality
assurance evaluation and test the new software systems and integrated
software/hardware system modifications and (2) an independent systems
administrator will work closely with the Department of Public Works’
Director of the Office of Information Systems to make recommendations
to strengthen security, segregation of duties, and disaster recovery plans
and assess the Year 2000 vulnerabilities and conversion plan.

Regarding the 5-year forecasted statements of the Fund’s expected
conditions and operations, the CFO stated that no model exists for the
revenue forecasts, that gasoline consumption has declined since 1993, and
that the District’s estimates through 2001 are reasonable. However, we are
unable to opine on the 5-year forecasted statements because of a scope
limitation. This limitation resulted from a lack of documentation to




Page 22                                   GAO/AIMD-98-30 D.C. Highway Trust Fund
B-278524




support the assumptions made and the methodology used by the District
to prepare the forecasted statements of revenue and expenditures.




Gloria L. Jarmon
Director, Civil Audits

September 4, 1997




Page 23                               GAO/AIMD-98-30 D.C. Highway Trust Fund
Financial Statements


Balance Sheet




                Page 24   GAO/AIMD-98-30 D.C. Highway Trust Fund
                                        Financial Statements




Statement of Revenues, Expenditures, and Change in Fund Balance




                                        Page 25                   GAO/AIMD-98-30 D.C. Highway Trust Fund
                                    Financial Statements




Notes to the Financial Statements




                                    Page 26                GAO/AIMD-98-30 D.C. Highway Trust Fund
Financial Statements




Page 27                GAO/AIMD-98-30 D.C. Highway Trust Fund
Financial Statements




Page 28                GAO/AIMD-98-30 D.C. Highway Trust Fund
Appendix I

Comments From the District of Columbia


Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




                             Page 29   GAO/AIMD-98-30 D.C. Highway Trust Fund
Appendix I
Comments From the District of Columbia




Page 30                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
                 Appendix I
                 Comments From the District of Columbia




See comment 2.




                 Page 31                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
Appendix I
Comments From the District of Columbia




Page 32                                  GAO/AIMD-98-30 D.C. Highway Trust Fund
               Appendix I
               Comments From the District of Columbia




               The following are GAO’s comments on the District of Columbia Chief
               Financial Officer’s letter dated November 20, 1997.


               1. The report has been modified to include the $1.7 million of construction
GAO Comments   engineering cost overruns that the District stated it received from FHWA
               during fiscal year 1997. The report was also modified to reflect the
               District’s statement that the remaining $900,000 will be submitted for
               reimbursement from FHWA in fiscal year 1998.

               2. The report has been modified to clarify that the certified receipt for the
               $1.1 million was from the wholesaler’s mailing service and not from the
               District.




(913796)       Page 33                                   GAO/AIMD-98-30 D.C. Highway Trust Fund
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested