oversight

Implementing the Administration's Plan for Audited Financial Statements in the Federal Government

Published by the Government Accountability Office on 1990-09-18.

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

Contents




  Foreword .................................................ii
  Acknowledgements ........................................ iii


  Chapter l
  Opening Remarks by Virginia Robinson ......................... 1
  Keynote Address by Frank Hodsoll ............................. 4


  Chapter 2
  Subcommittee on Audited Financial Statements ................... 13


  Chapter3
  Panel Session on Agencies' Perspectives:
  General Services Administration ............................... 14
  Depa.rtnlent of Labor ....................................... 20
  Social Security Administration ................................ 25
  Depa.rtnlent of Veterans Affairs ............................... 33


  Chapter4
  Perspective on Audited Financial Statements ..................... 36
  Keynote Address by Donald Chapin ............................ 37


  Chapter 5
  Workshops on Financial Statements:
  General Services Administration ...............................45
  Depa.rtnlent of Labor ....................................... 51
  Social Security Administration ................................ 54
  Depa.rtnlent of Veterans Affairs ............................... 60
Foreword




Qn Tuesday, September 18, 1990, at the Crystal Gateway Marriott
   Hotel in Arlington, Virginia, a conference entitled "Implementing the
Administration's Plan for Audited Financial Statements in the Federal
Government" was held under the joint sponsorship of the Chief Financial
Officers (CFO) Council and the Joint Financial Management
Improvement Program aFMIP). As part of JFMIP's mission to
disseminate information addressing current issues in financial
management policies and practices within the government and to enhance
the spirit of cooperation among financial managers, we are publishing the
Conference proceedings.
      The Chief Financial Officers (CFO) Council meets monthly to
discuss salient financial management issues.The Council activities are
done through various committees: Executive, Human Resources,
Financial Systems and Information (the subcommittee on Audited
Financial Statements falls under this committee), Central Agency
Requirements, Legislative, and Organization and Structure.
     The JFMIP is a joint undertaking of the General Accounting Office,
the Office of Management and Budget, Department of the Treasury, and
the Office of Personnel Management, working in cooperation with each
other and operating agencies to improve financial management in the
Government. As part of its overall mission, the JF.MIP periodically
sponsors conferences, seminars and forums on issues in financial
management.
      The keynote addresses at the "Audited Financial Statements"
conference were presented by Frank Hadsall, Chief Financial Officer of
the United States and Executive Associate Director for Management at
the Office of Management and Budget, and by Donald Chapin, Assistant
Comptroller General of the United States for Accounting and Financial
Management. Mr. Hadsall addressed "The Administration's Five Point
Program" for accounting standards, information and systems standards,
agency financial systems, central agency financial systems, and audited
financial statements. Mr. Chapin addressed the "General Accounting
Office's Perspective on Audited Financial Statements."
     The agenda of the CFO Subcommittee on Audited Financial
Statements was presented. In morning presentations and in afternoon
workshop sessions, government agency financial management
representatives and, as appropriate, representatives from the General
Accounting Office, offices of inspectors general, and independent
auditing firms discussed the implementation of audited financial
statements by the General Services Administration, the Department of
Labor, the Social Security Administration (Department of Health and
Human Services), and the Department of Veterans Affairs.




 ii
Acknowledgements




 We would like to acknowledge and thank all those who participated in
   this conference. We especially like to thank those individuals who
worked behind the scene to ensure that the conference was run smoothly
and successfully.

Program Coordinators
       Doris Chew, JFMIP
       Larry Eisenhart, Department of Health and Human Services (HHS)

 CFO Council
       Alvin Tucker, Department of Defense
       CFO Council Subcommittee on Audited Financial Statements:
         Larry Eisenhart, Frank SulliPan, and Frank .Abruzzino, HHS
       Susan Gaffeey, Office of Management and Budget

 Conference Arrangements
       USDA Graduate School:
       Philip Hudson
       Isabelk Howes
       Lynn Edwards
       Chuck Buddenhagen
       Kate Kosmicki

 Conforence.Aai:rnties
       ]udi Fuerstenberg, Department of Energy
       George Englert, Department of Housing and Urban Development
       Dar/me Schongalla, U.S. Geological Survey

       JFMIP staff:
       Ken Winne
       Geri Beard
       Frank Kramer
       Bernie Trescavage

Panel Session Recorders/Reporters
       GSA Workshop: Frank.Abruzzino, HHS
       DOL Workshop: Bn4&e Michelson, General Accounting Office
       SSA Workshop: Steve Swanson, Department of Transportation
       VA Workshop: Kathleen Linehan, Department of Energy




 ill
                              Chapter 1
                              Opening Remarks




                               Good morning. Pm Virginia Robinson, Executive Director of the Joint
                                  Financial Management Improvement Program and a member of the
                               Chief Financial Officers Council. I am very pleased to welcome you to
                               our forum on "Audited Financial Statements." It's really good to see such
                               a good tum-out today. As of last evening, we had about 410 people
                               registered, and we did have a number of walk-ins this morning. We are
                               very pleased to see so much interest in this kind of technical program.
                                    We have not only people from our traditional federal community
                               and the major agencies. We have a number of people with us from the
                               D.C. government and quite a few people from out of town. We even
                               have a person with us from Pakistan. We like to know that we are
                               appealing to a broad audience. And we have an excellent mix of audit,
                               accounting, budget, and information resources people with us here today.
                                     We are also glad that we were able to relocate the program so that
Virginia Robinson
                               we could accommodate participants from the private sector as well as the
Executive lJi.rector, ]FMIP    public sector to work together on this information exchange. We have
                               excellent representation from the audit community, and we are very
                               pleased about that especially since we are talking about the audit of
                               financial statements today. There is one other area that I also hope will be
                               emphasized today that is just as important as the audit, and that is the
                               area that's covered by our operating people, and, as usual, we don't have
                               quite as many of them in attendance as we do from the audit and the staff
                               communities.
                                     I would like to take this opportunity to emphasize that we will work
                               very hard in the future to see that we have good participation and
                               representation in these forums from operating people in accounting and
                               budget who really are on the front lines-the people who have to develop
                               these statements that we're planning to audit. Frequently, they're putting
                               out fires, making funds transfers, preparing the reports, developing
                               testimony, and all of those things that really make our government work.
                               They're just as important. They really need the training, and we will need
                               to provide more opportunities to make sure that they, too, are fully
                               participating in these programs, especially in the area of resource
                               management.
                                     We tend to find the resources that we need to do the audits. We
                               tend to find the resources that we need to do the staff work. But, again,
                               we will have to make the resources available for the expanded functions
                               that are being required of our operating people who are developing these
                               statements and really making our government work. One of the things
                               that we talk about when we discuss auditing financial statements is to
                               emphasize how well the statements have served the business sector, and
                               that we know that they will also serve the federal sector very well.




                               1
      We know, though, that there are some things that have been done
in the business world, some other things, that we would also like to
emulate, and one is this all-important area of training. And, again, I say
training for the people in operations as well as for the people who will be
auditing the statements.
      You'll be hearing more about training, especially from the JFMIP
perspective, as we issue our training report which will be forthcoming
very shortly.
      One of the other projects that we're working on in JFMIP that Pd
like to mention at this time that is very much related to audited financial
statements is our JFMIP standardization of financial information project.
In that project, we expect to deliver two principal products. One is a
glossary of terms so that we can have standardized terminology used
across government. A second product we expect from that project is a
compilation of data elements that will be in the external reports for
Treasury and the Office of Management and Budget. Just reflect on how
much more meaningful these financial statements will be when we have
consistent terminology and streamlined data elements-the ones that are
really needed-for external reports. We hope to finish that project well in
advance of additional major efforts that move forward on audited
financial statements. In fact, we're estimating that we should have the
product out in 3 to 4 months for your reactions. So that information will
be very much a part of reporting mechanisms that are in place as the
fmancial statements are continually audited.
      I noticed a little ad-not a little ad, a big ad-in the subway station
on my way to work a few days ago, and I think it's apropos though it is
in another field that is somewhat unrelated to financial management. It
described, sort of in a nutshell, what's important in the medical field, and
I think there is an analogy for us that we can use in fmancial
management. I think it sort of summarizes the message that I think we're
trying to convey today. This excerpt is from an ad from a respectable
hospital in this area, and the ad reads "it's not the number of patients who
come to our hospital that's important; it's the number of patients who go
home."
      An analogy for us, I think, in the financial management community,
is that it's not so important the number of footnotes, the number of
pages, that we have in our financial statements and our other reports.
What's important is the number of reports that are used and at least read
and preferably the number that will be taken home.
     I'd like to move now to another pleasure that I have this morning,
and that is to introduce the second Chief Financial Officer of the U.S.
Government. It seems a very short while ago at one of our JFMIP



2
Opening Remarks




 conferences that Mr. Frank Hodsoll was first introduced as the Chief
 Financial Officer and Executive Associate Director of the Office of
 Management and Budget. Given all the challenges we have before us in
 the federal financial management community, I do wonder if he feels as
 though it has been just a short while since he took that position.
        Mr. Hodsoll was appointed Executive Associate Director of OMB in
 February 1989 by President Bush. He has responsibility for OMB
 management functions. He advises the Director of OMB on procurement
 policy and privatization as well as selected aspects of international affairs
 and national security. All of this is in addition to his very important
 financial management role. There will be a presidential emphasis on
 strengthening the management of federal agencies, building on the
 initiatives of the Reagan Administration in this area.
      Mr. Hodsoll was Chairman of the National Endowment for the Arts
where he served since November 1981 until he was appointed to this
position in 1989. He was previously Deputy Assistant to President
Reagan and deputy to White House Chief of Staff James A. Baker. He
has held senior positions in a variety of federal agencies, including the
Department of State, the Department of Commerce, and the
Environmental Protection Agency. An attorney and former managing
director of a British trading company in the Philippines, he has degrees
from Yale, Cambridge, and Stanford law school. Please join me in
welcoming Mr. Frank Hodsoll.




 3
                                 Keynote Address




                                 Good morning. It's good to see such a large turnout at this seminar on
                                    audited financial statements. I commend the CFO Council and JFWP
                                 for identifying the need for the seminar and for their excellent work in
                                 making all the necessary arrangements.
                                      This seminar is important. As you may know, audited financial
                                 statements are the cornerstone of the Administration's financial
                                 management improvement strategy. In my talk this morning, I will be
                                 reviewing the overall strategy with you and explaining the key role of
                                 audited financial statements.
                                       The problem, as you well know, is that we don't really have
                                 adequate guidance or standards within the federal government for the
                                 preparation of financial statements. We'll have that guidance and those



-'
Prtink Hod.soil
Office ofManagement and Budget
                                 standards, hopefully, before too long. The CFO Council has a project
                                 underway to propose revisions in the Treasury Form 220 report series
                                 and, as I will discuss later, OMB, Treasury, and GAO are working hard to
                                 establish a joint mechanism for setting accounting standards.
                                       In the meantime, how do you proceed to comply with the
                                 Administration's requirement for audited financial statements? I hope this
                                 seminar will help you to answer that question. The agencies on today's
                                 program have marched out on their own. They have already been through
                                 the trials and tribulations of preparing financial statements and having
                                 them audited. They have learned lessons, and they are prepared to pass
                                 them on to us today. I very much appreciate these agencies' willingness to
                                 share their wisdom.
                                       Now, before getting to my topic, which is the Administration's
                                 overall strategy for financial management improvement, I'd like to spend
                                 a minute talking about you. I know that this audience is highly
                                 representative of the government financial management community. I
                                 want to take this opportunity to thank you for the fine work and progress
                                 that have been made over the past few years in improving financial
                                 management. We always hear in the press about the things we're not
                                 doing well, but we don't always get recognition for the improvements
                                 that are being made.
                                       In recent years there has been an emphasis on upgrading individual
                                 agency financial systems. Nearly every department and agency has a major
                                 upgrade underway. Taken as a whole, this is no doubt the largest upgrade
                                 program ever undertaken. You have all contributed significantly to this
                                 program. Agencies have cooperated by sharing systems, providing system
                                 services to others, and consolidating systems internally. This is resulting
                                 in more efficient and effective financial systems across government. We're
                                 doing well, but we still have a long way to go.




                                  4
Keynote.Address




 Summary ofthe "Five Point Program"
       While we must continue tQ upgrade our individual systems, the time
 has clearly come to focus on making those systems compatible and on
 making sure that they are producing accurate and useful information for
 program managers as well as financial managers. In other words, we need
 a govemmentwide strategy for a broad range of financial management
 improvements. I am here today to tell you that we have such a strategy.
 We call it the "Five Point Program." The five points are:
      1. Accounting Standards. Standards that govern the way we
 measure and record assets, liabilities, costs, and so on are, of course, the
 essential foundation of a credible financial reporting and disclosure
 process.
       2. Information and Systems Standards. These standards are essential
 to allow for electronic exchange of information among systems, and to
 assure that minimum functional capabilities are provided in all of our
 systems.
       3. Agency Financial Systems. We need to continue to upgrade these
 financial systems. We need those systems to produce timely and auditable
 data on both operations and the key indicators of success, failure and
 impending problems. We need, in particular, to begin work now on
 integrating financial and program data.
      4. Central Agency Financial Systems. Improved central systems are
 necessary for govemmentwide management. These systems must be
 compatible with and, ultimately, electronically linked to agency systems.
       5. Audited Financial Statements. Audited statements will provide
 needed information on the financial condition of agencies and programs.
 Equally important, they will force improved systems and operations. No
 agency head will want to sign financial statements that are expressly stated
 to be unauditable.
       In the best of worlds, these activities would be accomplished
 sequentially. The accounting standards first, followed by information and
 functional standards, full systems development, and then, finally, audited
 financial statements. Of course, this is not realistic, since each agency is at
 a different point in its systems development cycle, and activities such as
 standards-setting are processes that evolve over time. Thus, we are going
 to have to move out on all five fronts simultaneously. Let me tell you
 what this means.




 5
Keynote .Address




.Aecounting Sttindall'-ds
      As you know, the General Accounting Office has set accounting
 standards since the Budget and Accounting Procedures Act of 1950.
 There is general agreement among GAO, OMB, and Treasury that
 improved standards are needed and that we must have a better system for
 enforcing them. Also, there are constitutional problems with GAO's
 attempting to set standards for the executive branch.
      A solution we are pursuing-in collaboration with GAO and
 Treasury-is a joint accounting standards advisory board that would
 make recommendations to GAO, Treasury, and OMB. Accepted
 recommendations would be published by both OMB and GAO.
      The board would have representatives from OMB, Treasury, GAO,
 the Congressional Budget Office, civilian and defense agencies, and the
 private sector. The Board would be supported by an Executive Director
 and technical staff to perform the required research and related activities.
 Our intention is that the Board would function with a high degree of
 independence and public disclosure.
       This is obviously important to the subject of today's session.
 Financial statements are dependent on sound accounting standards. On
 the other han~ moving ahead with audited statements in parallel will
 flush out weaknesses in current standards that the Board will need to
 ad.dress.

 Information and Systems Standards
       This part of the program builds upon work ongoing in the Joint
 Financial Management Improvement Program (]Fl\il.P). An effort is
 underway to identify and define, at a very detailed level, the financial and
 budget execution information that flows from agencies to Treasury and
 OMB. The objective is to provide consistent data definitions, eliminate
 redundant data, and establish a standard data base encompassing central
 agency requirements. This will be the foundation for ultimately linking
 agency and central systems electronically. We expect to complete the
 initial data base definition early next year.
       This effort also involves developing additional functional standards
 for systems. We have a good base in place, with the Core Financial. Systems
 Requirements and the recently issued Personnel-Payroll functional
 requirements. JFMIP now has a project underway to establish Travel
 System requirements. These should be completed by the end of this
 calendar year. We expect to identify and establish a schedule for other
 subsystems by November.




 6
Financial Systems .
      Currently, agencies are required to produce and maintain 5-year
financial systems plans. The plans are submitted to OMB annually along
with the budget. Given the large number of plans submitted and the
limited resources available to review them in OMB, we have not been in a
position to make informed judgments on the merits of the plans, the
adequacy of the planning processes, or the levels of funding that should
be provided. We want to be advocates for deserving agency systems plans
and related resource requirements, but we need to have a good
understanding of the plans· in order to do this.
      We are determined to gain that understanding. This year,
interagency review teams are going into five volunteer agencies for an
intense 2-week assessment of the agencies' plan development processes, as
well as an evaluation of their Five-Year plans. These reviews will give
OMB the information we need to be effective advocates for funding
financial systems improvements within the 1992 budget. Eventually all
departments will be reviewed. Lessons learned will be included in a
revision ofOMB Circular A-127, as well.
     Some of you may be sitting here with a slight amount of
consternation, wondering if your agency may be one of the "volunteered"
agencies in the Administration's plans. Well, fear not, the five agencies
have been selected and progress is well under way. Interagency teams
have begun their reviews ~t the Departments of Agriculture, Commerce,
Transportation, Treasury, and Veterans Affairs. In fact, the preliminary
reports will be completed within a few weeks.
      I want to make one point about the content of agency plans. The
plans must include steps to integrate financial and program information. I
don't mean to say that this must be done in the first year, but the plan
must head in this direction and include milestones each year that show
measurable progress. The integration of program and financial
information is absolutely essential to effective program management at all
levels. We can't expect program managers to be supportive of systems
that cannot meet their management information needs. Plans that do ~ot
move us in this direC!ion are simply not acceptable.

<Jentral Agency Financial and Budget Systems
     The current process for central agency collection of budget and
accounting data is, I am sorry to say, neither efficient nor consistent. It
requires duplicate reporting; major segments are highly reliant on paper
reporting; information on budget execution, including unobligated
balances, is not centrally accessible; and the process causes reconciliation
problems between Treasury and OMB.
I




7
Keynote Address




      In order to solve these problems, we are undertaking a major effort
 to automate budget execution data, expand budget execution reporting,
 and, ev~ntually, establish an integrated budget and accounting data base.
       1. The automation of budget execution data. A joint team of OMB
 and Treasury staff is currently designing a system that will allow agencies
 to electronically enter budget execution data on the SF-133 into a
 Treasury data base, which will be accessible to OMB. Beginning in
 January 1991, these data will be reported monthly.
       2. Expanded budget execution reporting. OMB will define
 additional budget execution data elements to provide disclosure of
 contingent liabilities and commitments.
       3. Establishment of single budget and accounting data base. This
 part of the initiative will merge the budget execution data base with other
 Treasury financial data bases to create a single uniform source of financial
 and budget information. Such a data base would eliminate the need for
 most individual- agency reports to Treasury and OMB.
       Establishment of this single budget and accounting data base is a
 long-term objective. Progress is underway, however, and the first
 components of the system will be tested in late 1990. Over the next 3
 years, the major tasks will be carried out by the Treasury Department.
 The project is scheduled to be completed by 1994.

.Amlited Financial Statements
       Our objective is to have agencywide audited financial statements
 produced in each cabinet department, EPA, and NASA by 1994. Today's
 session is an outgrowth of this effort. We have asked agencies to provide
 specific plans on how they will achieve this objective. As we review these
 plans, one of the things we are looking for is specific milestones that
 reflect measurable progress each year. For example, financial statements
 by program or agency components that lead incrementally to agencywide
 statements. We are generally pleased with the level of agency
 commitment reflected in the plans that we have received to date.
      Incidentally, 10 of our 16 target agencies are planning to produce
 audited financial statements-either for ·the entire agency or agency
 components-in fiscal year 1991.

 Summary and Closing
       Now that I've provided some detail on the component parts of our
 Five Point Program, I'd like to talk a little about the Program as a whole.
 First, as you have certainly gathered, it is ambitious and broad in scope.
 S~cond, its parts are closely interrelated-progress in each part will be




 8
dependent on progress in the other parts. Third, it is long-term. We are
not looking for quick fixes or immediate success.
      Take the example of audited financial statements. We would all like
to see the federal government produce audited financial statements that
are accurate, consistent, and meaningful-statements that could and
would be used to improve the management of the government. That is
clearly going to take some time, because first we have to have adequate
standards in place and our systems in shape. But, in the interim, requiring
audited financial statements is going to help assure that those standards
and systems improvements are made.
      What is attractive to me about this strategy is that it has big goals,
but a very practical, common sense approach toward meeting them.
     Clearly, this Program is worthy of our collective commitment. No
one should underestimate the importance of what we are trying to
accomplish. Federal government spending is over 1 trillion dollars a
year-one-fifth of our G~oss National Product. Without sound financial
control and reporting systems, billions of taxpayer dollars arc at risk.
      OMB, Treasury, JFMIP,and the CFO Council arc all playing major
roles in moving the Five-Point Program forward. Ultimately, however,
the Program's success will depend on you. The Administration can chart
courses and lay out plans, but, in the end, we're more on the sidelines
than in the game. You arc the players, and your agencies are where the
work gets done.
      I appreciate you attending this seminar-it indicates to me that we
have your support in tackling this critical issue of improving financial
management in the federal government. I. trust that the seminar will
provide you with valuable insights on how your agency should go about
preparing financial statements. Hopefully, it will also introduce you to
people to consult with after the seminar. If, at the end of the day, you
think there's a need for additional structured discussion and/or training in
this area, please make your voice heard. We are ready to listen and
respond.
     Thank you very much.




9
Qµestions and.Answers:
      Q - A number of people are here from smaller agencies today, and
they are very much interested. What will be expected of them from the
Administration's Five Point Program?
      A - We started with the larger agencies, but it's our hope that the
smaller agencies will be able to proceed with all of the parts of the Five
Point Program as quickly as possible. We will try to help some of the
smaller agencies along. Clearly, all agencies of government eventually
have to be in the same area of progress in fmancial management. In our
movement from 1991 through 1994, we expect that we will see progress
starting for parts of the agencies and building towards agencywide
financial statements.
      Q - Are means being considered to submit fmancial statements
electronically between agencies?
      A - I think it may be doable in the future, but we will need to do
that at the central level.
      Q - Will this process eliminate the need for the SF-220 series
reports-that's the balance sheet or portions of a balance sheet currently
prepared by the agencies-and the SF-225, which is a report on
obligations? Will these be eliminated in the future?
      A - Even though in particular agencies fmancial statements may take
somewhat different forms, eventually there will be standard reporting
requirements and some system for aggregating that information. For the
moment, the 220 series and the 225 will very much remain; Treasury is
looking at revisions in the 220 series and maybe over time that will
change. But the need for central aggregation will continue and so some
central series to bring together reports or the information on the reports
as the basis for the financial statements will still be needed.
     Q - How will adequate personnel and funding be provided for
implementing the Five Point Program?
      A - For the five volunteer agencies, we will be working with the
budget side of OMB right up to the director level to see if the plans
produce a completely credible way of achieving the objectives that I
mentioned. H the agencies require resources, I think I can assure that
those resources will be in the President's budget. Equally important, we at
OMB will be working with the appropriations subcommittees on the Hill
to assure that those resources are put into agency budgets next year as a
very high priority. Over the next 2 or 3 years, we hope to complete this
team approach in each of the agencies that I've mentioned so that we will
be able to move these fmancial management plans along.




10
      Q - What are Congress's plans to establish a chief financial officer
for the entire federal government, and how is this timed with the
Administration's Five Point Program?
      A - As some of you know, there are two bills introduced on the
Hill, one by Senator Glenn and a number of others, and one by
Congressman Horton and a number of others. There is a draft that is
being considered by Congressman Conyers and there may be other bills
as well. Within the executive branch, there is a fair amount of agreement
as to the kind of things that ought to happen at the agency level and that
ought to happen in terms of audited financial statements, and reporting
and the like. In terms of the central agencies and the central CFO, there is
no agreement within the administration either as to the structure or the
location of a central CFO at this time. That's something that will have to
evolve over the coming days but maybe not until next year. While there
are some forces that would like to get CFO legislation passed this year,
my guess is that the hearings that are underway in the House and will be
underway in. the Senate will probably set the stage for a more concerted
legislative look next year.
     Q - Would you comment on the prospects of funding of the Five
Point Program? Do you know what the aggregate U.S. Government
request is for this?
      A - I think that the prospects for funding, particularly as we move
through next year, will be very good because through the early parts of
the budget process and the appropriations process, we will have the whole
Administration working with the Congress to try and get these things
done. So I have very high hopes for next year. In terms of this year, we
got caught between going up with a budget amendment tha~ would have
added money for these purposes to agency budgets and the news at
mid-session review that we were going to have a much worse budget
deficit problem than we had anticipated. Therefore, we had to revert to
offsets as a matter of political reality. As far as OMB is concerned, we will
be putting the money in the budget and fighting for it, and our
experience where we have gone up and actually talked with committees
has been positive.
      Q - It seems to me that the success of the program will be heavily
influenced by Congress and their emphasis on the appropriations process.
Step three proposes to integrate finance and program information. Can
you provide further details?
       A - The success of the program will be heavily influenced by the
Congress and by the appropriations subcommittees, but we think we have
a fairly good wicket there. Basically, the HUD scandals and the publicity
given to some of the GAO reporting on particular agencies has energized



11
a number of folks on the Hill not to want to get caught in their oversight
capacities with something nasty coming along that they couldn't predict.
Since improved financial reporting is an essential part of the remedy, we
are getting very good informal reactions to the process by most
Congressmen and Senators. There are still concerns on the part of some
that financial reporting in accordance with what we hope will become
generally accepted federal accounting principles might prejudice certain
kinds of programs in that it will emphasize assets and liabilities in terms
of financial condition, whereas the budget, which is essentially a cash
financial document, doesn't do that.
      Generally speaking, we feel that the appropriations process will be
supportive. The integration of financial and program information-do I
have further details? Not in a technical sense, but as we go through these
financial management plans, I expect that the teams will come back with
some technical points on how to make progress in particular agencies and
programs.




12
                                  Chapter2
                                  Subcommittee on
                                  Audited Financial Statements




                                  As representative of the CFO Subcommittee on Audited Financial
                                    Statements, I would like to tell about the representation of the
                                  subcommittee and some of its objectives since it has direct relation to the
                                  a~enda of audited financial statements. The subcommittee is comprised of
                                  aght agency representatives from the General Services Administration
                                  and the Departments of Agriculture, Defense, Energy, Health and
                                  Human Services, Labor, Transportation, and Veterans.Affairs. We also
                                  have representatives from the central agencies--Office of Management and
                                  Budget, the General Accounting Office, and the Department of the
                                  Treasury--and from the President's Q>uncil on Integrity and Efficiency.
                                         What is this subcommittee all about? Th.is seminar is the first
                                   agenda of the subcommittee. However, the prime responsibility of the
                                   subcommittee is to review the SF-220 agency reports (financial
                                   statements) and the processes it takes to produce those as well as the
                                   current initiatives for audited financial statements. We will also look at
u,.,., Bismhsrl
Dep11/rtment ofHealth and Human
                                   trying to ensure that we have an integrated reporting process between the
                                   reports which go to Treasury and the final audited financial statements
                                   that are being called for by the President and OMB.
SerPices
                                         We plan two different products. The first will recommend to
                                   whatever body is appropriate at the time-given that we might have a
                                   CFO or we might have a financial accounting standards board-changes
                                   to the federal agency financial reports (SF-220) that are submitted to
                                   Treasury and any changes on issues that we feel need to be addressed with
                                   accounting policy in producing a set of revised SF-220 reports. We hope
                                   to complete that deliverable by March 1991 and, in the process, ensure
                                   that it is integrated with the new standard general ledger. The second task
                                   will be to look at additional issues that one would have to deal with once
                                   revised SF-220 reports are submitted to Treasury and audited financial
                                   statements are prepared. One of the big differences is timing-when do
                                   you submit reports to the Department of Treasury and when do you have
                                   your final product that has been fully audited?
                                         Our CFO Subcommittee has sent out a survey form to most of the
                                   agencies with the objective of learning the current problems that agencies
                                   are facing in preparing the SF-220 reports and issues that they have to
                                   deal with concerning audited financial statements. A number of agencies
                                   are either in the process of producing some form of audited financial
                                   statement, or-as have these four agencies up here-have already
                                   produced them. We hope to have our review of the timing problems and
                                   related issues completed by September 1991. We may consider holding a
                                   second seminar, maybe in April, to let everyone know the trials and
                                   tribulations that everyone went through to produce the fiscal year 1990
                                   reports, as well as the Subcommittee's findings on SF-220 reports and
                                   issues with accounting and policies. The Subcommittee may also serve as
                                   a clearinghouse, and we will soon write to agencies and provide telephone
                                   numbers for information exchange.




                                   13
                                  Chapter3
                                  Panel Session onAnencies' Perspectives:
                                  General Services Aiiministration




                                   Good morning. GSA prepares annual consolidated financial statements
                                      and our statements are audited by the public accounting firm of Arthur
                                   Andersen & Company. Jay Meriwether and I are going to give you two
                                   different perspectives of what it was like to go through those audits and
                                   this afternoon Bob Suda, also of the GSA Office of Finance, will be
                                   moderator for our workshop session. The panel members will try to
                                   answer questions you might have concerning the financial statement
                                   audit, one that is conducted by a public accounting firm. Everyone on the
                                   workshop panel has multiple years of experience in this audit process.
                                         GSA's administrator is Mr. Richard G. Austin and he presides over
                                   the very diverse functions of the General Services Administration-all of
                                   those supplies, buildings, telephones, and ADP services, actually a rather
                                   substantial financial organization. In fact, if GSA were a private company,
                                   we would rank number 72 on the Fortune 500 list. We have annual sales
Le&y Boucher                       that exceed $6 billion, and we make almost 2 million payments to over
General Services Administration    100,000 vendors each year.
                                         We started preparing consolidated financial statements in 1980. At
                                   that time, we prepared a statement of changes in financial position and an
                                   abbreviated consolidated income and cost statement and, as you might
                                   expect, it was not quite complete and not quite right. We couldn't figure
                                   out how to handle the national stockpile activities at that time, so we did
                                   the easy thing, we just left it out.
                                          By 1982 we had added a consolidated balance sheet, comparative
                                   data, a brief summary of the results of operations, and format changes to
                                   the statement of changes in financial position. Up to this point we were
                                   still preparing the annual consolidated statements for our own use within
                                   the Office of Finance. We took our first big step in 1983 by publishing
                                   our consolidated statements as part of the GSA's annual operating
                                   summary. The report included the three primary financial statements,
                                   descriptions of significant accounting policies, supporting notes, and
                                   schedules. The 1984 statements were fundamentally the same as 1983,
                                   although we did try to implement the requirements of the new (Policy and
                                   Procedures Manual for Guidance ofFederal.Agencies) Title 2 and we finally
                                   included the national stockpile activities.
                                        In 1985, the General Accounting Office decided to audit our
                                   financial statements. That first year was truly a learning experience for
                                   both GAO and us. Every time we got together there would be new news
                                   on what the process would be and what the products would be. We pretty
                                   much dog-eared the 1985 AICPA publication calledAccounting Trends
                                   and Techniques, an annual survey of how 600 different firms present their
                                   financial statements. With so many options and the process so new to us,
                                   it is no wonder that things kept changing every time we got together.




                                   14
     When we started, we didn't even know that there would be four
products resulting from the audit, those products being the
       - auditor's report
       - report on compliance with applicable laws and regulations
       - report on internal controls
       - management letter recommendations.
      We were audited solely by the GAO for 3 years and we received a
qualified opinion in each of those years. In 1988, we began the transition
to having the audit performed by an independent CPA firm. Our IG
conducted a competitive procurement and Arthur Andersen & Company
was selected to audit our 1988 statements. For 1988, they were
responsible for all aspects of the audit except for one revolving fund, as
the GAO was still responsible for the Federal Supply Service General
Supply Fund. GAO fed the results of their audit to Arthur Andersen &
Company, which was responsible for the overall audit results. For the first
time, in 1988 the GSA earned an unqualified opinion.
      Our 1989 statements followed the same format as the previous 4
years. Arthur Andersen and Company conducted the entire audit and
performed the FMFIA A-127 review. We saved a tremendous amount of
time and energy in 1989 by using a personal computer software
package-an automated mapping program-to consolidate various trial
balances. This step is absolutely essential for us to complete our work
timely. We also earned an unqualified opinion in 1989.
      At GSA we have to consolidate various types of funds including
revolving, general, specific, and deposit. But with that, there really are,
without question, just three funds that comprise all the work; these are
the revolving funds for
       - the Public Building Service,
       - the Information, Resource and Management Service, and
       - the Federal Supply Service.
      The audit process for us begins in July with discussions on the audit
plan and with status meetings with our services. This is followed by the
preliminary field work being accomplished before the end of the fiscal
year. From that point through the end ofJanuary, all critical activities
take place, some over and over again. Following resolutions, we expect an
auditor's opinion some time around mid-February, and we have received
all four products by the end of April. Just like you will have, we have had
our start-up problems; each of the services is directly involved with the




15
process and there was some initial resistance and fear both within our
services and within the Office of Finance.
      The process initially took a lot of time and effort to accomplish until
we finally learned what to do and, of course, how to do it most
effectively. Initially we couldn't always find the back-up that we needed to
support some of the accounting entries that we had made; these were the
significant deficiencies we encountered for the first 3 years of being
audited. You would think that all of our receivables would be collectible '
since all of our customers are our sister agencies. Unfortunately, this is
not true, but also unfortunately we never acknowledged that fact and we
would keep receivables on the books just about forever. Due to the audit
process, though, we established appropriate allowance for bad debt
procedures in each of the revolving funds. Another early problem was
that in our Public Building Service, we frequently had either not recorded
or had misclassified work in process and completed construction.
     Now, you know there is a year end and I know there is a year end.
We know there is a pipeline and you would think because of that we
would get all the year-end accruals in. We didn't. We still don't. It is
always going to be something; you'll miss something every year. Some of
our reconciliations within the funds were either ignored or they were not
done on a timely basis. This occurred in part because of the
overwhelming work that initially had to be organized for us when we
consolidated our accounting operations into two regions. The
reconciliations not getting done also resulted from our orientation at that
time-we had always had a payables and receivables frame of mind. We
did only a so-so job in the area of accounting control and we didn't have
to do otherwise because no one was looking over our shoulders.
      Doing the financial statement audit certainly changed that. We have
redirected appropriate attention to accounting control and I must admit
that we are much, much better accountants because of it. We initially
lacked clear-cut year-end cut-off procedures for our clients and our
components to follow; now we have them in place.
       Of the four products that result from the audit of financial
statements, we are all familiar with the auditor's report and, of course,
our aim is always to earn an unqualified opinion. You will receive a report
of compliance with applicable laws and regulations; the auditors look to
see if, in fact, we follow all of the rules and regulations that have been
established for the conduct of our business. If they find that we are, in
fact, following all the rules, then they can feel reasonably comfortable that
our financial statements are materially correct. You will also receive a
report of internal controls. Here the auditors check to see whether or not
they concur that controls are in place to safeguard the assets of the




16
agency. They review policies and procedures established for income,
expenditures, control of assets, and financial reporting. Lastly, and in my
opinion most useful, you will receive the management letter
recommendations.
      The management letter is your road map for the immediate future.
It contains all the deficiencies that were found that did not materially
affect the financial statements but were, nonetheless, errors that need to
be corrected. We had 54 such deficiencies in 1988 and 51 deficiencies in
1989. If you don't correct something between the fiscal years, the error
will come back to haunt you on the next year's management letter.
      Clearly, orte of the benefits of being audited is that you get to work
with some very objective accountants who are also very competent.
Sometimes we don't see the forest for the trees, and sometimes we do,
and when we do, it is sort of nice to have your processes validated And
the management letter, again, not only identifies management
deficiencies, but it provides the clout within your agency to get those
issues resolved. Remember, they're there forever unless something is done
about them.
      When you say that you've been audited, you are saying that an
outside force has commented on the quality of your stewardship role. I
believe this adds tremendously to your credibility, and it supports all your
related financial responsibilities. Lastly, and in no way least, the public's
confidence in us is raised by having our financial statements audited by a
public accounting firm.
      Here's a picture of where we were and where we are. Two
accountants dedicated for 4 months complete the consolidation process to
see the audit through completion; that's pretty much what we now expect
this commitment to be. Of course, there are still regularly scheduled
status meetings attended by the program managers, accountants, and
auditors for the entire time period from July through February.
      I think that we're doing a pretty good job at GSA. I think that the
annual audits certainly have played a large part in our success. I do truly
believe it is one of the reasons why we have been so successful. It has
truly made better accountants of us. Of other things that have helped, one
is that we have one centralized accounting system for the agency. We also
went through a major consolidation in 1986 so that all of our accounting
operations would be performed in only two regions. The work ethic of
the people of Kansas City and Fort Worth, in my opinion, is unmatched;
they do a tremendous job for us. And, lastly, we conduct our own
internal reviews each year in each region in payables, receivables,
accounting control, and accounting operations to make sure that they do




17
                        a good job for us; we have check lists for each of these areas and each
                        check list exceeds 100 items.
                             Now Pd like to tum the program over to Mr. Jay Meriwether of
                        Arthur Andersen and Company.


                        1bank you, Roy. You did a great job in terms of giving that overview.
                           It's really gratifying for me as an auditor to sit here in front of such a
                        large group and see the interest that is being demonstrated in the
                        program that Frank Hodsoll outlined for you this morning and also to see
                        the interest in specifically the auditing of financial statements. We do
                        believe that there is a value to that process and a value that we can
                        contribute as part of that process. It's nice to get up here and be able to
                        tell or take part in telling a success story, and the GSA development of
                        their consolidated financial statements and the auditing of those financial
                        statements is a real success story where a great deal of that success goes to
                        the auditee.
                              In our review, the key success factors have been planning and
                        preparation by the agency, a good process, as Roy has outlined for you,
                        in the year closing and reporting procedures, the consolidation-the
]tiy Meriwether         streamlining of that, the coordination of gathering information from the
Arthur Andersen & Co.   various services, bureaus, and other points throughout the agency. A
                        positive attitude-one of "this will be a beneficial exercise"-not one of
                        "here comes the auditor again." It requires a buy-in from management
                        and GSA did have that from their senior management and that includes
                        Dick Austin. Also, that sort of buy-in and that support, I think, trickles
                        down to financial managers and it makes them want to do a good job
                        because they believe that it will be well recognized and well rewarded.
                              Team work between the auditee and the auditor is critical; that's
                        something that we set up early on in our process and have adhered to
                        faithfully. It means biweekly status meetings throughout the key points of
                        the audit process with the financial management, with key people from
                        the different services, and also with the Inspector General's Office
                        responsible for overseeing our contract. Sometimes those meetings are
                        only 10 or 15 minutes long with each one of the groups, but we found
                        that just getting together regularly to make sure that we're
                        communicating where we are and to hear any comments that the
                        individuals have to offer to us has been helpful in the process. It has
                        helped in terms of the timely resolution of issues that were identified in
                        the preliminary process or early in the beginning of the final work so that
                        those don't become things that hold up the conclusion of the audit work.




                        18
     As Roy mentioned, this past year we were really ready to sign off by
January 31 on the financial statements, and I think that's a real tribute to
GSA and what they were able to do. That's not far behind what the
private sector is expected to do in terms of their lOK reporting
requirements.
      The key issues that have to be addressed by the agency are support
for balance sheet accounts, something that, as Roy mentioned to you,
GSA struggled with over a period of several years before they got it right,
but I think they've got it in good shape now; recognition of all liabilities
that aren't necessarily required in the budget reporting but are needed for
the financial reporting; support for key footnote information regarding
interagency activities, leases, commitment and contingencies; legal
contingencies; working with the general counsels within an agency; and
getting them to opine and share information with you is a real challenge.
But we worked through that one and got what we needed.
       Key areas to address are making sure that we focus early on the state
of the data processing system, the controls, the effectiveness and
efficiency with which it puts forth the information. Always in question to
me as an auditor is how long is this going to take and what is the level of
effort and the answers arc that it depends. It depends on the size of the
organization, the complexity of the transactions they're involved in, the
number of physical locations, the strength of the internal control
structure, the condition of the books and records-what is required of the
first-time-through effort to get the road map developed to be able to do
that audit.
      In GSA's case, we were able to come in and follow the GAO audit
efforts, and I think that they really laid the groundwork for our successful
audit. We had some basis of evaluating what the effort would be, based
on what GAO and the GSA IG staff had spent in the 1987 audit; that was
roughly 22,000 man-hours. We took a little bit of a gamble that first year
and we guessed that we, over a couple of years, would be able to cut that
time in half. And we relied upon certain productivity methodologies and
techniques that we have in place. We sensed that there was   an improving
internal control environment within the agency and that we had a group
of people who were willing to work with us to make this a successful
effort. We were able to do the 1989 audit in 11,000 man-hours; I think
that we did a good job, we have a client that is happy, and we did have a
few things to offer to them in ways of suggestions and improvement in
terms of the 51 management letter recommendations.
     Thank you for your interest and your attention.




19
                      Panel Session on Anencies' Perspectives:
                      Department ofLauor




                       Jlte Department of Labor offers perhaps an interesting contrast to the
                           General Services Administration. Of course, we deal primarily in social
                       programs, highly decentralized, and we don't have perhaps the same
                       degree of systems consolidation that GSA has. Being a social
                       program-oriented agency, our programs offer some unique problems that
                       I'll be getting into in terms of producing financial statements. Let me just
                       give you a little history. Our effort really took off back about 1985; we
                       don't have nearly the experience GSA has had, but in 1985 our Office of
                       the Inspector General undertook a study to determine the feasibility of
                       producing financial statements. Upon concluding the study, which came
                       out very positively, we got commitment from then Secretary Brock and
                       our Assistant Secretary for Administration and Management, Tom
                       Komerek.
                            The IG has really taken the predominant role in our agency and has
Michul Griffin        designed, compiled, and audited those statements. There have been
Deptirtment ofLabtw   comments about the propriety of both compiling and auditing,
                      but-remember, 5 years ago, management was very heavily into building
                      financial systems-management participation was somewhat limited. In
                      light of that, I did not feel uncomfortable with the IG's role, and we have
                      a very positive working relationship with our Inspector General. The
                      Office ofIG took the primary lead in researching financial statements that
                      had been produced in the federal, state, and local governments; at that
                      time, GAO's (Polky tind Procedures Manual for Guidtince ofFederal
                      Agencies) Title 2 was being modified, and that was very topical. At the
                      same time, Treasury was modifying the SF-220 reports, and that had a
                      profound effect upon our overall effort.
                             An initial stage of the IG's work was an in-depth review under a
                       control and risk evaluation (CARE) methodology. We saw hundreds of
                       pages of flow charts that we were asked to validate; there was a very
                       extensive CARE review throughout our department. In retrospect, that
                       was a very important stage for us, a very important step for us to have
                       gone through because it provided the audit community with a basis for
                       getting in and doing the audits, for doing sampling on the systems, for
                       validating information from our systems, and the process produced the
                       foundation for proceeding with further financial statement compilation
                       and audit work.
                            We have prepared fmancial statements for each of the past 4 years.
                       Our 1989 statements are fully compatible with Treasury reporting
                       requirements, and, we feel, with GAO Title 2 fmancial disclosure
                       requirements. We have used the statements in a broader annual report
                       issued by the Secretary of labor, and we hope to continue to issue official
                       consolidated statements with consistent supporting information, program
                       information, and supporting detailed financial data related to those



                       20
Department ofLabor




 programs. And we want to issue the statements along business lines,
 recognizing that in the federal government there are perhaps some unique
 presentation problems.
        By far the greatest financial activity within the Department of Labor
 is in the Employment and Training Administration, primarily two lines of
 business, one the Unemployment Trust Fund and the other the Job
 Training Partnership Act. The Unemployment Trust Fund is a very
 highly decentralized delivery system of income security benefits to the
 unemployed; it is run by the states with oversight provided by the
 Department. Perhaps two-thirds of our total assets come from it. The
 Employment and Training Administration also administers the Job
 Training Partnership Act, a grant program of some $4 to $5 billion
 annually. Further, it administers the Job Corps Program with
 approximately 100 Job Corps Centers throughout the United States.
       Our next agency, the Employment Standards Administration,
 administers two benefit programs of great importance and substantial
 assets and liabilities. One is the Federal Employees Compensation Act;
 the other is a trust fund, the Black Lung Disability Trust Fund, that pays
 medical disability and survivor benefits for disabled coal miners. The
 Black Lung Disability program is unusual in that it is set up as a trust
 fund; there are earmarked receipts for the trust fund and yet there are
 congressional appropriations limitations that are placed on it, a fact that
 has presented some unique display problems. The Employment Standards
 Administration also administers regulatory programs in the workplace in
 terms of wage-hour and child labor laws.
      Several other agencies administer enforcement programs including
 Safety and Health, Mine Safety and Health Administration, and the
 Pension Welfare Benefits Administration (administers Employment
 Retirement Income Security Act laws). These are very labor-intensive
 programs, totally separate entities within DOL, and very different in
 character from the Employment and Training Administration.
      DOL is not a large agency by employment standards (about 18,000
 FTEs) but we have a very diversified set of programs. Our agencies or
 administrations have varied combinations of Treasury SF-220 reporting
 requirements; in auditing, four discrete audits were done (of
 Employment and Training Administration, Employment Standards,
 Occupational Safety and Health, and Mine Safety and Health) and
 another represented consolidating those discrete audit entities and
 including smaller entities.
      DOL is using an integrated accounting system, the Department of
 Labor Accounting and Related Systems (DOLARS}, which is undergoing
 redevelopment. The Department is seeking greater integration of systems.



 21
Department ofLabor




 For compilation of financial statements, a number of external data sources
 outside DOL systems must provide data. The Treasury Department, for
 example, is a major source of information for the Unemployment Trust
 Fund as IRS collects employer taxes that feed into the trust fund. Certain
 information related to the Unemployment Trust Fund and major grant
 programs is collected from the states.
       Initially, our SF-220s were not used as a basis for the Inspector
 General's work. The CARE review that I mentioned earlier identified a
 lot of information that simply wasn't getting consolidated and
 coordinated in our departmental system; our Employment and Training
 Administration had several systems that weren't fully tied in with our
 departmental system and its production of SF-220 reports. We had
 multiple reporting responsibilities, or dual reporting responsibilities, with
 the Treasury Department and we were not reporting the full scope of
 Unemployment Trust Fund activity in our 220s. The full scope of
 activity, however, was picked up in the financial statements-this area
 shows a govemmentwide coordination problem th3tt I suspect many of
 you may get into with major funds, perhaps, if you use Treasury as your
 ban.king agent.
        The audit compilation work performed by the Inspector General
 identified a variety of problems related to actuarial liabilities not being
 fu.Hy identified in our SF-220s, accrual estimates that simply weren't
 booked, summary data pulled in from subsidiary·systems which failed to
 reconcile with department system data, and inaccuracies that had to be
 addressed.
       Let me talk a little bit about the resource requirements. I mentioned
 earlier the CARE review that was undertaken; that cost approximately
 $1.5 million and was conducted over approximately an 18-month period.
 The design and feasibility work cost approximately $1.4 million.
 Compilation and audit work in the first year ran roughly $2 million. So
 we were running between $5 and $6 million overall in front-end costs in
 the first couple of years to do the CARE review work and to do the
 design work on the financial statements. With that investment, there has
 been quite a decline in costs. In 1987 our costs for contract audit and
 compilation was $3 million; $2millionin1988, and $1.9 million in
 1989, so you can see that the costs do go down dramatically but that it is
 the front-end that is a little scary.
       What benefits have we effected from this major effort? I think
 primarily the internal control and audit findings have really gotten the
 most attention of management, and I provided you with a listing of some
 of the major problems that were identified. Our general ledger and our
 central accounting system did not reflect all financial activity of the




 22
Department ofLabor




 department with respect to capitalized property accounts receivable and
 the information in the Unemployment Trust Fund that had to be
 coordinated with Treasury. Our subsidiary records were not accurate;
 they were incomplete and did not tie in with the general ledger. This was
 important with respect to the grant contract management subsystem and
 a departmental property management system. We had the misclassified
 obligations that I referred to earlier, and we had problems in developing a
 methodology for computing the liability for future benefit payments that
 were not based on sound actuarial principles.
       Being responsible for Section 4 certifications at year end, you can
 imagine that to have such an extensive review of our systems and audit, I
 view that as a tremendous benefit. I sleep a little better submitting that
 report, sending it forward. More importantly, it has really guided our
 management in revising our systems, modernizing them, and replacing
 systems. It has brought our agency closer together; in the past, our
 SF-220 reporting had been done primarily at the departmental level with
 very little attention given to it in our agencies.
      In many cases, as I have shown you, much of our detail that needs
 to be verified and audited is in those agencies. So we feel that our
 agencies and agency heads should have a stake in the SF-220 reporting,
 which leads to the audited financial statements. We have found that our
 data integrity has improved, particularly in areas that are not budget
 related, i.e., in certain proprietary accounting lines as our enforcement
 agencies all maintain a fairly healthy debt portfolio related to assessments
 of employers in the workplace. With these audit findings, for the first
 time some of that infomiation started making sense. Beyond that, we
 found that people are actually starting to manage those debt portfolios
 much better and that is an important consideration.
      Considering the next steps, the good news is that the financial
 statements we have produced have been largely a product of the Inspector
 General; we have prepared the same plan as many of you have to transfer
 the compilation expertise to management. It is going to be a major effort,
 and a systems changeover is one of the complications that we will
 experience, one that will require a whole new set of detailed operating
 procedures for compiling those statements.
       We need to revisit special issues as they come up. The
 Subcommittee's work certainly will have an impact on us. We need to
 examine the number of audit reports, I think, that are issued and I think
 we are starting to reduce their number. We issued five separate audit
 reports in prior years; I believe we are working toward still compiling on
 the sam.e basis but limiting the number of audit reports that come out of
 the effort.




 23
Department ofLabor




       We want to tty to get away from some of the layering of the audits,
 continue the same scope, but cut down on the volume of audits
 circulating in the department. We need to build and are working on a
 better reporting capability for our SF-220 report generation. Our audits
 have come out with reasonable timeliness, but with room for
 improvement. We manage to get the audit statements out by March, but
 some of the internal control reports and the management representation
 material does not get processed as quickly as it should and that is
 important if we are going to meet our objectives in that area.
       We feel very strongly that the SF-220s should serve as a basis-a
 final step-before the compilation of audited statements. We're very
 supportive of the effort to use the SF-220s as a bridge to the final
 production of audited financial statements. We are, of course, looking for
 a common set of principles and guidelines so that the substance of our
 reports settles down; we're hoping that the outline that Frank Hodsoll
 provided us this morning will help settle and stabilize financial reporting
 so that we can get on with the job.




 24
                                 Panel Session on Anencies' Perspectives:
                                 Social Security Ailininistration




                                 It is a pleasure to be here with you to share some of our experiences,
                                   some of our problems, that we have had over the course of the last 3 or
                                 4 years in doing financial statements. It goes without saying, I think, if
                                 there was one common theme that ran across all the presentations that
                                 have occurred up until this point in time, that one of the most critical
                                 elements in being able to do an audited financial statement is your
                                 relationship with the auditor.
                                        In our,case, we were particularly fortunate to have Dick Kusserow
                                  and Tim Trockenbrot who asserted a commitment, a leadership, to this
                                  effort and made sure that it occ\irred. Without that effort, without that
                                  collaboration and cooperation, it couldn't have happened. By far, I think
                                  the greater burden in doing the financial statements, assuming that your
                                  systems are such that you can pull the information together, falls heavily
                                  on the audit side.
Nomuin Goldstein
                                        Certainly that was the case at SSA. We chose to do financial
Social Security Administration
                                  statements about 3 1/2 years ago. We did that as one of our initiatives to
Dep11mnent ofHealth a-nd Human
                                  try to instill and improve the public confidence in the administration of
Sm1kes                            the Social Security Trust Fund. As you know, over the course of a
                                  number of years, there has always been a question mark as to how well
                                  Social Security is doing, whether the trust funds will be there. One of our
                                  interests has been trying to promote public confidence in the trust funds
                                  that fh:ey will be there and our ability to exercise a fiduciary responsibility
                                  over those trust funds; that we do, in fact, take it seriously and that we
                                  want to do a good job in doing so.
                                         Another reason why we wanted to embark on doing audited
                                  financial statements is the desire to operate in a more business-like
                                  fashion. We felt that this was an important element in any activity that we
                                  did, we wanted to make major decisions in a business-like fashion, and we
                                  thought using audited financial statements was one vehicle by which we
                                  could further our objectives of operating in that fashion in the sense that
                                  it instilled greater professionalism, discipline and accountability into our
                                  accounting staffs, into the organization as a whole, and we thought that
                                  would serve a useful purpose.
                                        By way of background in terms of what Social Security is, we
                                  administer a program that approximates $250 billion a year. By far the
                                  largest bulk of that money obviously is in the trust fund payments to
                                  beneficiaries. Our administrative budget is something on the magnitude
                                  of $4 billion a year. We administer funds that are funded out of general
                                  revenues as well as trust funds. One of the first decisions that we had to
                                  make was whether or not we wanted to do the final statements with
                                  particular emphasis strictly on the trust fund side of it, or did we want to
                                  incorporate the general fund side of it as well.




                                  25
Social Securi;ty Administration




       Because of the closely-intertwined nature of our activities, we chose
 to have all our operations subjected to financial audit. We are a
 decentralized organization in that we have 1300 field offices and 10
 regional offices and other facilities throughout the country. Nonetheless,
 we operate a centralized accounting operation. I think that, too,
 contributed to our ability to pull together the effort to do the financial
 statements. If, in fact, you had a decentralized accounting operation, I am
 sure the efforts of coordinating the pulling together of that information
 would add a degree of complexity that we didn't have to deal with
 specifically within SSA.
       Another issue that one needs to decide when going forward with
 the effort of doing financial statements is the mechanism by which you
 want to publish your financial statements. In SSA's case, we considered
 three objectives. Each year we published what we call a trustee's report
 which is basically a cash-based report projecting the health of the Social
 Security Trust Funds; the report strictly deals with the trust funds and it
 is predicated on actuarial estimates and forecasts where we'll be 75 years
 out.
       Another alternative was stand-alone financial statements. A third
 alternative was publishing them in the SSA annual report which we're
 required to issue by May 1 of each year. We chose to put it in the SSA's
 annual report because it did have widespread publication; and it was a
 document that was known. We wanted it to be a first-class effort. The
 addition of the financial statements, we felt, would enhance the annual
 report and the utility of the annual report. Making that decision led to
 certain other constraints about which I think you have heard from some
 of the previous speakers-that is, it sets up a series of time frames which
 when you're first embarking on the process seem almost insurmountable.
       Nonetheless, where there's a committnent and, thanks to the efforts
 of GAO and I guess some of the baseline experience that they had
 attained over the course of the years, we were able to construct a scenario
 where, in fact, it was possible to do. But to give you a flavor of how this
 drives the process, we basically for fiscal year 1990 are providing 24 days
 to close the books and another 18 workdays to prepare the financial
 statements.
      We have essentially allotted 39 days to the Inspector General's
 Office to perform their audit of these financial statements. As you have
 heard from some of the previous speakers, it's possible to do. It does take
 advance planning and coordination. It also takes teamwork both from the
 operating agency level as well as from your auditor. After you've gone
 through the review of the financial statements, by the time you go
 through the publication process, the proofing, the editorializing, and




 26
Social Securi-ey .Administration




 allow the printer 30 days to print the document, and if you want to get it
 out, and in our case our goal is to get it out by March 15, that really
 tightens up the time frames by which the process runs. So you really need
 to make a commitment to do it and to pull your thoughts together on
 how to approach it.
        From a staff point of view, we estimate that it takes something like
 3 or 4 work-years of effort to do this effort. Pm sure Tim will let you
 know that from his point of view; he has invested a lot more time than
 we have. Obviously, prior to the closing out of the reports and prior to
 the close of the fiscal year, we go through a lot of activity to gather
 information for the auditors to go to our actuarial staff to get estimates of
 liabilities, contingent liabilities, and so forth.
       There is a lot of discussion that occurs in order that we can meet
 these time frames that we spoke of. Because SSA has both trust fund and
 general fund responsibilities, one of the issues that we had to face, and in
 some if not all cases I'm sure you will have to face too in your
 relationships with Treasury and GSA, is how to get information that is
 necessary to incorporate into the financial statements. Certainly in our
 initial year we went through a process with GSA as to whether buildings
 should be reported or reflected on our financial statements or on their
 financial statements. This was specifically the case as related to buildings
 that were paid for by the trust funds.                         ·
       We had to get general counsel opinions. So there is a certain
 amount of thinking of what happens when you have interagency
 relationships. We have a similar situation with Treasury where they do all
 the tax collections, the FICA tax collections, and so forth, and how that
 information gets incorporated into our financial statements, the kinds of
 alternative audit techniques that the IG has to go through to satisfy
 themselves as to the reasonableness of the numbers being reported to us,
 all pose additional problems and issues that riced to be discussed and
 addressed in the initial efforts to pull together financial statements.
       Another issue which I would share as a govemmentwide issue is the
 issue of materiality. I think that there needs to be feedback from OMB in
 terms of the efforts that have occurred up to this point in time. I think
 that we don't really have a good baseline of experience as to what
 constitutes materiality and what is the paradigm for a qualified or
 unqualified opinion. In our case we have $163 billion of assets and we
 run into situations where we might not have a particular aspect of an
 inventory that ties in with the general ledger, for example. That raises
 questions so that we get into theoretical discussions as to how it should
 be reported. There probably isn't as good a base of information and
 experience as to the kinds of issues that should be dealt with in terms of




 27
                                Social Securi:ty Administration




                                 the presentation of materiality and how those qualified versus unqualified
                                 opinions would be provided. I think we want to make sure that
                                 govemmentwide we can have some consistency of application of those
                                 principles and there's a need to oversee that overall process to ensure that
                                 the consistency is occurring.
                                      With that, I'd like to turn it over to Tim who can share with you
                                 from his perspective the task that he had to undertake in auditing our
                                 statements.


                                 Thanks, Norm. I thank you for your introductory comments concerning
                                    our relationship; I'm sure some of our staff might have had some other
                                 comments at the conclusion of the exit conference. It sometimes occurs.
                                 But nevertheless I think it was a very good working relationship with
                                 SSA, and that we're very happy for. Norm has given you some insight
                                 into the preparation of a financial statement for Social Security. And what
                                 I'd like to do now is to cover some of the issues that are involved in the
                                 audit of these statements. Now many of us in this audience had not
                                 embarked on this, as I understand, but you may in the future. What Pd
                                 like to do is to give you background information regarding the Office of
                                 the Inspector General at lllIS. I think this will put the enormity of the
                                 task in perspective, especially when one considers the budgeted outlays of
                                 the Social Security Administration represent over 64 percent of the total
                                 in the Department of Health and Human Services. The Office of the IG
                                 is responsible for the audit and investigations of over 300 programs
Timothy Trockenlwot              administered by the Department. Major programs and agencies besides
Department ofHealth and Human    SSA include the Health Care Financing Administration which is
                                 responsible for Medicare and Medicaid programs; the Public Health
                                 Service which is responsible for the Food and Drug Administration,
                                 National Institutes of Health, the Centers for Disease Control, and a few
                                 other programs; the Family Support Administration which handles the
                                 Aid to Families with Dependent Children; and the Human Development
                                 and Services group which handles many of the aging programs in the
                                 Department. I mention this because with a total staff of only a little over
                                 650 auditors, resources to perform a full range of audits of these
                                 programs are already scarce.
                                      The decision to participate in the preparation of the audit of Social
                                 Security's financial statements, I believe, was a joint decision which
                                 included the former Commissioner of Social Security Dorcas Hardy,
                                 Comptroller General of the United States Charles Bowsher, and Inspector
                                 General Dick Kusserow. Obviously, with this level of support, all systems
                                 were "go" because a decision had been made that "we're going to do it"
                                 and we did. I'd like to mention, though, that is was very fortunate to have




                                 28
Dick Kusserow at the helm because Dick is a very strong proponent of
the CFO concept and the improvement of financial management in the
government. In fact, he is testifying this afternoon before the House
Committee on Government Operations in support of the Federal
Financial Management Reform Act of 1990.
      Some issues and concerns that I would like to mention include, first,
staffing. Fortunately, on my staff at the time I had several CPAs and I
could assign a number of them to the audit. A problem was that they had
limited experience in auditing financial statements for the purpose of
expressing an audit opinion. For assistance,we turned to GAO which had
detailed to us an auditor well experienced in the audit of federal agencies,
financial accounting, and preparing financial audit statements. This
individual, Jim Nycum, now with DIIBS, worked side-by-side with
Dennis Snyder, our present audit manager who has been the manager on
this assignment for 3 years. Both will be at this afternoon's SSA
workshop. I must say, too, that both Dennis Duquette of GAO and his
financial management division have been tremendous supporters of our
efforts throughout the entire engagement because when we first began on
the audit, it was "where do we begin?" Dennis had provided us
considerable counsel and advice. We also called upon GAO for assistance
by their actuarial staff with the actuarial projections that we had to face at
Social Security in the unfunded liabilities.
     Further, GAO provided training for all staff assigned to the audit by
giving the Controls and Risk Evaluation (CARE) course. CARE was
developed by GAO, first, to identify and evaluate the adequacy of
controls and accounting systems of an agency and, second, to determine
the degree of conformance of these systems with accounting principles,
standards, and other requirements.
      I think it's important to note, and we did early in the second year,
that it is management who is responsible for the statements. The
Statement on Auditing Standards, SAS No. 58, titled "Reports on
Audited Financial Statements," April 1988, added the wording to the
introductory paragraph of the opinion letter differentiating management's
responsibility from the auditor's responsibility, a very important
distinction. We incorporated revised wording in our opinion on Social
Security's financial statements for fiscal year 1988, and that continued for
1989 as well. Management is to acknowledge awareness of its
responsibilities for the fair presentation in the financial statements of
financial position, results of operation, and changes in financial position
in conformity with generally accepted accounting principles for federal
agencies-(Poli&y and Procedures ManuaJ for Guidance ofFederal Agencies)
Title 2-as we refer to it, in the management representation letter it
provides to its auditors. This is required by the Statement on Auditing



29
Standards No. 19. The management representation letter also covers
items such as availability of records for audit, the absence of errors or
irregularities, information regarding subsequent events, violations or
possible violations of laws or regulations, and other matters.
      The audit standards also provide for obtaining a legal representation
letter from the agency's legal counsel as required by the Statement on
Auditing Standard No. 12. The purpose of this letter is to determine if
there are any pending or threatening litigation claims or assessments and
to provide an estimate of the potential loss. Now the auditor's
responsibility is to express an opinion on the financial statements based
on the results of the audit. The results of the audit are expressed in
       - an opinion letter on the financial statements which is to be
         included in publication with the financial statements
       - a report of internal accounting controls covering the auditor's
         understanding of the agency's internal control structure and the
         assessment of control and risk, and
       - a report on the auditor's test of the agency's compliance with
         applicable laws and regulations.
      GAO's Office of Policy in concert with GAO's Accounting and
Financial Management Division issued a guide which has been very
useful; it's titled "Assessing Compliance with Applicable Laws and
Regulations" and dated December 1989. I think that for those who are
getting underway early on audits, it is a very good idea to refer to these
and other publications I'll mention in a moment. The audit reports can be
issued individually or combined in one report covering the financial audit.
Additional items of significance can be brought to management's
attention in the management letter. This was mentioned to be a very
useful document in the GSA presentation earlier; they indicated they had
54 items in the first year and 51 in the second. While I didn't count ours,
I know that we did have issues that we brought to their attention and I
think it has been very beneficial to management.
      I have made several references to accounting principles and auditing
standards; let me briefly tell you which ones govern financial statement
preparation and audit. The accounting principles for federal agencies are
promulgated by the General Accounting Office and commonly referred to
as Title 2 of GAO's Policy and Procedures Manual, for Guidance for Fetimd
Agencies. The Government Auditing Standards-referred to as the "Yellow
Book"-was published by GAO in revised form in 1988 and it describes
the standards of field work and reporting standards for audit of
government financial statements. It incorporates the standards of field
work and reporting of the AICPA; without restating those standards, it



30
prescribes supplemental standards of field work needed to satisfy the
unique needs of government financial audits. Future statements of the
AICPA will also be adopted and incorporated unless specifically excluded
by GAO through formal announcement.
       It is necessary for the government accountant and the auditor to
keep abreast of additional pronouncements by the AICPA and GAO. We
do this in our office by obtaining the AICPA's annual publications of
professional standards and through continuing professional education of
our staff. My view is that it is just as important for agency accounting
staff responsible for the preparation of financial statements to keep
abreast of accounting and auditing developments, including not only
GAO's Title 2 but also JFMIP's Core Financial Systems Requirements which
is very beneficial, Gwemment Audi'ting Standards (GAO "Yellow Book"),
AICPA's Statements onAudi'ting Standards ("SAS"), and the audit
accounting standards issued by the Financial Accounting Standards Board.
      Norm (Goldstein) mentioned earlier that the auditors have
approximately 39 days to examine the financial statements and footnotes
prior to issuing an opinion. While this is true, much of the work is done
during the interim period and at Social Security a lot of work was done
during those early few months. I would like to give you a brief overview
of how we approach the audit of SSA. The first two audits of financial
statements were performed under extremely tight time frames; in the first
year, we had fewer than 7 months from initiation of the audit to issuance
of the audit opinion. The 7 months included the CARE training from
GAO; the actual field work was limited to about 4 months time during
which we had to perform sufficient review to be able to express an
opinion on the statement. Our due date for the audit opinion was
determined by the date established for issuance in the annual report. With
that in mind, we had to rely very heavily on the work done in other areas
in reviewing internal controls and evaluations of accounting systems. This
included work done by SSA's quality assurance staff, audits by the GAO,
and our own audits and assessments in the Office ofIG. Social Security's
quality assurance staff, for example, has a regular program to evaluate the
accuracy of payments to beneficiaries; that program had been audited and
reported on by GAO and we were able to use the results of SSA's work
and GAO's audit to limit our review of internal controls in this area
relating to benefit payments. We developed what we call a sort of
synergistic effect in being able to do this because there were many audits
done by GAO, by the Department's internal staff, and by the !G's staff.
Being able to limit your substantive testing is very important in
accomplishing the job in the time frame.
     Let me mention a few of the cost benefits that we experienced in
performing this review. The audit that we embarked on, of course, was



31
Social &cunty .Administration




 extremely demanding both in terms of resources and talent and requiring
 many judgmental decisions. To fulfill our commitment in the audit of the
 financial statements at Social Security, we expended 3,000 staff days in
 the first year. This involved as many as 60 auditors in the first year's
 audit, over two-thirds of whom were CPAs. I don't say that to scare you,
 because we have been able to drastically reduce that in the second and
 third years-but, nevertheless, that first-year investment, if you've never
 been audited before, is a very sizeable investment. In return for those
 resources, we would expect that there be some benefits to both the
 department and the auditors and our experience has shown that
 preparation of the audited financial statements results in benefits to both.
       At Social Security, the Commissioner was able to report both to
 Congress and the public that the financial statements which were audited
 by the Office of Inspector General fully disclosed financial information on
 all SSA-administered programs and demonstrated the financial soundness
 of those programs. In fiscal year 1989, income to the trust funds exceed
 outgo by over $52 billion; current estimates show that under any
 plausible economic and demographic conditions the programs will be able
 to pay benefits well into the next century. This information was included
 in the annual report to the Congress and in notices sent to over 38
 million beneficiaries across the country. While the benefit from reporting
 this information is somewhat intangible, there are some more definite and
 measurable improvements resulting from the audit of financial
 statements. First, the pro~ss instills discipline in the agency's financial
 system that in many cases was sorely lacking. Second, the process of
 preparing statements ensures that a proper link exists between accounting
 transactions and reporting. The statements are understandable to the
 majority of readers whether they be officials of the Department of the
 Treasury, OMB, the Congress, or our taxpayers. Third, the agency
 obtains an independent assessment of whether accounting systems contain
 adequate safeguards to protect resources entrusted to the agency.




 32
                                 Panel Session on-_!Jgencies' Perspectives:
                                 Department of Veterans Affairs




                                  We have prepared consolidated financial statements and had them
                                       audited for the last 4 years. For us to put together consolidated
                                  statements and to have them audited is no easy task; I'll give you some
                                  facts about what the Department of Veterans Affairs really is.
                                       We currently are the largest hospital system operated in world; we
                                 have 172 medical centers and 5 independent outpatient clinics. The
                                 Department has 58 regional offices responsible for servicing the needs of
                                 our beneficiaries in the areas of compensation, pensions, and educational
                                 benefits. We operate 111 national cemeteries. We have 2 insurance
                                 centers, are the fifth largest U.S. insurance company, and currently have
                                 $278 billion worth of insurance. In support functions,we have 3 supply
                                 depots in the country; we have 3 major data processing centers; we have
                                 3 finance centers; and we have 4 canteen service field offices. Last, but
                                 not least, we have our central office at 810 Vermont Avenue. The
FmnkDemlle                       Department employs over 250,000 people, which means we do a payroll
Department of Veterans Affairs   for them. To be able to put all this together and get our statements, we
                                 have what we call field finance activities at each hospital, at each supply
                                 center, at two of the finance centers, and at our 58 offices-that adds up
                                 to about 225 different field finance activities.

                                       Our administrative payments and accounting for them is done in
                                 our Austin finance center in Texas; our compensation, pension,
                                 education, and other payments and accounting are done at our finance
                                 center in Hines, Illinois, just outside Chicago. Our life insurance program
                                 is operated in Philadelphia and in St. Paul. Because we have a large
                                 receivables balance like most other people that we are trying very hard to
                                 collect, we have a centralized accounts receivables activity in St. Paul for
                                 our benefit-related debts. We're starting now into what we call
                                 third-party payments. Our many cemeteries have only a small staff at
                                 each, and their accounting and payments are done generally through one
                                 of our hospitals.
                                       Our appropriations structure mirrors what I have told you here. We
                                 have 15 general fund appropriations and 11 revolving funds; we maintain
                                 5 trust funds, 5 deposit funds, and 5 clearing accounts. Our
                                 appropriations include annual, multi-year, and no-year accounts. At any
                                 one time, we are generally working about 80 active appropriations or
                                 funds.
                                       Putting that together, believe me, is no easy task. We do it on 41
                                 aged, antiquated, out-of-date, 1960- and 1970-era financial systems. We
                                 actually have about 80 trial balances that we put together to do
                                 consolidation. The general ledgers, if you want to call it that, and the trial
                                 balances do not have the same accounts; we are moving toward a
                                 standard general ledger and chart of accounts, but we're not there yet.




                                  33
Department ofVeterans Affairs




        So we are in the process not only of hand-pulling this information
 together this year, but-like most of you probably in this room- at the
 same time we are trying to change and update the accounting systems.
 We are restructuring our payroll systems and will bring up the first piece
 of it in February 1991. We hope to get the reengineering of the central
 system done by the end of 1992. We're modernizing our benefit systems
 in the Chicago office. We're in the process of redesigning our insurance
 systems. We're replacing our procurement and inventory system-we
 maintain and process a considerable amount of medical supplies through
 our supply depots. Last, but not least, we are building an integrated
 financial management system. We contracted for an off-the-shelf system 2
 years ago, and we're in our second of about 5, maybe 6, years of actually
 moving from these 41 antiquated systems into a truly integrated system
 that will allow us to bring all of this data together.
         You can see that our staff spends a lot of time putting data together,
 making sure the controls are there, working with auditors, and what have
 you. Our Inspector General has provided tremendous assistance, as have
 the General Accounting Office people who actually have done our audits.
 I'll tell you a bit about the costs of them. For the 1986 financial statement
 auidit, GAO put in about l 4,500 staff days and required us to have about
 5 FfEs to support that. For the 1989 audit, GAO put in 3,500 staff days,
 augmented by some contractual help. Our Inspector General contributed
 10 FTEs to the audit work. We have been able to reduce our piece of this
 from 5 FTEs to 2 1/2 FTEs a year. As we got better, the work load has
 come down and everybody has benefitted. The year just finished was the
 last year for GAO's auditing; our Inspector General has agreed to take up
 the task.
       As you may know, it is no easy task. In terms of actions during
 consolidation, I think we do the same things we heard today. Obviously
 there are corrections to the accounts that are initially reported. There are
 preliminary adjustments and final adjustments as a result of the auditor's
 work. We end up with a consolidated statement. We get a qualified
 opinion-it used to have two qualifications, but last year we got it down
 to one. The qualification remaining is on our land and buildings account.
 As the VA was blessed with inheriting hospitals and cemeteries from the
 military, the facilities were in pretty good shape, but the records weren't.
 On many facilities, we really have no traceable valuation on what is there;
 for this, budget constraints preclude our doing appraisals work as the
 payments for them would take funds from programmatic work. It leaves
 us with a qualification that we take seriously and are going to try to figure
 out a different way to get ourselves out of that bind. But with that
 exception, we do have a clean opinion.




 34
Department ofVeterans Affairs




        The problems we have encountered are many of those you have
 heard about today. We had trouble in the beginning, and even today at
 some points, getting management to buy into this. They look at the work
 as something that has to be done, but not necessarily the most important
 work to be done at the VA. Initially, and in some cases even today in our
 field facilities, there is a fear of being audited and what people might find.
       In our case, I think the time frames of when we start to when we
 finish are too slow; I think we finally got our results in late May or early
 June of this past year for the 1989 year and, to be most useful, we're
 going to try to move that up this year. We're going to try to put into our
 statements some programmatic information in future years, to see if we
 can get the programmatic people to buy a little more into what's going
 on here.
       We get a report on control weaknesses which we use considerably,
 a report on compliance with laws and regulations, a management letter
 that goes to our Secretary with items that are not material enough for
 them. to have to qualify the report, but are material enough in their
 opinion that they need to be reported to management.
       I think we have gotten three important things out of this. One of
 the items that we have definitely pulled out of here is the ability to get
 some financing and budget authority to start rebuilding our systems. By
 actually being able to show people the value of good systems and the data
 that can come from them, we've been able to convince our budget people
 as well as the people in OMB and the Congress to provide money to
 change our systems.
        We think the data that has come out of this has been very useful in
 terms of testimony that we have given on the Hill on financial statements
 on our liabilities and our ability actually to be able to ascertain what our
 risk is out there in terms of loan guarantees or compensation and future
 compensation payments. We use the information from the statements all
 the time in testimony, and we can do that because it is reliable
 information now.
      Drawing off that, what it has given us on the accounting side is that
 we've been able to put a discipline both into our people and our
 systems-into the way we do things. We've tightened up internal
 controls. We've gone after our material weaknesses, and it really has
 helped us considerably.




 35
                       Chapter4
                                         on
                        JIJ"llM!ift"41\1ective
                       Jl.A.f!Yll'lPlll"ited Financial Statements




                              We're very fortunate today to have as our guest speaker a gentleman
                        from GAO who I think we can properly characterize as a sparkplug
                        certainly in the recent events and in moving the government forward
                        towards audited financial statements.
                              Donald Chapin is the Assistant Comptroller General of the United
                        States for Accounting and Financial Management. He is responsible for
                        the operations of the Accounting and Financial Management Division of
                        the U.S. General Accounting Office. His duties include conducting
                        financial audits of federal agencies and government-owned corporations,
                        directing the accounting and auditing standard setting process for the
                        federal government, reviewing and auditing of federal agency financial
                        management systems and internal controls, coordinating the GAO
                        program on mismanagement, fraud, and abuse, the oversight of federal
                        inspectors general and other federal audit activities, reviewing the federal
.AJ1'in Tucker          budget structure and budget-related issues, and advising Congress on
Department ofDefense    auditing, accounting, and financial management issues.
                             In addition, Mr. Chapin currently is the GAO representative for the
                        following organizations:
                               - the Joint Financial Management Improvement Program,
                               - the National Intergovernmental Audit Forum,
                               - the Government Accounting Standards Advisory Council, and
                               - the Financial Accounting Standards Advisory Council.
                              Mr. Chapin joined GAO in October 1989. From 1984 to 1989 he
                        was an independent financial consultant specializing in management
                        controls and business evaluations. Before that, from 1954 to 1984, Mr.
                        Chapin was a partner of Arthur Young & Company and served in various
                        capacities as senior client handling partner, managing partner for
                        Continental Europe, national director for management consulting,
                        national director for practice development, and national director of
                        auditing. Mr. Chapin is a certified public accountant and practices in New
                        York and Florida; he is a member of the SEC practice section of the
                        AICPA. He also is a member of the Accountants Club of New York and a
                        former member of the AICPA Auditing Standards Executive Committee.
                        He has held a number of corporate directorships and is responsible for a
                        number of publications including Internal Audits and Top Management
                        and.Management Controls for Multinationals. Mr. Chapin is a Phi Beta
                        Kappa graduate of Williams College, where he majored in economics, and
                        he has an MBA in accounting from the Wharton School of Finance at the
                        University of Pennsylvania.
                             I ask you to welcome Donald Chapin. Thank you.



                        36
                          Keynote Address




                          Jtis a pleasure to be your luncheon speaker today. We at GAO commend
                            OMB for its commitment to sound financial reporting and financial
                          audits. We commend the CFO Council and the JFMIP for their
                          leadership in sponsoring this seminar. It is also a very enjoyable
                          experience for me because I feel that we have crossed a very important
                          bridge. Today we're talking seriously about how to do a financial audit. It
                          wasn't too long ago that we were talking about why we should do a
                          financial audit. That is a big change.
                                Today, I'd like to give you GAO's perspective on the challenges
                          faced in conducting a financial statement audit. I will address these
                          challenges within four broad categories:
                               1. Preparing for an audit,
                               2. Arranging for an auditor,
Donald Chapi.n
                               3. Dealing with challenges during the audit, and
GemralAccounting Office
                               4. Reporting on audit results.
                                The preparation for an audit, like any effective management process,
                          requires the right organization with sufficient authorities. It is important
                          that an agency have a CFO structure that is able to pull together
                          departmentwide financial reports. Assembling departmentwide
                          consolidated financial statements involves extraordinary coordination
                          among the reporting entities, and it is less painful when there is strong
                          financial management leadership at the top of the agency.
                                It is also desirable, I think, that an agency have an advisory audit
                          committee. I would like to open your minds up to that possibility. Audit
                          committees are commonplace in the private sector, but they do not, as of
                          now, have much prominence in the public sector-but they should. An
                          advisory audit committee can perform more than just an oversight rule
                          like that exercised by OMB or the Congress. It can help the agency and its
                          auditors to achieve their objectives. It can help top management avoid
                          many financial management pitfalls.
                                As I see it, an advisory committee can review the breadth and depth
                          and scope of the audit plan, can monitor the audit work performed, and
                          review the audit report prepared. It can provide advice regarding
                          interpretation of accounting principles and the preparation of
                          management reports. It can act as a sounding board for new systems
                          plans and other financial management initiatives and it can assess the
                          effectiveness of the audit resolution process. Believe it. An advisory audit
                          committee can help the CFO and the IG get their jobs done.




                          37
Keynote.Address




       Another important aspect of planning for an audit is arranging to
 have the right people. It goes without saying that fully-qualified people
 are needed at the top. CFOs and their deputies need to have the necessary
 training and experience. It's also equally essential that an agency have staff
 with the accounting skills needed to prepare its financial statements.
       One of the more difficult challenges that we've had to face in initial
 audits is the agency's lack of sufficient numbers of skilled accountants.
 Such people are needed to assemble financial statements from the
 typically large variety of input sources, to prepare the consolidating
 adjustments, and to deal with the numerous accounting issues. They are
 essential to timely reporting. Too often financial reports are uselessly late
 because there aren't enough experienced agency staff to properly prepare
 them and provide the needed documentation to the auditors. So I want
 you to try to get a handle on the number of qualified people you'll need
 and start recruiting to fill your needs.
       A third important area in preparing for a financial audit involves the
 underlying financial management systems. This is perhaps the most
 difficult problem facing most agencies. For the most part, financial
 management systems that we've been encountering in our financial audits
 to date have been marginally adequate. Most of you will not have a
 transaction-driven general ledger. Typically you'll be facing the need to
 collect financial information from manual and automated programs and
 accounting systems that loosely band together to form the agency's
 financial reporting system.
       In fact, some financial statement accounts may have to be developed
 from program or budget data and even the wizardry of statistical analysis.
 The result of this systems structure is sometimes poor-quality information
 being reported up to Treasury. And this situation could even result in
 your auditor declaring you to be unauditable. It depends on how bad it is.
 For most agencies, developing comprehensive and fully-integrated
 financial management systems that are reliable and in compliance with all
 the requisite accounting standards will take some time.
       It's important to begin the process now. In so doing, try to establish
 accounting systems or usable data systems where they don't exist and
 work on the integration of existing systems. This will both advance
 toward the goal of fully-integrated systems and improve your chances of
 getting an audited set of financial statements. Don't use the situation I've
 described as an excuse to wait before having a financial audit.
       Together, the agency and its auditors can usually develop a complete
 set of financial statements using the variety of financial information
 available. Derived account balances, however, may not be auditable. And
 this has been the problem where property and equipment accounts are



 38
Keynote Address




 uncounted frequently. The auditors will qualify their report when this is
 the case, but it's not all bad. There is much to be gained from isolating
 accounting and reporting problems and the underlying financial
 management systems that need to be addressed.
       The second broad challenge that Pd like to talk about is arranging
 for the audit. Pd like to exclude those situations where the GAO and the
 Inspector General has announced an intention to conduct a financial
 audit. In these cases, however, I would like to make one comment, that it
 is very important that a financial audit be viewed as a joint effort. Now I
 know that agencies are always helpful when we come in to do an audit.
 But in the case of the financial statements, there needs to be a real team
 approach. These audits should be viewed as an important part of an
 agency's financial management activities. In addition to the information
 they provide, they impart discipline to the financial operations and help
 deal with the process of improving systems. Also, if you treat the process
 as a team effort and you get the auditor involved in planning for the audit
 and in other decisions that you'll need to make like resolving accounting
 and reporting issues, the process will be a lot less painful.
       With regard to procurement of CPA services, I have a few points I'd
 like to make. First, it's necessary that the selection and contracting with
 an outside auditor be given high-level attention within the agency,
 defining the scope of work, the deliverables, agency support to be given,
 and other contract details that are very important the first time around.
       The CFO, the IG, and the advisory audit committee should be
 involved. But the agency head also should be involved to some extent. If
 you make a mistake here, it will run up the cost and produce
 disappointing results. Second, the ultimate real cost of an outside audit is
 very much dependent on the oversight and cooperation given by the
 agency. You should try to minimize your cost, your chances of paying too
 much for the results achieved. There is some value from an audit that
 results in a disclaimer of opinion-but not full value.
       First-time audits can be problematic. Often the auditor in this
 situation can only opine on the balance sheet and then with great
 qualification. You ought to be prepared for that outcome in the first year,
 but you can reduce the cost of such audits if the auditor doesn't do
 detailed auditing work for unauditable or unreportable situations.
 Expectations have to be carefully set and judiciously monitored. The
 agency contact person for the auditor needs to be someone
 knowledgeable of financial auditing, able to speak for the agency and not
 encumbered with excessive duties.




 39
      There's a cost to an agency beyond the price of an audit contract.
And that's the cost of the commitment of resources to support the
auditor. Auditors require space and support services, access to people and
records and some help. The time commitment of agency personnel will be
a major cost and how much that turns out to be will depend on the
planning and control of the audit. Not to acknowledge this will result in a
frustrating and unnecessarily expensive experience. We've been
contracting with CPA firms to support our audit efforts for several years
now. I think you can say that we've learned a lot through that experience
and gotten pretty good at it.
      We've evolved a selection and contracting process that has resulted
in an engagement of firms with well-qualified staff and at competitive
prices. We're planning to share our approach with you. We've been
consulting with the GSA on the development of a governmentwide
contract for audit services, and we will be publishing guidelines for the
procurement of CPA services.
       The next major challenge I'd like to discuss is the audit itself, or, I
should say, the weaknesses that will surface from the audit. The first-time
and even a second-time audit will bring forth both anticipated and
unanticipated weaknesses. It may be advisable to contract for an audit
review or a preaudit before the final decision is taken to go forward with
a full scope audit. This will typically result in an "audit requirements"
report which will set out what may be fatal flaws that will need to be
corrected before an agency can be successfully audited.
      It's been our experience that most problems will be sufficiently
correctable with the application of resources to permit an audit to go
forward and achieve worthwhile results. But, as I said before, don't be
disappointed if in the first year all you can achieve is an audited balance
sheet with one or more qualifications for certain accounts. In our
experience, that's about par for the course.
       Let me share with you some of the typical challenges to successful
first-time audits of large federal agencies. First, widespread
operations-dispersion of accounting operations and records around the
country, or the world. If systems and procedures are not uniform and
there are numerous operations of financial significance, this will be a
major audit problem. Just finding out what the various systems are that
will be needed to prepare financial statements is a major undertaking.
Organization of audit resources and audit planning will be a major
challenge.
      Second, risky ADP operations-if data processing operations are
not well controlled, particularly with regard to access to programs and
data files, or if the application systems have not been thoroughly tested,



40
Keynote Address




 or are known to be unreliable, the audit is going to be a tough challenge.
 And the auditor you select to do the work will need specialized skills and
 imagination to deal with this kind of a challenge.
       Third, weak financial systems and controls-as I discussed earlier, if
 there are inadequate financial management systems or accounting
 practices that are not being followed, or no experience in preparing
 accrual-based financial statements, it will add considerable time to the
 audit, and it could even make an audit impractical. Then there is a
 problem of material weaknesses and internal controls. Many control
 weaknesses can be overcome by a different audit strategy, albeit more
 costly, but some weaknesses may make the kind of audit opinion you
 want unattainable.
       Now Pd like to highlight a few of the conditions or weaknesses we
 find on initial audits. At the top of my list is the lack of monitoring of
 operations by agency management. This problem is particularly difficult
 where an agency has "turned over" part of its operations to the private
 sector without maintaining good controls. Next on my list is the failure
 to use fundamental accounting procedures and controls. Considering that
 reconciliations are an important control mechanism to prevent or detect
 fraud, embezzlement or illegal acts, we are frequently surprised that they
 are not being performed, or are being performed so poorly. We find
 accounts out of balance by millions and hundreds of millions of dollars.
 For example, detailed records of accounts and loans receivable are often
 not reconciled with control accounts. Property records, when they exist,
 are also not reconciled with control accounts and so on. We see too many
 instances of weak internal controls and ineffective FMFIA processes when
 these are relatively easy to identify and correct. We are amazed that
 control weaknesses persist and don't get fixed.
      And last on my list is the lack of commitment to sound financial
 reporting, as evidenced by sometimes erroneous financial statements sent
 to Treasury and OMB. The root of the problem is apathy toward financial
 reporting. Agency CFOs have to turn this situation around and they have
 to make good reporting important to everyone.
       This then brings me to the last challenge, that of reporting on
 results. The form and content of your financial statements needs
 attention. We believe that the statements that you're used to seeing
 should be augmented by an analysis of appropriations which ties them
 into the financial statements. We've just developed such a statement
 format and are exposing it for comment in our audit report to the
 Veterans Administration. But there are other form and content issues that
 need to be addressed by each of the agencies and there should be some
 guidance provided by the CFO Council on this issue.




 41
Keynote.Address




        Financial statements are an important vehicle for top management
 to present the results of its actions for public scrutiny. They should be
 part of a larger annual report on how management has discharged its
 fiduciary responsibilities. One of the things I wanted to do today, once
 again, is to encourage you to prepare such an accountability report each
 year. I would suggest that it might contain the following: first, a
 statement of agency objectives by program. This would be management's
 interpretations of the congressional mandate; second, a discussion and
 analysis of operations that ties the financial statement results to agency
 objectives. We've experimented on this in the recent VA audit and are
 satisfied that it can be done and it can be very illuminating. Third, the
 financial statements and auditor's report itself. And last, a summary of the
 agency's FMFIA report and the auditor's reports on internal control and
 compliance. Looking forward, we would anticipate that the auditor can
 cover, to some degree, the FMFIA report in its report on internal
 controls and compliance. But that's the future.
       In conclusion its probably not an understatement to say that we've
 got a very tough job ahead of us. But it's certainly a job that's doable and
 one that definitely needs doing. We've developed, at GAO, a great deal of
 experience in doing this work and, while I admit we don't have the
 answers to all the questions, we're certainly willing to work with agencies
 to help them as much as we can as they develop plans for financial
 statement audits. Thank you very much for your attention, and I'd be
 delighted to take some questions.
       Q - "With the cost of these audits in the civilian side of the house,
 has any analysis been done on the cost of doing an in-house or
 out-of-house with the idea of possibly a federal auditing agency that does
 this throughout the government?"
       A - I don't know of any such plans or considerations. The cost
 differentials are fairly easy to compute since one of the things you do in
 your contract with an outside auditor is to establish the rate for the work.
 So you can do this, but no study to my knowledge is underway to justify
 some kind of overall federal audit agency that would supersede any IG
 prerogatives or preclude having independent public accountants do some
 of the work..
       Q - "Can a 9FO contract directly to do the financial statement
 audit, or what is the GAO position?"
      A - That's a tough question. As you well know, the IG community
 claims that they are 100 percent responsible for all auditing activities
 within their agency, and the legislation suggests that that's the case.
 However, the CFO has a very important role to play in this whole matter
 because the audit results are his. They're his to use and the results are very



 42
Keynote .Address




 important to his progress in improving financial systems and getting
 controls in place. So the CFO cannot be left out. What we have now is
 sort of a settling down of who's going to do what, and I would hope that
 when it's all over that the contract for outside audit services is with the
 agency CFO with the IG playing a very important role in the selection
 process.
      Q - "In your opinion should the CFO-I assume it means CFO of
 the United States-be located in OMB, Treasury Department, or
 independent?"
      A - As you know, we support the Glenn bill which calls for the CFO
 function provided for in the bill to be in OMB.
      Q - "Please comment upon the adequacy of existing accounting
 standards as they relate to the preparation of financial statements."
        A - Well, we have them. There is a set of codified accounting
 standards in existence for the guidance of the federal government. But I
 would be the first to admit that they need to be updated and they need to
 be extended to deal with some of the important issues that we're all going
 to face for the first time. As Frank (Hodsoll) may have said this morning,
 there's a process that we hope to bring to conclusion soon that will
 involve a broad group of competent people within government and
 outside government to help us set the necessary accounting standards that
 will fill in some of the voids and amend some things we already have to
 bring them closer into alliance with the needs of the federal government.
      Q - "Audited financial statements are useful in the private sector
 because the investing public knows how to read them and act on them.
 However, what is being done to inform the public that audited
 government financial statements exists? Who's going to explain what the
 accounts and statements mean to largely unsophisticated taxpayers?"
       A - You know, it's not so easy to read financial statements in the
 private sector. Most people don't. The people that do are financial
 analysts who explain it all in a few simple words and extract, from the
 documents that the accountants so laboriously prepare, the essence of
 them, what they mean, what they show, what they indicate about the
 results of the company and where it's going. I foresee a similar process
 happening in the federal government.
       There should be a discussion and analysis that goes along with the
 set of financial statements so that the unsophisticated reader can grasp
 what's happening at the agency, can understand the trends, can see what
 the impacts on funding arc going to be, and make certain basic
 determinations about the efficiency and effectiveness of the agency insofar
 as that can be shown from financial information. That's the function of



 43
Keynote .Address




 financial analysis, balance sheets, income statements and footnotes. The
 information for that analysis comes from the financial statements and
 without the statements you can't make the analysis. The same problem
 exists for government that exists for the private sector.
       In government, like the private sector, we have to get good at
 interpreting the financial statements and telling the unsophisticated
 people outside the agency-namely the taxpayers and the Congress-
 what they really mean. And we can do that. We've tried it out on the VA.
 We are proud of our initial efforts in terms of taking a set of financial
 statements and producing an informative discussion and analysis. We've
 done the work at VA for 4 years so we've got a good history to look at. I
 think we've come up with some very interesting observations that distill
 what is happening in that agency from a financial point of view. I think
 you all should see that document when it comes out. It is with the VA .
 now for comment. I would urge those that are considering how to make
 good use of financial statements to take a look at the VA discussion and
 analysis and see whether you can use the same kind of approach in
 explaining your agency's financial statements to the users who are not
 sophisticated and need some help in reading them.




 44
Chapters
Workshop on Financial State1nents:
General-Services Administration




                          Panel members included

                           (top left): Robert Sudti
                           (top right): IJonuU ]uluon
                           (middle left): Gerard &I.wards
                           (middle right): Edward Gramp
                           General Sewkes Administration
                          (bottom left): Larry.Albert
                          (bottom right): John Catalfamo
                          Arthur Anderson & Co.


                       Robert Suda, Director of the
                          Information Resource
                       Management Services and Public
                       Building Service Accounting
                       Division, GSA's Office of Finance,
                       and moderator of the workshop,
                       introduced panelists Donzell
                       Jackson, Gerard Edwards, and
                       Edward Gramp from GSA and
                       Larry Albert and John Catalfamo
                       from Arthur Andersen & Company.
                               Mr. Suda began with a slide
                        presentation and discussion. He
                        first described the scheduling of the
                        major events in the preparation
                        process, which encompassed the
                        preliminary meetings held in early
                        September to the receipt of the
                        audit opinion in the first week of
                        February. He noted that last year,
                        for the first ti.me, the trial balance
                        was downloaded to a personal
                        computer (PC) and off-the-shelf
                        software was used to consolidate
                        balances; this process reduced
                        preparation ti.me by nearly 2
                        months. The auditors now have the
                        preliminary numbers by December
                        15, which gives them a good start
                        toward meeting the scheduled
                        completion date.



 45
     Mr. Suda pointed out the major segments of the annual report, its
four primary financial statements and the supplemental schedules.
Supplemental schedules are presented by fund type; i.e., general, special,
revolving and deposit. Ninety-three percent of GSA's spending is by the
revolving funds.
     The most important sources of data for the financial statements are
the GSA general ledger trial balance, system-generated cost reports, and
the GSA Form 816, from which changes in capital asset accounts can be
analyzed. External reports supply some data and reconciliation is
performed to selected report balances. Other reports also supply data,
such as the financial statements for each of the revolving funds, which are
prepared and distributed internally. These statements, along with the cost
reports, are among the tools used to effectively manage the revolving
fund programs.
      Information is provided from within the accounting system for
analyses of intra-GSA activity, property and equipment, and other areas.
A benefit of this analysis work (and the audits) has been the identification
of significant amounts of equipment that had not been properly
capitalized. Operating staff prepare schedules for receivables, future lease
costs, and long term debt. Most support work is done by
Washington-based staff, some by the Kansas City and the Fort Worth
Accounting Centers which are relied on for tracking such. matters as
subsequent events. External information is needed; examples include the
GSA General Counsel providing contingent liability amounts and the
payroll system providing amounts of unfunded liabilities and other
detailed breakdowns.
      Communications is vital to a successful audit. Since GSA is very
business oriented, their drawing upon the private sector expertise of
Arthur Andersen & Company has been quite beneficial. An applied
technique has improved the process for taking an inventory for coal and
oil. A system (EXECUTRAC) was implemented to keep top management
appraised of audit progress. Responsibility is given to the senior staff
accountants to make the day-to-day audit decisions rather than bring
them to managers. On a bi-weekly basis, all parties to the audit meet to
appraise its progress.
     GAO's Policy and Procedures Manual for Guidance ofFederal Agencies,
Title 2 is relied upon for basic guidance to generally accepted accounting
principles (GAAP) and is supplemented by other sources. Again, the
auditor may have the specialized experience needed to advise in
establishing standards, or resolving issues.




46
      The GSA Annual report is distributed to Congress, OMB, GAO,
GSA management and is used for agency recruiting. In addition, requests
for copies are received from citizens and universities.


Larry Albert, Arthur Andersen & Company's manager for the GSA
  audit, provided two slides which detailed the chronology of a financial
audit. He stressed the importance during an audit of frequent
communication. A perpetual listing is kept of issues that warrant
discussion and account balances or other items for which further
information or adjustments are needed. Weekly meetings with GSA and
daily communication usually resolves matters readily that could otherwise
become problems. GSA has been very responsive; some recommendations
that were included in the 1988 or 1989 management letters had often
being acted upon by the GSA staff even prior to the issuance of the letter.
      Mr. Albert indicated his company has a top-down approach in
performing audits. They look first at the goal, which is to issue three
opinions, the primary one being the auditor's opinion on the fairness of
the financial statements and the others being on internal controls and on
laws and regulations. The work for the three opinions is performed
concurrently, as the auditor has to have a clear understanding of the
internal controls and the laws and regulations before the financial audit
can be completed. Testing is chosen that is thorough, yet cost-effective. ·
In evaluating internal controls, the overall agency control environment is
assessed as general risks, areas of review include the EDP systems
complexity, the materiality of the various programs, and other factors.
Specific risk analysis is then performed at the account level; from these
analyses, the substantive tests may be developed. These tests may be
confirmations, review of reconciliations, detailed vouchering, and others.
From these risk assessments the detailed work programs are developed.
      Mr. Albert indicated that the auditors found it fortunate to audit
following several years of GAO audits, because there had been
opportunity to identify and resolve material problems; hence, they were
able to provide an unqualified opinion for each of these 2 years.



Contract for auditing servkes
      GSA is in the process of arranging a govemmentwide contract for
auditing services. The solicitation proposal is expected to be "on the
street" mid-October to early November and the procurement schedule
issued in 1991.




47
Sele&ted questions and answers
       Q - "Could the software package used for mapping and
consolidation of trial balances at GSA be used at other agencies? Please
describe it. Will it permit account adjustments and provide a proper audit
trail? Can it be purchased?"
       A - GSA uses two software packages, the first is the Data Transfer
System (DATRAN) which downloads data from the mainframe
computer to a microcomputer environment. The second, the
Microcomputer Trial Balance System (MTBS) maps whatever general
ledger accounts are specified into financial statement formats (or any
other scheme). The MTBS produces over 30 separate financial statements
for GSA, then combines them. Work is underway to use the MTBS for
SF-220 series reports. The MTBS, as used by GSA, is "tailored" for
making account adjustments and provides a proper audit trail. The MTBS
is a licensed software package (Arthur Anderson & Company can advise
about its acquisition); other products with similar capabilities are
available on the market.
     Q - "What role did the (GSA) IG play in the audit?"
      A - They contracted for it; the financial statements have been
entirely prepared by the Office of Finance. Through the first several
audits, the IG worked with GAO to evaluate internal controls and verify
that the work produced was complete and thorough.
     Q - "How is Arthur Andersen & Co. involved in GSA's (OMB
Circular) A-127 review process?"
     A - GSA has the responsibility for A-127 reviews; AA&Co. is doing
the detailed reviews of the systems on a rotating basis. The GSA Office of
Financial Management Systems is doing the limited reviews.
     Q - "Discuss where the SGL is used at GSA."
     A - Currently, the trial balances are cross-walked to the SGL
accounts. GSA is in the process of converting to the Standard General
Ledger.
      Q - "Do balances on the SF-220 series reports agree with those on
the Financial Statements?"
      A - They reconcile, but may not agree. Subsequent to year-end
closing there may be material adjustments recommended by the operating
components or by the auditors. One recent point of difference, however,
is that beginning in FY 1989, the Funds with Treasury account has
adopted the GAAP standard, i.e., it will reflect the agency's true "cash"
position rather than Treasury's balance which is also posted to by other
agencies' transactions.



48
     Q - "Does GSA have a single integrated accounting system?"
    A- Yes, GSA operates the National Electronic Accounting and.
Reporting System (NEARS), which is a single integrated system.
    Q- "Are the reviews required by (OMB Circulars) A-123 and
A-127 performed as part of the audit?"
     A - Yes for A-127; no for A-123. A lot of the review work done
within the audit helps to fulfill the agency's responsibilities under A-127
andA-123. In the reportAA&Co. issues for A-127 requirements, they
include everything done in the form of internal control reviews. The
Administrator can then take this input, along with what the IG and others
have done, and be better able to appraise if the agency has complied with
the Circulars.
      Q - "Compare GSA's contract with AA&Co. versus the services
received from the GAO."
     A-They have both been very positive experiences for us. Obviously,
the great results from the AA&Co. audits were built upon the work GAO
performed the prior 3 years. We are better as an agency from working
with GAO, and progressed further through our dealings with AA&Co.
     Q - "What was the· cost of the AA&Co. audit?"
      A - Since the scope of the work performed year to year varies, it is
not easy to quantify, however a "ballpark figure" for last year would be
$500 thousand. Some people have questioned how we could do the audit
for less cost to GSA than was incurred by the GAO. One reason may be
that AA&Co.'s documentation process is more streamlined, i.e., the
GAO's responsibility to report to the Congress requires a higher level of
documentation than that required by private sector standards. Having
major program areas well-documented by GAO helped AA&Co. in its
work; and GSA had corrected the more serious deficiencies before
engaging AA&Co. for audit services.
     Q - "Why are there so many management letter concerns?"
      A - The management letter addresses both financial and program
management issues. Some issues suggest improvements in the flow of
data and reports. They are all very important to us. GSA's Staff Offices
and Services (program areas) have strict deadlines to respond to
management issues.




49
     Q - "Are the financial statements prepared in accordance with
GAAP?"
     A - Yes, they are presented in accordance with GAO's Policy and
Procedures Manual, for Guidance ofFederal, .Agencies, Title 2 and follow the
pronouncements of the Financial Accounting Standards Board.
     Q - "What observations do you have on the federal government's
unfunded liabilities?"
      A - This would be a personal observation. It is imperative that an
entity prepare its financial statements on an accrual basis; there is no way
that a business can be properly managed strictly by using a cash basis
presentation. An example of this would be the financial mess New York
City experienced some years ago while trying to manage on a cash basis.
     Q - "When GSA began the process for the first audit by a CPA firm,
was there an auditability assessment done? And if so, what were some of
the major deficiencies found by AA&Co. ?"
     A - No formal auditability assessment was done. Again, it was due
to AA.&Co. following GAO in auditing GSA. Through their previous
audit experience, GSA had developed the good internal control
environment to preclude this need.      ·




50
                     Workshop on Financial Statements:
                     Department ofLabor




                     As the Department of Labor (DOL) had just completed its 4th year of
                        having the departmentwide financial statements audited, this workshop
                     included discussion of DOL's 4 years of experience in compiling financial
                     statements and having them audited. Three individuals spoke during this
                     session. First, Robert McGregor of the Office of Inspector General (IG)
                     of the DOL spoke about an overview of DOL and the approach to audit
                     the financial statements. Next, Hunter Rice of Metcalf, Rice, Fricke, and
                     Davis (CPA firm participating under contract in the DOL financial
                     statement audit) spoke about statement preparation, presentation, and
                     audit of the Employment and Training Administration, the largest DOL
                     agency. Lastly, Steven Censky of Williams, Young, and Associates (a firm
                     participating under contract in the DOL financial statement audit) spoke
                     about the overall consolidation and compilation of DOL statements.

                     ~ ofDOL and the.Audit ofFinancial                     Statements
                          Mr. McGregor's talk was divided into several sections. His
                     introductory remarks centered on the objectives of the audit and the
                     reasons for undertaking such a project without regulatory or
                     administrative requirements. DOL's Office of the Assistant Secretary for
                     Administration and Management and the IG believed that audited
                     departmentwide consolidated financial statements would indicate that the
                     financial management operations of DOL were reliable and that they
                     contained the necessary discipline and accountability to provide useful
                     information and support to management. Subsequently, Secretary Brock
                     announced DOL's intent to have its consolidated financial statements
                     audited with an opinion expressed on them.
                          Mr. McGregor also discussed DOL's experiences in working toward
                     consolidated DOL audited financial statements. The approach was
                     divided into phases which involved preparing a plan
Boben .M&Gregor           (1) identifying the components ofDOL and the related risk and
Department ofLabor   materiality involved in each,
                           (2) focusing on the degree and level of decentralization in DOL and
                     the related risks and materiality involved,
                           (3) identifying the amount of effort involved in compiling financial
                     statements of the major DOL components and the effort required to
                     prepare consolidated DOL statements,
                          (4) estimating the audit resources needed to complete the
                      examination of the financial statements, and
                          (5) coordinating with external organizations such as GAO,
                     Treasury, and the audit community.




                      51
                                    Depanment ofLabor




                                           A phased-in approach was planned in which the actual audit of the
                                     overall DOL consolidated financial statements would not be done in total
                                     in the first year, but would instead follow after enough experience had
                                     been gained in audit of the component parts. The phased-in approach
                                     included proceeding on a pilot basis where parts of the work was done at
                                     major components of DOL. DOL also had to acquire audit resources
                                     (through contract and assignment ofIG staff), coordinate the auditors'
                                     work, and assemble their work into a unified whole.
                                          The second- and third-year audits (for fiscal years 1987 and 1988)
                                     took about 3 months or so less time than had the first-year effort.
                                     Beginning in fiscal year 1987, the audited financial statements were
                                     included in the Secretary's annual report.
                                           The benefits gained from the audits helped improve DOL's
                                     accounting and financial management systems. A number of significant
                                     gaps and deficiencies in the existing accounting systems were identified
                                     and these provided bases for making improvements addressing the audit
                                     findings. Auditing implementation also helped ensure that full and
                                     accurate program cost information was captured, maintained, and
                                     reported so as to enhance DOL's accountability and provide the
                                     underlying discipline need~d for effective financial management systems.

                                     Employment and Training .Administration ofDOL
                                           Mr. Rice divided his talk into several sections and explained how his
                                     firm, when auditing the Employment and Training Administration
                                     (ETA), assisted DOL in completing the audit of its financial statements.
                                     He began by discussing the relative size and materiality of the ETA in
                                     relation to overall DOL. ETA is the largest agency within DOL and
                                     during fiscal year 1988 controlled approximately 95 percent of DOL's
                                     overall budget authority. ETA's total budget authority was about $31.4
                                     billion for expenditures and about $30.1 billion for financing sources
                                     which included about $23.2 billion in employer taxes, $2.6 billion in
                                     jnterest, and about $4.3 billion in appropriations. Total assets of ETA
                                     were about $50.6 billion comprised mostly of investments--$36.2
                                     billion, funds on deposit with Treasury-$7.0 billion, and
                                     receivables-$6.3 billion. Total liabilities were about $13.4 billion which
                                     included about $11.2 billion of accrued unemployment benefits payable.
                                            Mr. Rice talked about the five major accounting systems that had to
                                     be consolidated into the summary ETA financial statements. These
Hunter }lice                         systems included the DOL general ledger, the ETA subsidiary grant
M.etctdf, Rice, Fricke, Davis and    ledger, the unemployment trust fund general ledger, DOL contractor
Associates                           property management system, and the accounts receivable system. The
                                     first step was to generate trial balances relating to ETA from all the
                                     systems and identify the necessary adjusting and closing entries. Adjusting



                                     52
                                 Department ofLabor




                                  entries mainly revolved around noncash items such as allowances,
                                  depreciation, financing sources, and unfunded liabilities. For closing
                                  entries, attention had to be paid to M account transfers and withdrawals
                                  to Treasury.
                                       The requirements and criteria under which the financial statements
                                  of ETA were prepared had to be reviewed carefully. The criteria mainly
                                  included GAO Poli&y and Procedures Manual, for Guidance ofFederal,
                                  Agencies, Title 2, requirements and Treasury requirements from chapter
                                  4100 of the Treasury Financial Manual,.
                                        Lastly, Mr. Rice discussed the accounting and auditing issues that
                                  needed additional consideration. The accounting issues included defining
                                  the DOL and ETA reporting entity, unfunded liabilities, and program
                                  year consolidation. The main audit issue that needed attention was the
                                  compliance testing required under generally accepted government
                                  auditing standards. The compliance testing segment involved reviewing
                                  the requirements of several laws and regulations and verifying DOL's
                                  compliance with the numerous requirements.

                                  OPerall Consolidation ofDOL's Financial Statements
                                       Steven Censky talked about two main topics for which his firm was
                                  responsible in the audit of DOL's financial statements. The first item
                                  involved coordinating the audit testing of the departmentwide integrated
                                  systems. DOL's systems basically contain decentralized input of
                                  accounting data from central locations and numerous regions.
                                  Considering the numbers and types of audit staffs (different audit
                                  contractors and the IG staff), coordination of the testing of the systems
                                  was necessary to avoid disrupting normal DOL operations and to
                                  maximize the efficiency of audit testing.
                                        The.second item was the process of consolidating all ofDOL's
                                  agencies' financial statements-which included opinions on the agency's
                                  statements as provided by the numerous audit contractors. A critical area
                                  to identify in the process was occurrence of interdepartmental
                                  transactions. In the supplementary schedules, an overall financial
                                  statement showing each DOL component and the overall DOL
                                  elimination of interdepartment transactions was included. It was felt very
                                  important to show this statement so that the individual components of
                                  DOL were shown in total and the items eliminated were highlighted in
Steven Censky                     arriving at the consolidated DOL statements.
Wd/.iams, Young and Associates




                                  53
W orksh~ on Financial Statements:
Social Security Administration




                        Panel members included:

                         (top left): Matthew Schwimteck
                         (top right): Stnen Schaeffer
                         (middle left): Eliza-beth Lawson
                         (middle right): Charles Lewis
                        Social Security Administration
                        (bottom left): Dennis Snyder
                        (bottom right): James Nycum
                        DHHS, Office ofInspector Genera/,


                      prior to 1983, the Old-Age,
                         Survivors, and Disability
                      Insurance (OASDI) program was
                      funded on a "pay as you go" basis,
                      meaning that the benefits of current
                      retirees were paid by current
                      workers. In 1983, Congress passed
                      legislation that revised the funding
                      basis. Workers now pay enough to
                      fund both current retirees and to
                      help build up reserves which will be
                      needed later to pay benefits to the
                      "baby boom" generation. Currently,
                      these reserves total approximately
                      $157 billion.
                             Since the new legislation
                      focused attention on SSA's
                      management of the OASDI
                      program, the Commissioner of SSA
                      decided to produce audited financial
                      statements. Such statements would
                      show both the Congress and the
                      public that the trust funds were
                      being soundly managed in a
                      businesslike fashion. The first set of
                      audited financial statements were
                      produced for fiscal year 198 7; and
                      audited financial statements have
                      been produced for each subsequent
                      fiscal year.




 54
Social Security Administra:tion




Major Decisions
      In order to produce audited financial statements, SSA believes all
 agencies will have to make decisions regarding the following issues:
        - Will the auditor render an opinion on the financial statements?
          SSA decided to obtain an opinion.
        - Who will audit the statements? Inspector General (IG)? General
          Accounting Office (GAO)? Private Certified Public Accountant
          (CPA) firm? SSA chose to use the IG.
        - What will be the scope of the audit? All operations? Selected
          operations? SSA included all of their operations within the audit
          scope.
        - What will be the vehicle for publication of the audited financial
          statements? SSA incorporated the audited financial statements
          into their annual report to the Congress.

 SSA's .Approach
       Because the annual report to the Congress must be produced by
 March 1, SSA has approximately 150 days from the end of the fiscal year
 to produce the audited financial statements. This time period is utilized as
 follows:
        - 45 days (Oct 1- Nov 15) Close books and produce reports for
          Treasury and the Office of Management and Budget (OMB).
        - 30 days (Nov 15 - Dec 15) Prepare audited financial
          statements, footnotes, and supplemental schedules.
        - 45 days (Dec 15 - Feb 1) Complete audit and resolve audit
          recommendations.
        - 30 days (Feb 1 - Mar 1) Print audit report.
      Each March, SSA plans the coming audit by doing the following:
        - Identifies SSA components.
        - Develops timeline for key events.
        - Coordinates audit plan with auditors and SSA Deputy
          Commissioners.
        -   Begins process necessary to obtain actuary reports.
        - Prompts General Counsel about legal issues that may affect
          financial statements.



 55
Social Secunty Administra:titm




       AB stated above, SSA does not begin the production of the audited
 financial statements until November 15. A three-person staff produces the
 statements in accordance with a documented process. SSA downloads
 "general ledger" information from their mainframe accounting system
 into a personal computer (PC). The PC contains programs that produce
 both the SF 220 Report and the audited financial statements. During this
 time, financial information received from Treasury is reconciled with SSA
 financial records. SSA prepared the financial statements in accordance
 with the accounting principles in GAO's Policy and Procedures Manual, for
 Guidance ofFederal, Agencies, Title 2.

 Lessons Learned
       Document the process of producing audited financial statements
 during the first year. SSA neglected to do this until the second year.
       Involve the auditors as early as possible, so that they may express
 their views on how the footnotes are worded.

 IG Perspe&tipe
      The IG followed the auditing standards set forth by GAO's
 Government Auditing Standards ("Yellow Book") and the AICPA's
 "Statements on Auditing Standards" (SAS). A great emphasis was placed
 on ensuring that the audit staff was experienced and professionally
 competent. Several auditors were CPAB and all auditors obtained
 continuing professional education (CPE) in accordance with the "Yellow
 Book." Although actuarial projections were obtained from outside
 consultants, the IG staff completed most of the field work.
      The first audit (fiscal year 198 7) required the involvement of 60
 auditors for a total of about 14 staff years. The fiscal year 1989 audit
 required only 8 staff years. Some of the auditing effort will be contracted
 out for fiscal year 1990.
      Before undertaking the first audit, the IG reviewed prior audits
 issued by GAO and other government audit agencies. The IG places great
 importance on understanding and testing SSA's internal controls. At the
 completion of the audit, the IG produced the following reports:
        - Opinion report.
        - Report on internal controls.
        - Report on compliance with laws and regulations.
        - Management letter.




 56
Social Secunty .Administration




 Financial Statements
       In accordance with the "Yellow Book," SSA produces three audited
 financial statements:
        - Combined Statement of Financial Position (Balance Sheet).
        - Combined Statement of Financing Sources and Expenses and
          Trust Fund Balances (Income Statement).
        - Combined Statement of Cash Flows and Reconciliation
          (Statement of Changes in Financial Position).
       In addition, SSA produces footnotes and supplementary schedules
 that accompany the financial statements.

 Bala.nee Sheet-SSA Perspecrive
       The balance sheet shows SSA's assets, liabilities, and government
 equity. Because SSA allows for 4.4 days of check float, the fiscal year
 1988 Fund Balance with U.S. Treasury line has a negative balance.
 Government securities reflected in the Investment category will be sold
 after 4.4 days to cover checks written to beneficiaries. Accounts receivable
 are reflected at net of an allowance for uncollectible accounts. Most
 accounts receivable arise from benefit overpayments. Capital assets are
 shown net of depreciation. SSA owns most of its own buildings.
 Unfunded liabilities are not shown on the balance sheet. These liabilities
 are disclosed in the supplementary information section. Both the IG and
 GAO concur with this approach.

 Bala.nee Sheet-IG Perspective
       The IG used Treasury statements to confirm the Fund Balance
 amount. To verify the Investment amount, the IG used confirmations and
 performed analytical reviews on Treasury Advice Slips. Liabilities were
 verified via analytical reviews. In addition, the IG obtained a Legal
 Representation Letter from the General Counsel.

 Income Statement-SSA. Perspective
       The income amount is based on SSA estimates that are reconciled to
 actual earnings data (W-2s)· certified by SSA. Expense amounts are based
 on actual activity measured by SSA's accounting systems during the year.
 This is the easiest statement to produce.

 Income Statement-IG Perspective
       To verify income, the IG reviews the adjustments to the estimated
 data based on actual wage data (94ls) provided to SSA by the ms and
 the reconciling of any differences between the W-2s and the 94ls. With



 57
respect to expenses, the IG performs tests to ensure that the income
statement reflects them in the correct amount and for the proper fiscal
year.

Statement ofCash Flows
     The statement reconciles the cash based Treasury statements to the
accrual based SSA statements.

Footna'tes
      SSA prepared the footnotes to the financial statements in
accordance with GAO's Title 2. The IG reviewed the footnotes very
closely.

Supplemental Information
     In preparing this information, SSA tried to present useful
information to the reader of the financial statements. They relied on their
judgment, not regulations, in compiling this information.

Opi,nion Letter
     The IG presented three qualifications in the 1989 Opinion Letter:
       - Uncertainty of revenue amounts due to discrepancy between
         amounts reported to IRS and SSA.
       - Uncertainty of accounts receivable due to benefit overpayments,
         i.e., the subsidiary accounting records did not reconcile with the
         General Ledger balances.
       - Uncertainty of equipment balances, i.e., the subsidiary
         accounting records did not reconcile with the General Ledger
         balances.
      The qualifications expressed by the IG prompted SSA to take
corrective actions for each area. SSA has requested a Comptroller General
decision regarding the expression of revenue in the financial statements.
To better track accounts receivable, SSA is installing a new Debt
Management System. Equipment balances are being verified with physical
inventories. In addition, individual items of equipment are being bar
coded.




58
Social Se&uri:ty .Administration




 IG's Com:lusions
       - Auditors must be adequately trained. In addition to meeting
         the minimum CPE requirements, special training for financial
         auditing should be given to each auditor. The auditors involved
         with this audit received 1 week of classroom instruction. This
         instruction was based on GAO's CARE approach to financial
         auditing.
       - Skilled, experienced auditors must lead the audit effort.

 SSA's Com:lusions
      Audited financial statements are a driving force behind management
 improvements in both the financial management and program
 management areas. The following reports focus management's attention
 on problem areas:
       - Qualifications expressed in the Opinion Letter.
       - Report on Compliance with Laws and Regulations.
       - Report on internal controls.
      Audited financial statements often help justify financial and program
 system improvements.




 59
                                  Workshop on Financial Statements:
                                  Department ofVeterans Affi:iirs




                                  Gordon Chapin began the discussion with an overview of the effort
                                     involved in compiling the Department of Veterans Affairs' (VA)
                                  Treasury reports and financial. statements. He described the complexity
                                  and scope of the V Ns operations and cited the diverse types of funding at
                                  the VA which include annual, no-year, and multi-year appropriations,
                                  revolving funds, and trust revolving funds. Additionally, the VA uses six
                                  to eight miscellaneous deposit funds and maintains a separate series of
                                  accounts for personal property, buildings, and equipment.
                                        The financial reporting process at the VA begins with an analysis of
                                  the general ledger trial balance and adjustments to accounts as
                                  appropriate. Note that this review and correction process also is done on
                                  a monthly basis to address any problems as they occur. Once the VA is
                                  satisfied with the accuracy of the corrected trial balance, the financial
                                  report preparation phase begins. The first report prepared at year-end is
Gonion Chapin                     the SF-133, "Report on Budget Execution," in preliminary and final
Department of Veterans Affairs    forms. Next, the TFS-2108, "Year-End Closing Statement," is prepared.
                                  The VA places significant emphasis on verifying the accuracy of the data
                                  entered on the TFS-2108, since itis a certified statement and the agency
                                  is locked into these numbers when preparing the remaining year-end
                                  reports. The final step is the production of the SF-220 series of reports.
                                  The SF-220 ~cries is currently prepared on a manual basis at the VA.
                                  Personal computer spreadsheets are used in this effort to combine the
                                  various appropriations into the Treasury reporting entities.
                                        The VA feels that the extension of the FAFR deadline to January
                                  3 lst will allow for further verification of balances and confidence in the
                                  accuracy of amounts reported.


                                  John Gartner provided a detailed look at the preparation of V Ns
                                     departmental financial statements and footnote disclosures. He
                                   distributed handouts showing the following three statements prepared by
                                   the VA and contrasted these statements to the SF-220 series financial
                                   reports.

                                  &hedule ofAssets, Liabi-Uties, and Equity
                                        The Schedule of Assets, Liabilities, and Equity is a balance sheet
                                  similar to the SF-220, "Report on Financial Position." Receivables and
                                  Advances tie to the SF-220 and the SF-220-9, with the exception of an
                                  additional $1.2 million Reserve for Bad Debts on the VA statement. One
                                  notable difference on the VA statement's asset section is the inclusion of a
                                  line titled "Foreclosed Property Held for Sale," which is not a separate
                                  line item on the SF-220.
 John Gartner
 Department of Veterans Affairs


                                   60
Department ofVeterans Affairs




      The presentation Qf property, plant, and equipment on the
 statements is an area of concern for the VA. GAO has issued a qualified
 opinion on the VA statements because of its inability to attest to the
 accuracy of plant and equipment balances. The VA keeps manual records
 of equipment values which they agree are essentially unauditable.
       Another difference between the VA statement and the SF-220 is the
 addition of a line titled "Other Financing Sources" to the asset section.
 This amount represents future appropriations that will come in to the VA
 to pay liabilities (obligations) incurred. Mr. Gartner noted that an
 alternative approach used in some agencies is to disclose this activity as
 negative equity.
        The liability section of the VA schedule includes a separate line item
 for the Liability for Losses on Guaranteed Loans. In 1989, this figure
 amounted to $2.6 billion. This liability is a result of VNs guarantee of
 home loan mortgages to veterans and represents the cost in future years
 for guarantees outstanding at the end of the current fiscal year. The large
 liability has evolved because the loan guarantee fund was never adequately
 financed. The funding was not made as the guarantees were made, but
 instead was funded as the defaults occurred.
       GAO had further qualified VNs statements in the past because of
 the VNs presentation of its insurance reserves on the Schedule of Assets,
 Liabilities, and Equity. The VA was reporting its insurance reserves based
 on statutory insurance principles rather than on a GAAP basis. For 1989's
 reporting, the VNs presentation was converted to GAAP and this
 particular qualification was eliminated.

 &hedule of&penses, Di-vidends, Revenue, and Financing
 Sources             ·
       Mr. Gartner pointed out that the presentation of this statement
 really does not look at all like the SF-221. The statement presents the
 activities of the VA as a self-balancing operation. The VA has attempted
 to give the reader an appreciation of the V Ns expenses and revenues by
 object class. This presentation makes it clear, for example, that the VA is
 heavily personnel-intensive, especially with services in the medical
 environment.
       The line item titled "Future Financing Sources" is the balancing
 figure that makes this report balance from top to bottom. The Future
 Financing Sources shown on this statement ties to the net change in
 Future Financing Sources on the balance sheet from year to year.




 61
Department ofVeterans Affairs




 Schedule ofSources and Uses ofResources and Reconciliation to
 Budget
      Mr. Gartner described this VA statement as a combination of the
 SF-222, "Report on Cash Flow," and the SF-223, "Report on
 Reconciliation." VNs statement includes a line titled "Net Use of
 Budgetary Resources," which is an exact tie to the VA budget that goes
 forward.
       Mr. Gartner noted that the VA also prepares a fourth statement
 which summarizes the activity in the "M" accounts. It shows the balance
 at the beginning of the year, new monies sent back to Treasury, and the
 resulting balance at the end of the year. GAO may be considering this
 type of statement as a new reporting requirement.
       It was emphasized throughout Mr. Gartner's presentation that one
 of the primary benefits of audited financial statements for the VA was the
 identification of unusual activity and/or potential reporting problems.
       Finally, Mr. Gartner discussed the footnote disclosures to the
 Veterans Affairs' financial statements. There are essentially 10 different
 disclosure items:
        - Significant accounting policies: defines the entity, basis of
          consolidation, financing sources, property and equipment,
          accrued compensation and pension benefits, losses on
          guaranteed loans, dividends payable, and worker's
          compensation.
        - Iiltragovernmental financial accounting: stresses that the VA is
          not a stand-alone entity but is part of the whole federal
          government, that the national debt is not reflected in their
          financial statements, and that the OPM and not VA reports on
          the financial condition of the CSRS and FERS.
        - Restatement of fiscal year 1988 statements: discloses that the
          fiscal year 1988 statements were restated to record life insurance
          reserves on a GAAP basis (thus eliminating one of GAO's
          qualifications).
        - Future liability for compensation and pension: reports the
          present value of unrecorded estimates for future compensation
          and pension liability.
        - Housing credit programs: discloses the provision for losses on
          guaranteed loans as well as the components of the provisions.




 62
                             Depanment ofVeterans Affairs




                                     - Insurance programs: VA has $27 billion in insurance
                                       outstanding. This footnote discloses the difference that exists
                                       between the statutory and GA.AP presentations of insurance
                                       reserves. The statutory method assumes a 3 percent return on
                                       investment and uses 1950 life expectancy tables. GAAP method
                                       uses c.."UlTent rate of interest (between 8 and 9 percent) as well as
                                       current life expectancy tables.
                                     - Investments: discloses makeup of investments and rates.
                                     - Receivables: accounts, loans receivables, and advances.
                                     - Property and equipment: presents the net book value of land,
                                       buildings, equipment, and construction in process. Discloses
                                       that land is carried at historical cost.
                                     - Contingencies: based on legal representation letter and includes
                                       Department of Justice cases as well as class action suits.


                             Next, Greg Ziombra from the General Accounting Office explained
                                 GAO's basic financial audit approach, the results of the VA audits, and
                              outstanding issues to be resolved at the VA. The scope of GAO's audit
                              was wide-ranging and included audits at various VA locations including
                              the central office, medical centers, regional offices, ADP centers, and
                              accounting and finance centers.
                                   There are four components of GAO's financial audits:
                                  I. Agency profile: a document based on a brief survey that
                              summarizes the entity, organization structure, and operations.
                                   2. Control and risk evaluation (CARE) methodology: includes
                              general risk analysis, transaction flow review and analysis, control testing,
                              and substantive testing.
                                   3. Financial statement consolidation: consolidation of data by
Grtgory Ziomlwa,
                              appropriation, comparison of financial statement data to Treasury reports,
Genera/, Accounting Office
                              and reconciliation of differences.
                                    4. Financial reporting: required reports include the "Opinion on
                              the Financial Statements," "Report on Internal Control Structure,"
                              "Report on Compliance with Laws and Regulations," and an optional
                              "Management Letter."
                                   The major results of financial audits of the VA indicate that
                              property accounts are not fairly presented and that several key internal
                              control weaknesses exist (including consistent failure to reconcile




                              63
                                 Department ofVeteram Affoirs




                                  subsidiary accounts to general ledger control accounts and the use of
                                  obsolete and inefficient financial management systems).
                                        Outstanding issues to be addressed by the VA as a result of the
                                  audits include the implementation of a property accounting system, the
                                  improvement of data processing security controls, and the improvement
                                  of various internal accounting controls.


                                 Fmally, John Johnston of the Office of the Inspector General described
                                   his office's participation in the fiscal year 1989 VA audit. Basically, his
                                 purpose was limited to the attestation of internal accounting controls
                                 through audits at various VA locations. IDs findings of control
                                 weaknesses were similar to those reported by GAO and included a lack of
                                 proper reconciliations, the lack of proper methods for identifying and
                                 collecting accounts receivables, and inadequate procedures for recording
                                 real property. Mr. Johnston discussed the VNs plan for meeting the audit
                                 objective for fiscal year 1990. The IG's office is planning to contract the
                                 rest of the audit work out to a public accounting firm since it would
                                 otherwise require approximately 10 to 15 percent of his existing staff.
                                 However, he acknowledged that contract funds currently are not available
                                 for this endeavor. Mr. Johnston stressed that while he fully supports
                                 audited financial statements, the auditing costs should not divert funds
                                 from existing VA programs.
John Johnston
Office ofInspectw Genera/.
Department of Veterans Affairs    Jllls concluded the VNs presentation; questions were then solicited
                                    from the audience.
                                       Q - How is the CFO working with GAO and the IG with the task
                                  of audited financial statements?
                                        A - The CFO will run interference with OMB trying to get funding
                                  for the audit of financial statements. The IG will go out and contract the
                                  actual audit work.
                                       Q - If audit work is contracted out by the IG's office, who signs the
                                  opinion?
                                       A - The contractor CPA firm would sign the opinion, presuming
                                  they do the preponderance of the field work.
                                       Q - Is the audit of financial statements cost-beneficial?
                                        A- Yes, the audit costs decrease each year. The benefits are many,
                                  specifically, the precision and expertise that it drives into the process.




                                  64