DOCUNBIT RESUE 00287 - [A0891554] Exanination of Financial Statements Bureau of Engraving and Printing Fund for Fiscal Years 1974 and 1975 Shows Need for Statutory Authority to Increase Capitalization. FOD-76-22; B-114801. arch 7, 1977. 19 pp. 2 appendices (4 pp.). Report to the on;ress; by Rotert 'l. Keller, Acting Comptroller General. Issue Area: ccounting and Financial Reporting (2800). CoLtact: Field operations Div. Budget Function: General Government: Other General Covernment (806). organization Concerned: Department of the Tree sury. Congressional Pelevance: House Committee on Banking, Finance and Urtan Affairs; Senate committee on Banking, Housing and Urban affairs; Congress. Authority: 12 Stat. 532. 30 Stat. 17. 19 Stat. 353. 31 U.S.C. 6 (a) . The Bureau of Engraving ard Printing Fund finances the Bureau's operations and any surplus the Fund accrues during any fiscal year is paid into the Treasury's general fund as siscellaneous receipts. Agencies using the Bureau's services make payments at prices adequate to recover the cost of producing the requisitioned items. In fiscal year 1975, a surcharge was added to prices charged to customers in order to finance a nachinery and equipment odernization program. Findings/Coaclusions: The Bureau cannot continue to levy the surcharge without specific statutory authority. he financial statements of the Fund present fairly its financial position at June 30, 1974 and 1975, in conformity with principles anr standards prescribed by the Comptroller General, with the exception that the Fund's increased capitalization is not authorized. Recommendations: The Secretary of the Treasury should obtain legislative authority for the Bureau to borrow funds from the Treasury's general fund as the optimum approach to financing capital improvements. (BRS) r. 0o Co REPORT TO THE CONGRESS BY THE COMPTROLLER GENERAL OF THE UNITED STATES Examination Of Financial Statements Bureau Of Engraving And Printing Fund For Fiscal Years 1974 And 1975 Shows Need For Statutory AuthorityTo Increase Capitalization Department of the Treasury The law establishing the Bureau's revolving fund requires that any surplus of revenue over costs be returned to the Treasury. In fiscal year 1975 the Bureau added a surcharge to the prices customer agencies paid to finance capital equipment. Without specific statutory authority to increase its capitalization, the Bureau cannot levy and retain the surcharge. GAO recommends t at the Secretary of the Treasury obtain the appropriate legislative changes to authorize the increased capitaliza- tion which has resulted from the funds ac- cumulated by the surcharge. GAO also recom- mends that the Secretary obtain authority for the Bureau to borrow funds from the U.S. Treasury so that subsequent major acquisi- tions of equipment can be financed by bor- rowing rather than a surcharge. FOD7&-22 MARCH-! 7, 1977 COMPTROLUR GENERAL OF THE UNITED FTATr S WASINGTON, D.C. I B-114801 To the President of the Senate and the Speaker of t House of Representatives This report summarizes our examination of the financial statements of the Bureau of Engraving and Printing Fund for fiscal years 1974 and 1975. We made our examination pursuant to the act of August 4, 1950 (31 U.S.C. 181), which established the Bureau of En- graving and Printing Fund. We are sending copies of this reFort to the Director, Office of Management and Budget, and to the Secretany of the Treasury. ACTING Comptrolle en of the United States COMPTROLLER GENERAL'S EXAMINATION OF FINANCIAL TATEMENTS REPORT TO THE CONGRESS BUREAU OF ENGRAVING AND PRINTING FUND FOR FISCAL YEhRS 1974 AND 1975 SHOWS NEED FOR STATUTORY AUTHORITY TO INCREASE CAPITALIZATICN Department of the Treasury D I G E S T The Bureau of Engraving and Printing Fund was established to finance Bureau operations which consist principally of manufacturing U.S. paper currency, various public debt instru- ments, postage and internal revenue stamps, food coupons, and military payment certifi- cates. Agencies using the Bureau's services make payments at prices adequate to recover costs of producing the items requisitioned. Revenue from sales of its products in f;cal years 1974 and 1975 was about $85.9 million and $99.3 million, respectively. Net lo3ses for fiscal years 1974 and 1975 were $150,031 and $369,631, respectively. (See p. 3.) In 172 the Bureau initiated a $17.5 million machinery and equipment modernization pro- gram. In fiscal years 1972 and 1973. the Congress appropriated $6 million for the pro- gram. In fiscal year 1973 the House Commit- tee on Appropriations directed the Bureau to establish prices to cover direct and indirect costs and to accumulate sufficient funds to replace capital equipment. In response, the Bureau has added a surcharge to the prices charged customers. As of June 30, 1975, the Bureau had collected $2,128,371 through its surcharge and had entered lease-purchase agreements for 12 pieces of modern equip- ment. (See p. 7.) Without specific statutory authority to in- crease its capitalization, the Bureau cannot legally levy and retain the surcharge. GAO recommends that the Secretary of the Treasury obtain the appropriate legislative changes to authorize the increased capitalization which has resulted from the funds accumulated by the surcharge. (See p. 10.) The Department of the Treasury disagreed with the need for legislative change to increase TlaUS. Upon removal, the report i cover dte should be noted hreon. FOD-76-22 capitalizat:ion primarily because it has been levying the surcharge without objection from the Congress and GAO. Although it is true that Bureau officials met with GAO in 1972 to discuss the surcharge, memorandums of that meeting by Bureau and GAO representatives present advised that such a surcharge was prohibited by the legislation governing the revolving fund. (See p. 10.) The Bureau is paying an average annual inter- est rate of about 14.6 percent for 12 pieces of equipment on lease-purchase agreements. If the Breau had had authority to borrow from the Treasury's general fund, the inter- est rate would have been considerably less than 14.6 percent. Therefore, GAO recommends that the Secretary of the Treasury obtain legislative authority for the Bureau to bor- row funds from the Treasury's general fund as the optimum approach to financing cap:tal improvements. (See pp. 9 and 10.) In GAO's opinion, the financial statements oZ the Bureau of Engraving and Printing Fund present fairly its financial position at June 30, 1974 and 1975, and the results of its operations and changes in its financial position for the year- then ended, in con- formity with the principles and standards of accounting prescribed by the Comptroller Gen- eral of the United States, except that the fund's increased capitalization, as discussed above, is not authorized. (See p. 12.) ii Contents DIGEST i CHAPTER 1 INTRODUCTION 1 Bureau accounting system 2 2 OPERATIONS 3 Procurement of currency paper 3 Data processing plans 4 Food coupon production 5 3 MACHINERY AND EQUIPMENT MODERNIZATION PROGRAM 7 Statutory authority needed to increase Bureau fund 7 Alternative methods of financing should be explored 9 Conclusions 9 Recommendations 10 4 INTERNAL AUDIT 11 5 SCOPE OF EXAMINATION AND OPINION ON FINANCIAL STATEMENTS 12 Scope of examination 12 Opinion on financial statements 12 FINANCIAL STATEMENTS Schedule 1 Comparative statement of financial condition June 30, 1975 and 1974 13 2 Comparative statement of income and expense for the fiscal years ended June 30, 1975 and 1974 14 3 Comparative statement of changes in financial position for the fiscal years ended June 30, 1975 and 1974 15 Notes to financial statements 16 APPENDIX Page I Letter dated September 30, 1976, from the Di- rector, Office of Operations, Office of the Secretary of the Treasury 20 II Principal officials of the Bureau of Engraving and Printing responsible or the activities discussed in this report 23 CHAPTER INTRODUCTION The bureau of Engraving and Printing, Department of the Treasury, manufactures U.S. paper currency, various public debt instruments, postage and internal revenue stamps, food coupons, and military payment certificates. In addition, the Bureau prints commissions, certificates of awards, anJ many other miscellaneous items. permits, The Bureau's products are produced for Government departments and independent agen- cies, the Board of Governors of the Federal Reserve System, and insular possessions of the United States. The Bureau conducts extensive research and develupment to improve the quality of products, reduce manufacturing costs, and strengthen deterrents to counterfeiting Govern- ment securities. It purchases equipment, rmaterials, and supplies; manufactures ink and gum used for its products; provides maintenance service for its buildings and plant machinery and equipment; and stores and delivers ucts in accordance with requirements of customer its rod- agencies. The Bureau renders additional services for other Government agencies, including (1) the operation of facilities for de- stroying mutilated securities and confidential papers and (2) custodial and elevator services in areas of its buildings occupied by other branches of the Department of the Treasury. Bureau management is vested in a Director, appointed by the Secretary of the Treasury. The Director reports to the Assistant Secretary of the Treasury for Enforcement, Opera- tions, and Tariff Affairs. Mr. James A. Conlon was ap- pointed Director on October 9, 1967. The basic legislation authorizing the Bureau's operation dates back to the act of July 11, 1862 (12 Stat. 532). This legislation has been supplemented by the act of March 3, 1877 (19 Stat. 353), and the act of June 4, 1897 (30 Stat. 17). The century-old Bureau has grown from a small unit of 6 per- sons to a large, modern industrial establishment employing over 3,000 people. The Bureau is housed in two buildings in Washington, D.C., witn a combined floor space of acres, and rents 11,400 square feet of warehouse about 25 space in Lorton, Virginia. The Bureau's principal customers are the Federal Reserve System, the Department of Agriculture, the U.S. Postal Serv- ice, and the Internal Revenue Service. 4 BUREAU ACCOUNTING SYSTEM The Accounting and Auditing Act of 1950, 31 U.S.C. 66(a) (1970), places responsibility for establishing and maintain- ing adequate systems of accounting and internal control with the head of each executive agency. These systems are re- quired to meet the accounting principles, standards, and re- lated requirements prescribed by the Comptroller General. The act also requires that the Comptroller General approve accounting systems when they are deemed adequate and conform to prescribed principles, standards, and related re- auirements. The Bureau's accounting systems were approved by the Comptroller General on July 9, 1952. 2 CIAPTER 2 OPERATIONS The Bureau's operations are financed by a revolving fund--the Bureau of Engraving and Printing Fund. Agencies using the Bureau's services pay prices deemed by the Secre- tary of the Treasury to be adequate to recover the Bureau's costs of producing the items. Any surplus the fund accrues in any fiscal year is paid into the Treasury's general fund as miscellaneous receipts, except that any surplus may be applied first to offset any accumulated deficit from prior years' operations. The Bureau reported that it delivered the following finished goods to its customers in fiscal years 1974 and 1975. Number of pieces Face value '7 ~...975 1975 Currency 2,324,000,048 2,823,840,776 $ 22,041,440,000 Bonds, notes, bills, cer- tificates, and deben- tures 5,868,097 4,958,357 $178,632,475,000 Stamps 40,209,216,683 34,185,724,872 $ 12,330,618,894 Miscella- neous 7,819,258 7,968,202 In fiscal years 1974 and 1975, revenue from the sales of products was $85,869,069 and $99,367,009, respectively. The Bureau reported net losses in both fiscal years--$150,031 in 1974 and $369,631 in 1975. The Bureau periodically reviews the costs of producing its products and adjusts selling prices accordingly. PROCUREMENT OF CURRENCY PAPER For printing U.S. currency the Bureau uses paper manufac- tured to conform to rigid specifications prescribed by the Secretary of the Treasury. The paper's distinctive feature is that small segments of colored fiber are incorporated while the paper is being manufactured. For the past 37 years, only one supplier has responded to invitations for bids issued under formal advertising pro- cedures for the Buzeau's requirements for currency paper. Our report on Exa!nination of the Breau of Engraving and Printing Fund, Fiscal Years 1970 and 1971,"( B-114801, May 17, 1972), pointed out the absence of adequate and effective 3 competition in procuring currency paper. The Bureau adopted our suggestion that future contracts be negotiated on the basis of the supplier's cost data--certified cost or pricing data in accordance with the provisions of the Federal Pro- curement Regulations (41 CFR 1-3.807-3 and 1-3.807.4 1976). On August 13, 1973, the Bureau awarded a $9 million fixed-price-with-escalation contract, which was negotiated on the basis of cost data, to its long-term supplier for furnishing currency paper during fiscal years 1974 and 1975. This contract was for an estimated 13.3 million pounds of currency paper at 67.1 cents a pound, an increase of 2.9 cents a pound over the prior contract price. The contract contains an option for extension through fiscal years 1976 and 1977, which was exercised in June 1975. The contract's standard price adjustment clause provides that the price for currency paper can be increased or de- creased proportionately with increases or decreases in the supplier's cost. Price increases on the contract were as follows: Date Price per pound Aug. 13, 1973 67.1 June 25, 1974 87.0 Dec. 3, 1974 89.1 Jtne 18, 1975 94.2 The large increase from August 1973 to June 1974 was primar- ily due to an average increase in raw materials of 15 per- cent, a 12-percent increase in labor, and a 5-percent in- crease in overhead rates due to smaller quantities produced. To effectively exercise its rights and safeguards un- der the contract, the Bureau established procedures for re- viewing the data used in negotiating the contract price and for auditing periodically the cost records at the contrac- tor's plant. As of January 1977 the Bureau' internal au- ditor had completed two audits of the contractor's cost rec- ords. DATA PROCESSING PLANS Currently, the Bureau's reporting systems and proce- dures are primarily manual. However, in 1972 the Bureau initiated a program for developing and implementing a computer-based management information system designed to provide and integrate information on its manufacturing and 4 financial activities. As the initial step, in November the Bureau converted its payroll and personnel processing1975 from punched card equipment to computer processing. The Bu- reau is using a payroll and personnel system the Department of the Interior developed. To further improve its data processing capabilities, the Bureau plans to -- reorganize its Tabulation Machine Section into a Data Processinq Division; -- train personnel in the use of more modern data processing equipment for data entry and computer time sharing; -- initiate a pilot project for improved data entry systems; and -- develop computer systems for inventory control, manufacturing, and financial accounting. FOOD COUPON PRODUCTION In fiscal year 1961 the Bureau began printing food coupons for the Food Stamp Program administered by the Food Nutrition Service of the Department of Agriculture. Since 1961 food coupon printing has increased from 7.9 million coupons to a record high in fiscal year 1975 of over 3 bil- lion coupons. Because of increasing demands on equipment, space, and manpower, the Bureau awarded a contract to a private company on November 2, 1971, for production of about half the annual food coupon requirement. This action was helpful in reducing excessive overtime and eased the existing equipment and space constraints. For fiscal year 1974 the Office of Management and Budget (OMB) reduced the Bureau's proposed personnel ceiling and di- rected the Bureau to contract out to private industry the en- tire food coupon production. After OMB's action, the Bureau received downward revisions in several work requirements. Because of these revised requirements, the Bureau requested and received OMB approval to continue producing about 20 percent f the food coupons needed during fiscal year 1974. During fiscal year 1975 the Department of Agriculture initiated a new series of food coupons for issue on March 1, 1975. Since the private companies were unable to provide all 5, the coupons needed by the changeover date, the continued producing the old series. Bureau During March the Department of Agriculture the Bureau to assist in producing the new series requested vate companies ould not meet the escalated programsince pri- ments. Therefore, the Bureau continued to produce require- pons through fiscal year 1975. food cou- A comparison of Bureau and industry volumes and for food coupon production follows: costs Bureau Percent Private firms Fiscal Total Coupons of year Coupons deliveries delivered product Cost delivered Cost (billions) (millions) (millions) 1972 1.87 1,439 77 $8,854,410 426 1973 1.89 $ 2,879,456 957 51 7,080,088 935 6,410,528 1974 2.53 443 18 3,986,180 1975 2,092 17,179,964 3.15 437 14 5,084,723 2,715 27,536,025 OMB granted the Bureau permission to produce all food coupon books in fiscal year 1976, because $2 the Bureau could produce the books cheaper than the private sector. 6 CHAPTER 3 MACHINERY AND EQUIPMENT MODERNIZATION PROGRAM On the basis of its analysis of immediate and predictable needs, the Bureau initiated a program in 1972 for the accelerated acquisition of modern machinery and equipment. The purposes of the program are to (1) maintain the Bureau's productive capacity at a rate consistent with the growth of work programs, (2) _.-cther improve its opera- tions, and (3) mechanize some or the more costly manual proc- essing operations. About $17.5 million will be required to implement this program. The cost of this specialized machinery and equip- ment, however, will substantially exceed funds normally available to the Bureau. Consequently, for fiscal year 1972 the Bureau received an appropriation of $3 million to ini- tiate the modernization program. For fiscal year 1973 the Bureau requested an addi- tional $6 million to continue the program; however, the Con- gress limited the appropriation to $3 million. In recommend- ing a $3 million appropriation, the House Committee on Appro- priations also directed the Treasury and the Bureau to review pricing policies for services with the view towards establish- ing prices which will generate sufficient funds, at least over the relatively long range, to cover direct and indirect oper- ating costs as well as accumulate an adequate reserve for re- placing capital equipment. In response to the objective set forth by the Commit- tee's report, the Bureau added a surcharge to prices charged customers beginning in fiscal year 1975. The surcharge rate is computed by dividing the amount of funds needed for equip- ment modernization by either the expected revenues for sales or the expected units of sales. The rate for each product is then applied to actual amounts billed or units deliveLed. Amounts collected from the surcharge are used to finance ma- chinery and equipment. As of June 30, 1975, the Bureau had collected $2,128,371 through its surcharge and had entered lease-purchase agreements for 12 pieces of modern equipment. STATUTORY AUTHORITY NEEDED TO INCREASE BUREAU FUND Although the Committee's direction to the Bureau was in agreement with the purpose of the revolving fund--to put the Bureau on a more self-sustaining basis--the Bureau cannot legally levy and retain the surcharge without specific sta- tutory authority. 7 The act of ugust 4, 1950 (31 U.S.C. S181-181e (1970)), which established the Bureau's revolving fund, provides that agencies shall pay for services "* * * at prices deemed by the Secretary of the Treasury * * * to be adequate to recover the amount of direct and indirect costs of the Bu- reau, including its administrative expenses, incidental to performing the work or services requisitioned." (31 U.S.C. S181 (1970)). The revolving fund was established to be available without fiscal year limitation for financing all costs and expenses of operating and maintaining the Bureau. Since replacement costs of capitalized assets are "costs and expenses" of operation, the Bureau is required to "make provision for replacement of capitalized equipment and other fixed assets through the maintenance of adequate depreciation reserves based on original cost or on appraised values * * *." (31 U.S.C. S181c (1970)) (empdsfs sup- plied.) Any surplus the fund accrues in any fiscal year must be paid into the general fund of the Treasury, provided that any sur- plus may be applied first to restore any impairment of the capital of the fund. The report accompanying the bill (S. 3653) enacting the 1950 act, stated that: "* * * since the Bureau would be authorized to recover all of its costs of operation, the cap- ital of the fund should be maintained at this original level unless additional capital were provided by appropriations. The need for such additional capital, however, is not contemplated on the basis of existing operations and condi- tions." (S. Rept. 1932, 81st Cong., 2d S.3 (1950).) The above legislation and accompanying report indi- cates that the Congress intended for the Bureau to request appropriations if additional capital were needed. We recog- nize that the position of the Committee on Appropriations may comport with the purpose of the revolving fund legis!la- tion--to put the Bureau on a more self-sustaining basis. However, authorization for the Bureau's surcharge would re- quire amendment of the existing statute. 8 ALTERNATIVE METHODS OF FINANCING SHOULD BE EXP LORED Recognizing that cash accumulation produced by a reasonable surcharge would take too long to provide suffi- cient funds to meet current machinery and equipment needs, the Bureau is using lease-purchase agreements which permit the acquisition of items as funds become available. It ex- pects that the annual savings through using modern machinery will initially offset and eventually exceed lease payments. The annual payments for the 12 pieces of equipment are shown in the following taDle. Annual uayment Down TiE- - - - nd ........ 4th 5 h eaym!nt year year year year yeI Total Six Currency Overprint- ing and Processing a- chines leased from MGD Graphic Systems Divi- sion, Rockwell Inter- national $700,000 $1,629,504 $1,486,'08 $ 870,048 '7,968 $ 649,224 6,122,752 Two Intaglio Currency Presses leased from MGD Graphic Systems Division, Rockwell International - 517,632 476,856 436,080 395,280 354,504 2,180,352 Four Intaglio Currency Presses leased from American Banknote Co. 3 258 0 0 0 258 --- 1__ 1L34LQ !L!L 518,000 - L _ L0 5 LALLLq2Q Total S700L000 5 51 o 6 $S2 .L3. L! $1L824L128 $LjiLq4 $1LK217 S13L475T10 Th_ purchase price of this equipment would have been $10,244.000. Therefore, the Bureau is paying an average an- nual interest rate of about 14.6 percent. We believe that less costly alternatives may be avail- able for financing capital improvements. If the Bureau had had authority to borrow from the Treasury's general fund, the interest rate wld have been considerably less than the 14.6 percent paid. Not only would it have been less expensive but also the Bureau may not have had to levy the surcharge or use lease-purchase arrangements, both of which have caused con- siderable administrative problems. For example, devising formulas for assessing the surchage by product and account- ing for its receipt and disbursement are complicated and time-consuming and no doubt will eventually necessitate addi- tional controls to assure hat inequities do not result from the way the surcharge is levied and spent. CONCLUSIONS Although the Bureau was acting in response to direc- tion from the House Committee on Appropriations, it cannot 9 legally levy and retain the surcharge without specific statutory authority. Accordingly, we believe the Bureau should seek a legislative amendment to authorize the in- creased capitalization of the fund. We believe also that, in the future, as an alternative to the surcharge and lease- purchase agreements, the Bureau should obtain lonn-term bor- rowing authority to finance major equipment acquisitions. This would reduce financing costs and simplify administrative procedures. The Department disagreed with the need for legislative change to increase capitalization primarily because it has been levying the surcharge without objection. (See app. I.) A.though it is true that Bureau officials met with us in 1972 to discuss the surcharge, memorandums of that meeting by the Bureau and our representatives present advised that such a surcharge was prohibited by the legislation governing the revolving fund and that the report of the Appropriations Com- mittee did not amend the original legislation in this regard. Our participants stated that in view of the circumstances, we probably would not take issue with the surcharge approach. However, we suggested that the Bureau seek an amendment to the revolving fund legislation and that it also discuss with the Committee the apparent conflict between the legislation and the Committee's instructions. The Bureau did not pursue amending the law and, consist- ent with our previous position, we believe that an amendment is required. RECOMMENDATIONS We recommend that the Secretary of the Treasury obtain the appropriate legislative changes to authorize the in- creased capitalization which has resulted from the funds ac- cumulated by the surcharge. We furtner recommend that the Secretary obtain legislative authority for the Bureau to bor- row funds from the Treasury so that subsequent major acqui- sitions of machinery and equipment can be financed by borrow- ing rather than by adding a surcharge. The Treasury did not comment on our recommendation that the Bureau seek legislative authority to borrow funds from the Treasury. However, in several meetings with Bureau offi- cials, they have indicated agreement with our suggestion. 1.0 CHAPTER 4 INTERNAL AUDIT The objective of the Bureau's Office of Audit is to assist management at all levels in achieving efficiency, ef- fectiveness, and economy in financial, administrative, pro- duction, and other operations. To accomplish this objec- tive, the Bureau's internal auditors conduct three types of reviews: Examinations of financial transactions, accounts and reports, including an evaluation of compliance with applicable laws, regulations, and authorized policies and procedures. Reviews of efficiency and economy in using resources. Reviews to determine whether desired results are ef- fectively achieved. The Office of Audit is headed by the Chief Internal Auditor who reports directly to the Director of the Bureau. The internal audit staff as of June 30, 1974, and June 30, 1975, numbered 21 and 24 auditors, respectively. The internal auditors issued 52 reports with 173 recommenda- tions in fiscal year 1974, and 61 reports with 229 recommen- dations in fiscal year 1975. Recommendations by the internal auditors resulted in reduced operating costs; strengthening internal controls; better use of personnel, materials, and equipment; improved safety and security; more effective procurement and warehous- ing; and identifying obsolete stock and equipment. The Office of Audit distributes its draft reports to the responsible officials and incorporates their comments in th2 final report. All outstanding recommendations are followed up every 30 days. If no action has been taken, the matter is reported to the Director of the Bureau in writing. Our review indicated that the internal audit work was satisfactory and included adequate tests of the areas re- viewed. Therefore, the extent of our detailed tests of ac- counting records was reduced. Our review of the internal audit staff's work included (1) reviewing the audit program to determine the adequacy of the prescribed procedures, (2) observing the taking of physical inventory of selected items at the end of the fiscal years, and (3) reviewing re- ports and workpapers pertaining to audits of the accounts to the extent that we deemed appropriate. 11 CHAPTER 5 SCOPE OF EXAMINATION AND OPINION ON FINANCIAL STATEMENTS SCOPE OF EXAMINATION We made our examination of the financial statements of the Bureau of Engraving and Printing Fund for fiscal years 1974 and 1975 in accordance with generally accepted auditing standards and included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances, in view of the effectiveness of inter- nal controls, including the internal audit function. OPINION ON FINANCIAL SATEMENTS No amounts are included in the financial statements for (1) interest on the investment of the Government in the Bureau of Ertgraving and Printing Fund, (2) depreciation on the Bureau'l buildings excluded from the assets of the fund by the act of August 4, 1950, and (3) costs of certain serv- ices performed by other agencies for the Bureau, such as check preparation and external audit. These costs, the amount of which is not readily determinable, are excluded by law. To accumulate sufficient funds to replace capital equip- ment, the Bureau has added a surcharge to prices charged customers. Without specific statutory authority to increase its capitalization, the Bureau cannot legally levy and re- tain the surcharge. (See p. 7.) In our opinion, the accompanying financial statements (schs. 1, 2, and 3) present fairly the financial position of the Bureau of Engraving and Printing Fund at June 30, 1974 and 1975, and the results of its operations and changes in its financial position for the years then ended, in conform- ity with principles and standards of accounting prescribed by the Comptroller General of the United States, except that the fund's increased capitalization, as discussed above, is not authorized. 12 SCHEDULE 1 SCHEDULE 1 DEPARTMENT OF THE TREASURY BURE 0 OF ENGRAVING AND PRINTING FUND COMPARATIVE STATEMENT OF FI!'NCIAL CONDITION 3 JUNE 0, 1975 AND 1974 June 30, June 30, 1975 1974 ASSETS CURRENT ASSETS: Cash with the Treasury $12,675,257 $ 8,302,151 Accounts receivable (note 2) 10,914,481 6,964,670 Inventories (notes 1 and 2) 21,800,632 12,464,219 Prepaid expenses 147,857 92,559 Total current assets 4 5 538 F2 2 7 27,823,599 PLANT AND EQUIPMENT (notes 1 and 3) 38,948,828 37,208,220 Less accumulated depreciation (note 1) 26,581,981 25,219,059 Net plant and equipment 12,366,847 11,989,161 DEFERRED CHARGES 120,140 134,640 Total assets $58,025,214 $39,947,400 LIABILITIES AND INVESTMENT OF THE U.S. GOVERNMENT LIABILITIES: Accounts payable $ 3,389,510 $ 2,754,458 Accrued liabilities (note 4) 10,049,653 8,008,022 Trust and deposit liabilities 307,977 240,970 Advances from others (note 5) 15,576,751 2,001,367 Total liabilities (note 6) 29,323,891 13,004,817 INVESTMENT OF THE U.S. GOVERNMENT: Appropriation from U.S. Treasury 9,250,000 9,250,000 Donated assets, net 18,044,969 18,044,969 Provision for capital improvements (note 7) 2,128,371 - Accumulated earnings or deficit(-) (note 1) -722,017 -352,386 Total investment of the U.S. Government 28,701,323 26L942,583 Total liabilities and investment of the U.S. Government $58,025,214 $39,947,400 The notes following schedule 3 are an integral part of this statement. The opinion of the General Accounting Office appears on page 12. 13 SCHEDULE 2 SCHEDULE 2 DEPARTIMENT OF he TREASURY BUREAU OF ENGRAVINC AND PRINTING FIEND COMPARATIVE STATEMENT OF INCOME AND EXPENSE 30 FOR THE FISCAL YEARS ENDED JUNE L 1975 AND 1974 1975 1974 OPERATING REVENUE: SALES OF ENGRAVING AND PRINTING 99L _99 S8 5Lt!L OPERATING COSTS: Cost of sales: Direct labor 29,037,427 26,628,428 Direct materials used 11,039,746 8,758,968 Contract printing (food coupons) 30.297,223 16,351,414 Contract printing (gasoline rationing coupons) - __796L_60 70 Prime cost LIZILM 5jt535L_7 Overhead costs: Salaries and indirect labor 22,320,360 19,561,821 Factory supplies 3,581,374 2,415,208 Repair parts and supplies 843,249 600,135 Employer's share personnel benefits 4,567,867 4,088,963 Rents, communications and utilities 2,635,190 1,580,117 Other services 1,170,857 1,062,712 Distribution charges (food coupons) 1,119,949 741,468 Depreciation and amortization (note 1) 1,572,558 1,472,394 Gains(-) or losses on disposal or retirement of fixed assets -1,171 5,428 Minor equipment 984,210 386,545 Transportation of things 332,182 359,712 Sundry expense (net) -:L0 101t9 Total overhead 39L12IL311 32L376L4^ Total osts 109L L711 Z911L512 Less: Nonproduction costs: Shop costs capitalized 964,244 851,870 Cost of miscellaneous services rendered other agencies 1,531,233 1,193,108 t495477 2LO 044,978 Cost of production 107,004,234 85,866,534 Net increase(-) or decrease in finished goods and work in process inventories from operations -_LLt613 L252L56t Cost of sales _9 738 221 8.IOLLU1Ir OPERATING PROFI'r R LOSS(-) _-371,212 _-150,031 NONOPERATING REVENUE: Operation and maintenance of incinerator and space utilized bv other agencies 1,120,609 905,558 Other direct charges for miscellaneous services 412205... 550 NONOPERATING COSTS: Cost of miscellaneous services rendered other agencies __L13,L2i3 _.ALI22L " NONOPERATING PROFIT OF WSS(-) 1.81 NET PROFIT OR LOSS(-) FOR THE YiAR (note 1) $___ -369t61 S__:135060, The notes following schedule 3 are an integral part of this statement. The opinion of the General Accounting Office appears on page 12. 14 SCHEDULE 3 SCHEDULE DEPARTMENT OF THE TREASURY BUREAU OF ENGRAVING AND PRINTING FUND COMPARATIVE STATEMENT OF CHANGES IN FINANCIAL POSITION FOR THE FISCAL YEARS ENDED JUNE 30 L 1975 AND 1974 Funds rovided and_ a led 1975 1974 FUNDS PROVIDED: Sales of engraving and printing $ 99,367,009 Provision for capital improvements $85,869,069 2,128,371 - Operation and maintenance of incinerator and space utilized by other agencies 1,120,609 Other direct charges for miscellaneous 905,558 services -_ 412,205 287550 103,028,194 87,062,177 Less cost of sales and services (exclud- ing depreciation and other charges not requiring expenditure of funds: fis- cal year 1975 $1,571,387, fiscal year 1974 $1,477,822) 99698,067 8534,387 3,330,127 1,327,790 Sales of surplus equipment Decrease in working capital 5,740 4,804 _153,470 Total funds provided $ 3335867 FUNDS APPLIED: Acquisition of fixeds assets $ 1,909,870 Acquisition of experimental equipment $ 1,350,955 and plant repairs and alterations to be charged to future operations 30,444 Increase in working capital 135,109 1,395,553 1 -_ Total funds applied 335,8 $1486064 Analysis of changes in working capital June 30, 1975 June 30 1974 Increase Decrease Increase Decrease Current assets: Cash $ 4,373,106 Accounts rceivable $1,465,931 3,949,810 $3,057,566 Inventories 9,336,413 Prepaid expenses 744,448 55,297 25,059 Liabilities: Account, payable $ 635,051 Accrued liabilities 1,327,699 2,041,631 156,264 Trust and deposit liabilities 64,013 Advances from others 18,583 13,575,384 1,001,367 Other liabilities _ _ 294 __2,253 $17,714,626 $16,319,073 $3,822,850 $3,976,320 Increase or (de- crease) in working capital -,395,553 70 The notes following schedule 3 are an integral part of this statement. The opinion of the General ccounting Office appears on page 12. 15 NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Inventories--Finished goods and work-in-process inventories valued at cost, including administrative and serv- ice overhead. Except for the distinctive paper, which is valued at the acquisition cost, raw materials and stores inven- tories are valued t the average cost of the materials and sup- plies on hand. Plant and equipment--Machinery and equipment, furniture and fixtures, office achines and motor vehicles acquired on or before June 30, 1950, are stated at appraised values as at that date. Additions since June 30, 1950, and all build- ing appurtenances are valued at acquisition cost. The act that established the Bureau of Engraving and Printing Fund specifically excluded land and buildings cost- ing about $9,000,000 from the assets of the fund. Also ex- cluded are appropriated funds of about $7,184,000 lar extra- ordinary uncapitalized building repairs and air-conditioning. DePreciation--Depreciation is computed under the straight- line method. The depreciation rates used are based on the following useful lives: 6 to 30 years for machinery and equipment, 6 to 20 years for motor vehicles, 10 years for office machines, 10 years for furniture and fixtures, and 3 to 20 years for building appurtenances. Earnings--Customer agencies make payment to the Bureau at prices deemed adequate to recover costs. Because of varia- tions between prices charged and actual costs, the Bureau could earn a profit or incur a loss in any fiscal year. All profit is to be paid into the general fund of the Treasury except that required to offset any accumulated loss from prior years' operations. 2. Inventories June 30, 1975 June 30, 1974 Finished goods $ 8,434,866 $ 2,726,854 Work in process 7,143,966 5,585,964 Raw materials 3,446,419 2,144,205 Stores 2,775,381 2,007,196 Total $21,800,632 $12,464,219 The large increases in finished goods and work-in-process inventories are primarily due to orders by the Department of Agriculture for food coupon books necessitating greater in- ventories ($4.1 million). Also, in the latter half of fiscal year 1975 the U.S. Postal Service significantly reduced field 16 inventory levels of postage stamps, which had an immediate effect of reducing orders received from postal service cen- ters. The increase in postage stamp work-in-process, fin- ished goods, raw materials, and stores inventories estimated at $4.3 million is attributed to this reduced demand. The large increase in finished goods was the primary reason for the increase in accounts receivable. 3. PLANT EQUIPMENT June 30, 1975 June 30, 1974 Machinery and equipment $03,722,512 $30,130,815 Motor vehicles 162,370 160,914 Office machines 412,356 408,027 Furniture and fixtures 663,590 610,202 Building appurtenances 5,797,273 5,148,790 Total 37,758,101 36,458,743 Less accumulated depre- ciation 26,581,981 25,219,059 Net 11,176,120 11,239,684 Construction in progress 1,190,727 749,477 Total $12,366 847 $11,989,161 Construction in progress on June 30, 1975, consists of $999,137 for various items of machinery and equipment, and $191,590 for various building appurtenances. The June 30, 1975, total of $37,758,101 includes $16,972,743 of fully depreciated assets still in use. The amounts by class are: Machinery and equipment $12,814,782 Motor vehicles 52,166 Office machines 181,853 Furniture and fixtures 291,923 Building appurtenances 3,632,019 Total $16,972,743 17 4. ACCRUED LIABILITIES June 30, 1975 June 30, 1974 Payroll $ 2,120,407 $2,963,187 Accrued leave 2,812,642 2,586,307 Constructive receipts 2,370,530 1,641,200 Cther 2,746,074 817,328 Total $10,049,653 $8,008,022 The accrual for constructive receipts is the estimated value of work performed by contractors to special specifica- tion, which had not been delivered to or accepted by the Bu- reau at the statement date. For June 30, 1975, the offset- ting entries are to raw materials, $419,638; stores, $146,527; and work in process, $1,804,365. 5. ADVANCES The following agencies have advanced funds to the Bureau which are being used to finance increased inventories needed for future deliveries: June 30, 1975 June 30, 1974 Departmelit of Agricul- ture (food coupon books) $14,000,000 $2,000,000 U.S. Postal Service (post- age stamps) 1,576,751 - Other 1,367 Total $15,576,751 $2,001,367 The Bureau pays contractors for food coupons when they are delivered to the warehouse. However, Agriculture does not pay the Bureau until about 3-1/2 months later. Because this time lag severely limits cash resources, Agriculture advanced the Bureau an additional $12 million during fiscal year 1975. 6. COMMITMENTS AND CONTINGENT LIABILITIES Outstanding commitments with suppliers for unperformed contracts and undelivered purchase orders total $8,195,701 as of June 30, 1975. A lease agreement for renting a closed circuit televi- sion system provides for payments averaging about $126,125 annually through March 1977, $96,913 from April 1, 1977, to March 31, 1978, and $64,224 from April 1, 1978, to March 31, 1979. At the end of payment, the Bureau will assume 18 ownership of the equipment. Under the agreement the Bureau could be liable for a termination charge if it suspends or discontinues making rental payments. This charge was com- puted at $112,392 as of June 30, 1975. The Bureau has no plans to suspend or discontinue this system. Civilian members of the Bureau's guard unit have sub- mitted claims for overtime compensation alleged to be due for the period prior to October 9, 1973. The Bureau will pay the compensation but as of December 31, 1975, it had not begun processing individual claims. If all possible claims are paid, the liability is estimated to be about $500,000. 7. SURCHARGE Effective July 1, 1974, the Bureau included a surcharge on the selling price of its products which will provide funds for future capital improvements. The surcharge rate is com- puted by dividing the amount of funds needed for equipment modernization by either the expected revenues from sales or the expected units of sales. The rate for each product is then applied to actual amounts billed or units delivered. This plar. was developed in response to the directive issued Dy the Committee on Appropriations (H. Rept. 92-1150 (1972)) in reporting out the Treasury, Postal Service, and General Government Appropriation Bill, 1973 (Report No. 92-1150). In its report the Committee directed that the Bureau generate sufficient funds to cover direct and indirect costs of opera- tions as well as accumulate an adequate reserve for replace- ment of capital equipment. 19 APPENDIX I APPENDIX I OFFICE OF THE SECRETARY OF THE TREASURY WASHINGTON. D.C. 20220 SEP 30 1976 Dear Mr. McElyea: Owing to Assistant Secretary Macdonald's recent transfer Department of Defense, I have taken the liberty of to the responding invitation to comment on draft report B-114801, Examination to your of Financial Statements, Bureau of Engraving and Printing Funs for Fiscal Years 1974 and 1975. [See GAO note 1, p. 23.] Surcharge The matter of financing the Bureau's equipment discussed as far back as March 10, 1972, during the needs was formally appearance of the Director of the Bureau of Engraving and Printing before the House Sub- committee on Appropriations. In reporting out the Treasury, vice, and General Government Appropriation Bill (H.R. Postal Ser- 1150, 92nd Congress, (1973), the House Committee on Appropriations recommended that the Bureau's 1973 appropriation be reduced from the $6 million requested to $3 million and stated in part that "The Committee therefore recommends $3 million in the accompanying bill and directs the Bureau and the Department to review the pricing policies for services with the objective of establishing prices which will, at least over the relatively lmng range, generate sufficient funds to cover direct and indirect costs of operations as well as accumulate an adequate re- serve for replacement of capital equipment." The Bureau implemented this Congressional directive to raise its prices by establishing the surcharge. On August 15, 1972, in an effort to resolve any problems regarding the establishment a meeting was held between the General Accounting of such a surcharge, Office and the Bureau. 20 APPENDIX I APPENDIX I At this meeting, the Chief, Office of Financial Management of the Bureau, discussed both the pertinent language of Public Law 656 and the Com- mittee's directive General Accounting Office staff members indicated that there would be no objection by the GAO if the Bureau complied with this directive. On March 13, 1974, in hearings before the House Subcommittee on Appropr.ations, the Director of the Bureau testified, without objection, that "... the Bureau is making provisions to implement the use of e surcharge, beginning in fiscal year 15, as a means for financing future capital improvements." Additionally, "in their comprehensive analysis of productivity in Government, including existing capitalization con- straints, the CSC-GAO-OMB study group has identified the use of the sur- charge approach, as this committee recommended, as one of the viable techniques for improved financing capability toward the acquisition of productivity enhancing equipment." A similar statement was made at the Senate Hearings before the Subcommittee on Appropriations that same year. On March 14, 1975, in the hearings before the House Subcommittee on Appropriations, the Director informed the Subcommittee that, beginning in fiscal year 1975, the Bureau had incorporated a surcharge in the cost of producing products. Since that time, the Bureau of Engraving and Printing has continued to use the surcharge technique in generating funds for short term equipment acquisition needs, without objection from Con- gressional committees. Further, this Department has relied on Decision B-104492 (copy en- closed), issued by the Acting Comptroller General on October 4, 1951, advising the Secretary of the Treasury that the Bureau of Engraving and Printing Fund established by Public Law 656 is available for the purpose of financing additional equipment for the Bureau, as a necessary cost of operating and maintaining the Bureau. [See GAO note 1, p. 23.] 21 APPENDIX I &PPENDIX I Again, I have appreciated the opportunity to comment upon this document and applaud GAO for its comprehensive analysis and openness in dealing with the Executive Branch of Government. Should you desire further contact on either of these subjects, my staff and the staff of Director Conlon would be glad to meet with you. Sincerely yours William F. Hausman Director Office of Operations Mr. S. D. McElyea Director, Field Operations Division United States General Accounting Office Washington, DC 20548 Enclosures [See GAO note 2.] GAO notes: 1. Deleted material relates to data in our draft report which has not been incorporated in this final report. 2. Enclosures not included. 22 APPENDIX II APPENDIX II PRINCIPAL OFFICIALS OF THE BUREAU OF ENGRAVING AND PRINTING RESPONSIBLE FOR THE ACTIVITIES DISCUSSED IN THIS REPORT Tenure o, office From To DIRECTOR: James A. Conlon Oct. 1967 Present DEPUTY DIRECTOR: Kenneth A. DeHart (note a) July 1974 Present Donald C. Tolson Oct. 1968 Dec. 1973 CHIEF, OFFICE OF AUDIT: Jay L. Esserman Feb. 1973 Present ASSISTANT DIRECTOR OF ADMINIS- TRATION (note b): Seymour Berry Aug. 1975 Present CHIEF, OFFICE OF ADMINISTRATIVE SERVICES: Jules C. Rieder Feb. 19'5 Present Albert J. Hamberg (note c) May 1975 Dec. 1974 CHIEF, OFFICE OF FINANCIAL MAN- AGEMENT: Maurice M. Schneider June 1974 Present Andrew J. Wilson Jan. 1967 June 1974 a/Mr. DeHart was acting Deputy Director prior to his promo- tion for the period following Mr. Tolson's retirement. b/Assistant Director of Administration is a newly created sition beginning 7/1/75. po- c/Mr. Hamberg left his office during the spring of 1974 on disability leave. Mr. Rieder became acting Chief from July 1974 until his promotion. 23
Examination of Financial Statements Bureau of Engraving and Printing Fund for Fiscal Years 1974 and 1975 Shows Need for Statutory Authority to Increase Capitalization
Published by the Government Accountability Office on 1977-03-07.
Below is a raw (and likely hideous) rendition of the original report. (PDF)