oversight

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)

                          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