oversight

Forest Service: Year-end Financial Reporting Significantly Improved, but Certain Underlying Problems Remain

Published by the Government Accountability Office on 2003-05-01.

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

             United States General Accounting Office

GAO          Report to the Chairman and Ranking
             Minority Member, Subcommittee on
             Forests and Forest Health, Committee on
             Resources, House of Representatives

May 2003
             FOREST SERVICE
             Year-end Financial
             Reporting
             Significantly
             Improved, but Certain
             Underlying Problems
             Remain




GAO-03-538
             a
                                               May 2003


                                               FOREST SERVICE

                                               Year-end Financial Reporting
Highlights of GAO-03-538, a report to the      Significantly Improved, but Certain
Chairman and Ranking Minority Member,
Subcommittee on Forests and Forest             Underlying Problems Remain
Health, Committee on Resources, House
of Representatives.




Since 1996, we have periodically               The Forest Service has made significant progress toward achieving financial
reported on Forest Service financial           accountability, receiving its first “clean” or unqualified audit opinion on its
management problems that we, the               financial statements for fiscal year 2002. This was attained because top
U.S. Department of Agriculture’s               management dedicated considerable resources to address accounting and
Office of the Inspector General, and           reporting deficiencies. We consider this a positive step; however, sustaining
other independent auditors have
identified. We have designated the
                                               this outcome and achieving financial accountability will require more than
Forest Service financial                       obtaining year-end numbers for financial statement purposes.
management as a high-risk area
since 1999. Because of these                   The Forest Service continues to face several major challenges, many of
longstanding financial management              which resulted in unfavorable audit opinions in the past. Specifically, the
deficiencies, the Subcommittee                 Forest Service’s fiscal year 2002 financial statement audit report disclosed
asked GAO to report on the Forest              material internal control weaknesses related to its two major asset
Service’s progress in correcting its           accounts—fund balance with the U.S. Department of the Treasury, and
financial management problems and              property, plant, and equipment—as well as for certain estimated liabilities,
on remaining challenges and actions            payroll processes, computer security controls, and software application
underway to address those                      controls related to its procurement and property systems. Further, the
challenges.
                                               Forest Service has not addressed the challenges of replacing or enhancing
                                               legacy feeder systems and implementing a financial management field
                                               operation that supports efficient and effective day-to-day financial
We recommend that the Forest                   operations and routinely produces reliable and timely financial information.
Service develop a comprehensive
financial management strategy that             The Forest Service has corrective actions underway or planned that are
  • defines financial management               intended to resolve these problems, including a financial management
     goals and objectives,                     strategic plan. If this plan is to serve as a “road map” toward financial
  • specifies corrective actions,              accountability, the Forest Service needs to ensure that its plan is
  • identifies target dates and                comprehensive, integrating and prioritizing the various corrective action
     resources needed,                         initiatives underway and planned.
  • identifies responsible parties,
     and
  • prioritizes and links                      History of Forest Service Audit Reports
     improvement initiatives,                   Fiscal                                                Material internal              Noncompliance with
                                                year              Opinion                             control weaknesses             laws and regulations
     including USDA financial
     management systems                         1991                  Adverse                         X                              X
     enhancements.                              1992                  Adverse                         X                              X
                                                1993                  Qualified                       X                              X
 The Forest Service concurred with              1994                  Qualified                       X                              X
 our recommendations and                        1995                  Adverse                         X                              X
 indicated that it is developing a              1996                  No Audit
                                                                                 a
                                                                                                      No audit                       No audit
 strategic plan.                                1997                  Disclaimer                      X                              X
                                                1998                  Disclaimer                      X                              X
                                                1999                  Disclaimer                      X                              X
                                                2000                  Disclaimer                      X                              X

www.gao.gov/cgi-bin/getrpt?GAO-03-538.          2001                  Disclaimer                      X                              X
                                                2002                  Unqualified                     X                              X
To view the full report, including the scope    Source: USDA Inspector General and KPMG audit reports.
and methodology, click on the link above.
                                                a
For more information, contact McCoy              The Forest Service chose not to prepare financial statements in an effort to focus on
Williams at (202) 512-6906 or                   correcting accounting and reporting weaknesses.
williamsm1@gao.gov.
Contents



Letter                                                                                                              1
                         Results in Brief                                                                           2
                         Background                                                                                 3
                         Scope and Methodology                                                                      6
                         The Forest Service Has Made Significant Progress toward Achieving
                           Financial Accountability                                                                  7
                         Despite Progress Made, Accountability Challenges Remain                                    10
                         An Efficient and Effective Financial Management Organization Is
                           Key to Achieving Financial Accountability                                                16
                         Corrective Actions Are Underway or Planned to Resolve Remaining
                           Problems                                                                                 18
                         Conclusion                                                                                 20
                         Recommendations for Executive Action                                                       21
                         Agency Comments and Our Evaluation                                                         22


Appendix
           Appendix I:   Comments from the Forest Service                                                           23


Tables                   Table 1: Forest Service History of Audit Opinions                                           5
                         Table 2: Forest Service Material Internal Control Weaknesses                               13




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                         Page i                                                          GAO-03-538 Forest Service
A
United States General Accounting Office
Washington, D.C. 20548



                                    May 1, 2003                                                                                Leter




                                    The Honorable Scott McInnis
                                    Chairman
                                    The Honorable Jay Inslee
                                    Ranking Minority Member
                                    Subcommittee on Forests
                                      and Forest Health
                                    Committee on Resources
                                    House of Representatives

                                    Since December 1996, we have periodically reported1 on financial
                                    management problems identified by the U. S. Department of Agriculture’s
                                    (USDA) Office of the Inspector General (IG) in its annual audits of the
                                    Forest Service’s financial statements. In prior reports and testimonies, we
                                    discussed (1) how the lack of accountability raises concerns about the
                                    Forest Service’s stewardship over billions of dollars of taxpayer money
                                    appropriated to it, (2) how its autonomous field structure hampers efforts
                                    to achieve financial accountability, and (3) its progress in correcting its
                                    financial accounting and reporting deficiencies. This report responds to
                                    your request that we continue to monitor the Forest Service’s efforts to
                                    improve its financial management and determine

                                    • whether the Forest Service has made progress in resolving previously
                                      reported financial management problems,

                                    • challenges that the Forest Service faces in achieving financial
                                      accountability, and

                                    • actions underway or planned by the Forest Service for resolving
                                      remaining problems.




                                    1
                                     U.S. General Accounting Office, Financial Management: Forest Service’s Efforts to
                                    Achieve Accountability, GAO/AIMD-99-68R (Washington, D.C.: Feb. 8, 1999); Forest
                                    Service: Barriers to Financial Accountability Remain, GAO/AIMD-99-1 (Washington,
                                    D.C.: Oct. 2, 1998); Forest Service: Status of Progress Toward Financial Accountability,
                                    GAO/AIMD-98-84 (Washington, D.C.: Feb. 27, 1998); Financial Management: Forest
                                    Service’s Progress Toward Financial Accountability, GAO/AIMD-97-151R (Washington,
                                    D.C.: Aug. 29, 1997); and Letter to the Chairman, House Committee on the Budget,
                                    GAO/AIMD-97-11R (Washington, D.C.: Dec. 20, 1996).




                                    Page 1                                                         GAO-03-538 Forest Service
Results in Brief   In fiscal year 2002, the Forest Service made significant progress toward
                   achieving financial accountability, receiving its first unqualified or “clean”
                   audit opinion on its financial statements. To achieve this milestone, the
                   Forest Service’s top management dedicated considerable resources and
                   focused staff efforts to address accounting and reporting deficiencies that
                   had prevented a favorable opinion in the past. We consider this a positive
                   step toward achieving financial accountability. However, sustaining this
                   outcome and achieving financial accountability requires more than
                   obtaining reliable onetime year-end numbers for financial statement
                   purposes.

                   The Forest Service still must overcome several major challenges before it
                   can routinely produce reliable and timely financial information to
                   effectively manage operations, monitor revenue and spending levels, and
                   make informed decisions about future funding needs for its programs. The
                   fiscal year 2002 financial statement audit report disclosed material internal
                   control weaknesses2 in several areas, including its two major asset
                   accounts--fund balance with the U.S. Department of the Treasury
                   (Treasury) and property, plant, and equipment--certain estimated liabilities,
                   payroll processes, computer security controls, and application software
                   controls related to its procurement and personal property systems. The
                   audit report also discussed areas in which the Forest Service’s financial
                   management systems are not in substantial compliance with Federal
                   Financial Management Improvement Act of 1996 (FFMIA)3 requirements.
                   These relate primarily to the above internal control weaknesses.




                   2
                     A material weakness is a condition in which the design or operation of one or more of the
                   internal control components does not reduce to a relatively low level the risk that errors,
                   fraud, or noncompliance in amounts material to the financial statements may occur and not
                   be detected promptly by employees in the normal course of performing their duties.
                   3
                       P.L. 104-208, title VIII, 110 Stat. 3009-389 (1996).




                   Page 2                                                          GAO-03-538 Forest Service
             As discussed in our prior reports and testimonies, the agency faces the
             challenge of replacing or enhancing certain antiquated financial subsidiary
             systems–called feeder systems–that transfer data to the Foundation
             Financial Information System (FFIS), its standard accounting system, and
             implementing a financial management field organization that supports
             efficient and effective day-to-day financial operations. In 1999, we
             designated Forest Service financial management as high risk on the basis of
             serious financial and accounting weaknesses.4 Again in our January 2003
             report,5 we reiterated our concerns due to the serious deficiencies that
             remain.

             The Forest Service has corrective actions underway or planned that are
             intended to resolve these problems, including a financial management
             strategic plan. If this plan is to serve as a “road map” toward financial
             accountability, the Forest Service needs to make sure its strategic plan is
             comprehensive--integrating and prioritizing the various corrective actions--
             and includes detailed steps for implementing these actions.

             The independent auditor hired by the Forest Service made numerous
             recommendations to improve the internal control weaknesses identified
             during its audit of the fiscal year 2002 financial statements. We support
             these recommendations. In addition, we are recommending to the Chief of
             the Forest Service that the Budget and Finance Deputy Chief/Chief
             Financial Officer (CFO) develop a comprehensive financial management
             strategic plan to effectively manage the improvement efforts underway and
             planned. The Forest Service concurred with our recommendations and it
             is developing a strategic plan.



Background   The Forest Service, a component of the USDA is responsible for
             maintaining the health, diversity, and productivity of the nation’s forests
             and grasslands to meet the needs of present and future generations. This
             mission is carried out through the use of several programs, the largest
             being the National Forest System. Through the National Forest System, the
             Forest Service manages about 192 million acres, comprising about 8.5


             4
              U.S. General Accounting Office, High-Risk Series: An Update, GAO/HR-99-1 (Washington,
             D.C.: January 1999).
             5
              U.S. General Accounting Office, High-Risk Series: An Update, GAO-03-119 (Washington,
             D.C.: January 2003).




             Page 3                                                       GAO-03-538 Forest Service
percent of the total surface area of the United States. On these lands, the
Forest Service, among other things, supports recreation, sells timber,
provides rangeland for grazing, and maintains and protects watersheds,
wilderness, fish, and wildlife. In addition, the Forest Service provides
financial and program support for state and private forests and undertakes
research activities. The Forest Service, headed by a chief, conducts its
activities through 9 regional offices, 6 research offices, 1 state and private
forestry area office, the Forest Products Laboratory, and the International
Institute of Tropical Forestry. In addition, the National Forest System has
155 national forest offices and more than 600 ranger district offices.

The Chief of the Forest Service manages from the national office,
headquartered in Washington, D.C., and provides national-level policy and
direction to the field offices. The Forest Service has approximately 30,000
employees and a budget of over $5 billion to carry out its mission. The
Forest Service Budget and Finance Deputy Chief/CFO is responsible for the
financial accountability of funds appropriated by the Congress for Forest
Service programs and reports to the Forest Service Chief.

The Chief Financial Officers Act of 1990 calls for CFO Act agencies, such as
USDA, to have financial management systems, including internal control,
that provide complete, reliable, consistent and timely information. The
Government Management Reform Act of 1994 (GMRA) requires the CFO
Act agencies to prepare and have audits of annual financial statements.
FFMIA builds on the foundation laid by these acts by emphasizing the need
for agencies to have systems that routinely generate timely, accurate, and
useful information. Specifically, FFMIA requires that the auditor report on
whether the agencies’ financial management systems substantially comply
with (1) federal financial management systems requirements,
(2) applicable federal accounting standards, and (3) the U. S. Government
Standard General Ledger (SGL) at the transaction level6 requirements. As
authorized by GMRA, the Office of Management and Budget is responsible
for identifying components of the designated CFO Act agencies that are
required to have audited financial statements. OMB requires that the
Forest Service, a major component of USDA, have audited financial
statements.




6
  The SGL provides a standard chart of accounts and standardized transactions that
agencies are to use in all their financial systems.




Page 4                                                         GAO-03-538 Forest Service
Since its first financial statement audit for the fiscal year ended September
30, 1991, the Forest Service has faced numerous serious accounting and
financial reporting weaknesses that have prevented it from receiving a
positive audit opinion. These are shown in table 1.



Table 1: Forest Service History of Audit Opinions

Fiscal year             Opinion      Explanation
1991                    Adverse      Major inaccuracies in the financial statements.
1992                    Adverse      Major inaccuracies in the financial statements.
1993                    Qualified    Pervasive errors in the field-level data supporting
1994                    Qualified    the land, buildings, equipment, accounts receivable,
                                     and accounts payable.
1995                    Adverse      Continuing pattern of unfavorable conclusions
                                     about the Forest Service’s financial statements.
                                     Several shortcomings in accounting and financial
                                     data and information systems were identified.
1996                    No Audit     Due to the severity of the accounting and reporting
                                     deficiencies, the Forest Service did not prepare
                                     financial statements for fiscal year 1996, but chose
                                     instead to focus on resolving these problems.
1997                    Disclaimer   Unable to reliably track and report on major assets
                                     worth billions of dollars, including accounts
                                     receivable, real property, and accounts payable.
                                     Also errors in records of fund balances with
                                     Treasury.
1998                    Disclaimer   Lack of basic accountability for major assets and
                                     liabilities; the inability to accurately track the cost of
                                     programs and activities, and significant reporting
                                     errors in the Forest Service financial statements
                                     and supporting records.
1999                    Disclaimer   Unable to determine accuracy of property, plant,
                                     and equipment and unable to verify fiscal year fund
                                     balance with Treasury because of lack of
                                     reconciliations and unsupported balances
                                     remaining from its old accounting system.
2000                    Disclaimer   Material internal control weaknesses existed in the
2001                    Disclaimer   financial statement compilation process and in
                                     procedures for compiling the balances for fund
                                     balances with Treasury and general property, plant,
                                     and equipment. Because of these weaknesses, the
                                     agency was not able to provide timely, sufficient,
                                     and competent evidential matter to support
                                     amounts in the financial statements.
Source: GAO Analysis.




Page 5                                                             GAO-03-538 Forest Service
              In the past, we have reported and testified that the Forest Service’s
              (1) unreliable financial data hampers the agency’s and the Congress’
              decision-making ability, (2) lack of accountability exposes the agency to
              mismanagement and misuse of its assets, and (3) autonomous field
              structure hampers efforts to achieve financial accountability. In January
              1999, due to the longstanding serious accounting and financial reporting
              problems, we designated Forest Service financial management as a high-
              risk area. We continued to designate financial management at Forest
              Service as high-risk in our 2003 report. Since 1997, the IG and independent
              auditors have continued to report instances of noncompliance with certain
              federal financial accounting and information system requirements and
              internal control weaknesses related to Forest Service financial computer
              systems.

              The Forest Service, a component of USDA, uses and depends on many
              financial management systems and services provided by USDA, including
              the USDA National Finance Center (NFC). Therefore, efforts to improve
              controls over certain financial management computer systems and internal
              controls over accounting processes must be made in cooperation with
              USDA and NFC. For example, the Forest Service uses the USDA
              Foundation Financial Information System as its standard accounting
              system. In addition, NFC maintains and controls entry of many Forest
              Service transactions into FFIS. NFC also reports expenditures and
              collections it processes on the Forest Service’s behalf to Treasury. FFIS
              also depends on and receives data from feeder systems used by the Forest
              Service to record its transactions. Many of the Forest Service’s
              longstanding problems with regard to its accounting and information
              systems are a result of outdated technology of the financial feeder systems
              that transfer accounting data to FFIS.



Scope and     To address each of our objectives, we analyzed prior IG, consultant, and
              independent auditor reports including the audit report on the Forest
Methodology   Service’s fiscal year 2002 financial statements that described several
              financial management weaknesses and their effect on the Forest Service’s
              ability to properly account for assets worth billions of dollars entrusted to
              its care. Further, we examined the Forest Service’s financial management
              policies, procedures, and processes, including completed, ongoing and
              planned activities and related implementation schedules to determine the
              Forest Service’s progress, plans, and milestones for addressing financial
              management problems. We attended a Forest Service Budget and Finance
              planning conference and a financial statement training session conducted



              Page 6                                                 GAO-03-538 Forest Service
                         by the USDA CFO to gain a further understanding of Forest Service efforts
                         to improve its financial statement compilation processes and overcome
                         other financial management challenges. We analyzed reported financial
                         management problems against the corrective actions taken to determine
                         the remaining challenges. Further, we discussed the remaining challenges
                         and the status of improvement efforts with officials from USDA and the
                         Forest Service Office of the Chief Financial Officer, the USDA IG, and
                         independent contractors working for the Forest Service.

                         We also visited and interviewed financial management staff at five Forest
                         Service field locations. We visited the Intermountain Regional Office, the
                         largest of the National Forest regions, because it processes a wide variety
                         of financial accounting transactions. We also visited the Southern Regional
                         Office, National Forest of North Carolina Supervisor’s Office, Mt. Pisgah
                         District Ranger Office, and North Carolina Research Station, each
                         representing a different level of the financial management field
                         organization. At each location, we interviewed staff and performed walk-
                         throughs to obtain an understanding of accounting processes and
                         procedures for certain accounts material to the financial statements, such
                         as accounts receivable; property, plant, and equipment; other liabilities; and
                         certain collections/revenues, such as timber sales.

                         We performed our fieldwork from July 2002 through March 2003 in
                         accordance with generally accepted government auditing standards. We
                         requested written comments on a draft of this report from the Chief of the
                         Forest Service or his designee. The Chief of the Forest Service provided us
                         with written comments, which are discussed in the “Agency Comments and
                         Our Evaluation” section and reprinted in appendix I.



The Forest Service Has   The Forest Service has made significant progress toward achieving
                         financial accountability. For the first time since its initial financial
Made Significant         statement audit that covered fiscal year 1991, the Forest Service received
Progress toward          an unqualified or “clean” opinion on its fiscal year 2002 financial
                         statements. To achieve this milestone, the Forest Service’s top
Achieving Financial      management dedicated considerable resources and focused staff efforts to
Accountability           address accounting and reporting deficiencies that had prevented a
                         favorable opinion in the past.

                         Historically the Forest Service’s financial management systems have not
                         generated timely and accurate financial statements for its annual audit. In
                         addition, the Forest Service has had long-standing material weaknesses



                         Page 7                                                 GAO-03-538 Forest Service
with regard to its two major assets--fund balance with Treasury and
property, plant, and equipment. In the past, such weaknesses prevented
the IG from validating these two line items on both the Forest Service and
the USDA departmentwide financial statements. In fiscal year 2002, the
Forest Service reorganized the Budget and Finance Deputy Chief/CFO area
and focused staff efforts to address reporting and accounting deficiencies
identified in the fiscal year 2001 financial statement audit with the goal that
the fiscal year 2002 financial statements would pass audit tests. To assist in
these efforts, the Forest Service hired senior financial management
officials, consultants and contractors and formed a financial reports team
and several reconciliation “strike” teams to improve (1) the financial
statement compilation process and (2) reconciliations of its major
accounts, including fund balance with Treasury and property, plant, and
equipment.

During fiscal year 2002, the financial reports team completed a number of
efforts to improve the compilation process. For example, the team held a
series of financial statement workshops for national office and field staff,
updated the methodology for preparing the fiscal year 2002 financial
statements, and provided the necessary information to complete the audit,
such as account analyses and supporting documentation for sample
transactions selected for testing.

Six reconciliation strike teams, consisting of contractors with expertise in
reconciliation procedures and experienced Forest Service staff, performed
financial statement account reconciliations and reviews to help ensure the
accuracy and timeliness of recorded accounting data and that subsidiary
ledgers were reconciled to general ledger accounts. The strike teams
analyzed account data, identifying accounting errors and documenting
adjustments to key asset, liability, and budgetary accounts in order to
achieve accurate account balances. The fund balance with Treasury team
focused on reconciling material fiscal year 2002 and prior-year cash
transactions. The property, plant, and equipment reconciliation team
analyzed transaction data to identify inaccurate records and reconciled the
general ledger to its supporting detailed records. In addition, the property,
plant, and equipment strike team, in cooperation with the USDA Office of
the Chief Financial Officer, the USDA IG, and consultants, worked to
ensure that property documentation supported property records,
inventories were complete, and property was valued correctly.

Further, the property, plant, and equipment reconciliation team, worked
with USDA on modifications and enhancements to certain property feeder



Page 8                                                  GAO-03-538 Forest Service
systems. For example, in September 2002, USDA completed an automated
interface with the Infrastructure Real Property Subsidiary System (INFRA)
and FFIS. INFRA was revised to improve security by implementing
controls such as user access restriction and password protection. Also,
access to key data elements in the Personal Property System (PROP) and
the Equipment Management Information System (EMIS) was restricted by
September 2002 in order to address security weaknesses. At the same time,
certain automated error checks were added to EMIS to help ensure data
integrity.

While the primary focus of the reports and reconciliations teams was to
help attain a clean fiscal year 2002 audit opinion, the teams have been
institutionalized to work toward sustainable report compilation and
reconciliation processes. Through these established account
reconciliations and analyses, the teams are able to identify many of the
underlying causes of inaccurate data and out of balance conditions.
Specifically, according to the Forest Service CFO management, many of the
problems are caused by improper recording of transactions, FFIS system
problems, faulty interfaced and integrated feeder systems, lack of
consistent formal policies and procedures, lack of staff training and manual
accounting processes prone to human error. By understanding the root
causes, the Forest Service has resolved some of the problems identified.
For example, the strike teams coordinated with USDA to correct several
programming errors7 in FFIS that were causing inappropriate accounting.
For instance, the fund balance with Treasury team found that fund
transfers between Forest Service units for equipment usage, which are
noncash transactions, were incorrectly recorded and reported to Treasury
as cash collections. As result, the Forest Service’s fund balance account at
Treasury was being overstated by these amounts.

During fiscal year 2002, the Forest Service CFO management also issued
new policies and procedures or revised existing ones to help ensure the
quality and integrity of the financial data in FFIS and the feeder systems.
To communicate these changes, the Forest Service CFO issued over 25
CFO bulletins to accounting staff as the need for accounting and reporting
controls were identified. For example, the CFO issued several bulletins
that provided guidance on the proper recording of transactions, such as the


7
 FFIS is programmed to debit or credit certain general ledger accounts based on identifiers,
such as job code and transaction identification number and type, used to record the
accounting event.




Page 9                                                           GAO-03-538 Forest Service
                       types of transaction codes to use when entering data into FFIS. The CFO
                       also issued bulletins (1) requiring analysis of delinquent bills to determine
                       their collectability and (2) to clarify documentation requirements for
                       personal and real property transactions.

                       Further, Forest Service management continued to emphasize the
                       importance of financial accountability to its line managers in the field. In
                       April 2002, the Forest Service CFO implemented a set of financial
                       performance indicators to monitor progress of the field staff in maintaining
                       its accounts, including progress in clearing suspense account8 items,
                       monitoring collection of receivables, and compliance with CFO accounting
                       guidance.



Despite Progress       Achieving financial accountability involves more than obtaining a clean
                       audit opinion by producing reliable onetime year-end numbers for financial
Made, Accountability   statement purposes. The Forest Service still must overcome many
Challenges Remain      challenges to sustain this outcome and to reach the end goal of routinely
                       having timely, accurate, and useful financial information. In its December
                       2002 report on the Forest Service’s fiscal year 2002 financial statements,
                       the auditor, KPMG Peat Marwick LLP (KPMG), continued to identify
                       serious material internal control weaknesses and FFMIA noncompliance
                       issues primarily related to weaknesses in controls over financial
                       management computer systems that could adversely affect the Forest
                       Service’s ability to record, process, summarize, and report financial data in
                       a timely manner.

                       The auditor attributed many of the deficiencies identified to lack of
                       adequately trained staff; lack of manual internal control procedures, such
                       as supervisory reviews; and poor automated controls, such as user access,
                       system edits and system interfaces, within the FFIS and certain feeder
                       systems that transfer the data to FFIS. As discussed in table 2, the auditor
                       made several recommendations to address these conditions. We support
                       these recommendations and are not making any new recommendations in
                       these areas.




                       8
                         Suspense accounts are used to temporarily hold collections and disbursements until
                       disposition is determined and they can be properly classified in the applicable receipt or
                       expenditure budget accounts.




                       Page 10                                                           GAO-03-538 Forest Service
                             In addition, the IG, Forest Service contractors, and we have reported long-
                             standing problems regarding the Forest Service’s financial management
                             systems and its financial management organization. Many of the legacy
                             feeder systems that transfer data to FFIS are antiquated technology and
                             must be enhanced or replaced. The agency also faces the challenge of
                             implementing a financial management field organization that supports
                             effective and efficient day-to-day financial operations. Unless the Forest
                             Service addresses these issues and moves to sustainable financial
                             management processes, it will have to continue to undertake extraordinary,
                             costly efforts, outside of its normal business processes, to sustain clean
                             audit opinions. Further, management’s ability to routinely obtain reliable
                             financial information to effectively manage operations, monitor revenue
                             and spending levels, and make informed decisions about future funding
                             needs will continue to be hampered.



Remaining Internal Control   Our Standards for Internal Control in the Federal Government9 requires
and FFMIA Compliance         that agencies implement a strong internal control system that provides the
                             framework for the accomplishment of management objectives, accurate
Deficiencies Need to Be
                             financial reporting, and compliance with laws and regulations. It contains
Resolved                     the specific internal control standards to be followed. These standards
                             define internal controls as the policies, procedures, techniques, and
                             mechanisms that enforce management’s directives. They help ensure that
                             actions are taken to address risks and are an integral part of an entity’s
                             accountability for stewardship of government resources. The lack of good
                             internal controls puts an agency at risk of mismanagement, waste, fraud,
                             and abuse. Further, without strong internal controls, an agency is unable to
                             generate the consistent, reliable financial information needed to maintain
                             ongoing accountability over its assets.

                             In its fiscal year 2002 audit report on the Forest Service’s financial
                             statements, the auditor continued to report serious internal control
                             weaknesses with regard to the Forest Service’s two major asset accounts--
                             fund balance with Treasury and property, plant, and equipment. Also,
                             KPMG reported material deficiencies related to certain estimated


                             9
                               See U.S. General Accounting Office, Standards for Internal Control in the Federal
                             Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999), which contains the
                             internal control standards to be followed by executive agencies in establishing and
                             maintaining systems of internal controls as required by 31 U.S.C. Section 3512(c), (d),
                             commonly called the Federal Manager’s Financial Integrity Act of 1982.




                             Page 11                                                       GAO-03-538 Forest Service
liabilities, payroll processes, general controls and certain application
software computer controls. The following table provides a brief
description of each of the reported deficiencies and recommendations for
improvement.




Page 12                                            GAO-03-538 Forest Service
Table 2: Forest Service Material Internal Control Weaknesses

Financial management
area                      Conditions and recommendations reported by auditor
Fund balance with the     While the Forest Service has progressed in fiscal years 2001 and 2002 in reconciling its fund balance with
Treasury                  Treasury accounts, control deficiencies still exist in its reconciliation processes. The Forest Service had a
                          large backlog of unreconciled items that needed to be researched and resolved. In order to bring the Forest
                          Service’s fund balance with Treasury accounts into balance with Treasury records as of September 30,
                          2002, the Forest Service recorded an adjustment of $107 million. The auditor recommended that the Forest
                          Service document its reconciliation processes, establish a point of contact at the National Finance Center to
                          assist in the reconciliation process, analyze and determine the proper disposition of its budget and clearing
                          accounts, and allocate the necessary resources to complete monthly reconciliations in a timely manner.
Property, plant, and      Material deficiencies in the controls related to the accurate recording of property, plant, and equipment
equipment                 transactions remain. For example, there were instances in which recorded amounts did not agree with
                          supporting documentation and inappropriate payroll expenses were included in property values instead of
                          being recorded as expenses, resulting in an overstatement of property and an understatement of expenses.
                          Further, the Forest Service did not have effective controls over the initial recording of acquisition costs, in-
                          service date, and useful life of property items. Because the Forest Service did not require reviews of data
                          input for property transactions by a supervisor, another independent person or by system checks within
                          property systems, certain property items were not recorded properly. The auditors recommended that the
                          Forest Service train personnel on accurate transaction recording, require supervisory review of data input of
                          property transactions, and design and implement a control methodology that verifies recording of
                          acquisition costs, in-service date, and useful life and other critical elements, to ensure proper depreciation
                          of capital assets.
Accrued liabilities       The Forest Service’s proposed methodology for estimating certain liabilities, such as grants, was not
                          accurate and did not substantially support the unpaid amount of services that had been delivered as of
                          year-end. In addition, the proposed methodology did not consider payments to states, which are recorded
                          as liabilities as of September 30. If the Forest Service had used its proposed methodology, both its accrued
                          liabilities and associated expenses would have been understated for fiscal year 2002. As a result, sampling
                          methodologies were used to project the year-end balance. The auditor recommended that the Forest
                          Service develop a new methodology for estimating liabilities and maintain the supporting documentation
                          used to determine the estimate.
Payroll process           Serious automated control deficiencies existed with the Forest Service’s payroll time card entry system. For
                          example, it allowed the Forest Service users to submit their time sheets for approval to an employee that
                          was not the designated supervisor. In some locations, the employee could send the time sheet to
                          him/herself for approval. In addition, deficiencies in manual controls over the payroll process existed, such
                          as missing employee and/or supervisor signatures. The auditor recommended that the Forest Service
                          implement controls to ensure that employees’ supervisors appropriately review and approve their
                          subordinates’ time sheets, reinforce the requirement for time sheets to be signed by both the employee and
                          supervisor, and reconcile and biweekly certify its payroll registers to its personnel listing.
General and software      The Forest Service had material deficiencies in its general controlsa environment. For example, controls for
application controls      determining the trustworthiness of personnel, such as background checks, and limiting access to
                          information systems needed improvement. Software application controlsb related to procurement, and real
                          and personal property feeder systems also needed improvement. Without sufficient application controls, the
                          Forest Service is exposed to the risk of its property records being corrupted, lost, or altered, and errors and
                          omissions not being prevented, detected, and corrected. The auditor recommended several actions for
                          improving controls over user access, system interfaces, system edits, separation of duties, and data
                          accuracy and completeness.c
Source: GAO analysis.




                                            Page 13                                                             GAO-03-538 Forest Service
                             a
                              General controls include the structure, policies, and procedures that apply to the agency’s overall
                             computer operations, for example: security management programs, access control, application
                             software development and change, system software control, segregation of duties, and service
                             continuity.
                             b
                              Application controls covers the structure, policies, and procedures designed to help ensure the
                             accuracy, completeness, authorization and validity of all transactions during the application process.
                             Application controls play a crucial role in the auditability of these feeder systems.
                             c
                               Due to the sensitive nature of the issues identified, the auditor provided the Forest Service with a
                             separate limited-distribution report that contains the detailed findings and specific recommendations.


                             Further the auditor reported that the Forest Service’s systems did not
                             substantially comply with the three requirements of the FFMIA--federal
                             financial management systems requirements, applicable federal accounting
                             standards, and the U.S. Government Standard General Ledger at the
                             transaction level. One example of noncompliance with federal financial
                             management systems requirements was that the Forest Service did not
                             have required certification and accreditations of security controls
                             performed timely on its procurement and property systems. Further, the
                             Forest Service did not record revenue for certain collections, such as map
                             sales and camp site reservation fees, when they were collected, as required
                             by federal accounting standards.10 Instead, collections and fees were
                             recorded in a suspense account and revenue was recognized when the
                             money was used for other operational needs instead of when the revenue
                             was actually earned. This practice could result in revenues and related
                             costs being misstated on the Forest Service’s financial reports.



Financial Management         Weaknesses in the Forest Service’s financial management systems continue
Systems Remain an            to hamper its ability to achieve sustainable financial transaction processing
                             and reporting. In the past, the IG and we have reported long-standing
Obstacle to Achieving
                             problems with the feeder systems that process and transfer financial
Sustainable Accountability   information into FFIS. Several of the feeder systems that generate data
                             used to support the financial statements predate FFIS and have antiquated
                             technology. Because significant differences existed between the data in the
                             FFIS general ledger and its supporting detail in the feeder systems,
                             financial statements produced by FFIS could not be relied upon. For
                             example, the Forest Service uses several feeder systems to support its
                             multibillion dollar property, plant, and equipment line item in its financial
                             statements, including (1) Infrastructure Real Property Subsidiary System
                             (INFRA), (2) Personal Property System (PROP), and (3) Equipment

                             10
                              Statement of Federal Financial Accounting Standard No. 7, Accounting for Revenue and
                             Other Financing Sources, requires collections be recorded as revenue at the point of sale.




                             Page 14                                                                  GAO-03-538 Forest Service
Management Information Systems (EMIS). These feeder systems also rely,
in some cases, on data transferred from other lower level (subsidiary)
feeder systems. In prior years, material internal control weaknesses in the
compilation of the property, plant, and equipment balance contributed to a
disclaimer of an opinion on the Forest Service’s financial statements.

In preparation for the fiscal year 2002 audit, the Forest Service engaged a
consultant to perform extensive procedures to arrive at an opening
(October 1, 2001) property, plant, and equipment balance using statistical
sampling of property records. The existing data was examined for
erroneous and duplicate records through a variety of means, including
checks for mathematical accuracy and comparisons with physical records
and inventories. During this process, the consultant discovered that the
lack of and/or faulty interfaces between these feeder systems and FFIS
resulted in erroneous postings to the property, plant, and equipment
account. Although the Forest Service has made certain improvements to
its property feeder systems during fiscal year 2002, more needs to be done
to improve the quality and integrity of financial data in FFIS and the feeder
systems.

In its fiscal year 2002 report on Forest Service’s Information Technology,11
the auditor reported certain weaknesses in internal controls related to the
feeder systems. For example, the auditor found duplicate and dropped
records after data was transferred between PROP, the Purchase Order
Normal Tracking and Inventory System, and the Purchase Order System.
The auditor also reported that system data validation and error detection
controls were ineffective in EMIS. Further, the auditor reported
weaknesses related to the Automated Timber Sales Accounting System
(ASTA). Specifically, there were no controls built into ASTA to prevent
duplicate transactions from being recorded. As a result, field unit staff had
to manually review the data to identify any transactions that were
erroneously entered more than once.

We visited and interviewed financial management staff at five Forest
Service field offices about the accounting processes and systems used to
obtain a “field” perspective on financial management problems and the


11
  As part of the fiscal year 2002 financial statement audit of Forest Service’s financial
statements, the auditor conducted a review of the Forest Service’s information and
technology general and application controls. Due to the sensitive nature of the findings, the
auditors issued a separate restricted report to Forest Service Management.




Page 15                                                           GAO-03-538 Forest Service
                         status of improvement efforts. At the field offices we visited, the financial
                         management staff told us that system issues affect their operations. For
                         example, one field office uses the Timber Information Management (TIM)
                         system, an upfront system used to record the initial information and
                         produce bills for timber sales and wood product permits. Since the system
                         does not interface with FFIS, users have to manually enter the timber sale
                         deposits and permit sales into FFIS. Lack of an automated interface
                         between the systems increases workload as well as the risk of input errors.

                         Problems with the financial management systems continue to hamper the
                         Forest Service’s ability to move to sustainable processes. Until the Forest
                         Service resolves its systems problems, the financial statements produced
                         by FFIS cannot be relied upon without significant manual intervention to
                         reconcile differences between FFIS and the feeder-systems. Resolving
                         these differences consumes personnel and other resources and limits the
                         Forest Service’s ability to have reliable financial information on an ongoing
                         basis for day-to-day management.



An Efficient and         Among the other challenges that the Forest Service faces is establishing an
                         efficient and effective organization to accomplish financial management
Effective Financial      activities. The highly decentralized organizational structure of the Forest
Management               Service’s financial management presents significant challenges in achieving
                         financial accountability. Under the current organization, financial activities
Organization Is Key to   are performed and recorded at the Forest Service national office, nine
Achieving Financial      regional forest offices, six research stations and USDA NFC as well as at
Accountability           hundreds of forest and district ranger offices where many transactions
                         originate. The decentralized financial management organization presents a
                         significant challenge because the Forest Service’s national office financial
                         management team is tasked with ensuring that staff at hundreds of field
                         locations are routinely processing accounting transactions accurately and
                         consistently, in accordance with management directives.

                         Since February 1998, we have reported that the Forest Service’s
                         autonomous and decentralized organizational structure could hinder
                         management’s ability to achieve financial accountability. In March 1998, an
                         independent contractor, hired by the Forest Service to assess the agency’s
                         financial management and organization, also raised the issue of the
                         agency’s autonomous organizational structure. The contractor reported
                         that the Forest Service lacked a consistent structure for financial
                         management practices and that each field unit was operating
                         independently. In response to these concerns, the Forest Service



                         Page 16                                                GAO-03-538 Forest Service
conducted a Financial Management Field Operation Assessment (FOA),
which was completed in March 2001. As part of the assessment, the FOA
project team evaluated the current level of accountability for financial
management and made six recommendations to strengthen lines of
responsibility and accountability. Specifically, the team recommended that
the Forest Service (1) ensure that appropriate delegation of authority is in
place, (2) finalize performance measures for financial management,
(3) appoint field directors as responsible financial accountability officers
for their respective units, (4) appoint deputy chiefs in the national office as
responsible financial accountability officers for their units, (5) provide
training and develop core competencies, and (6) establish policies and
guidelines addressing the development, implementation, and financing
arrangements for shared services agreements related to financial activities.

The Forest Service has taken several actions to address the FOA
recommendations related to the autonomous field structure to improve
accountability for financial management in the field and throughout the
organization. For example, the agency restructured its national office
financial management team to create functional lines of accountability for
Budget and Finance management, under the leadership of the deputy CFO,
who reports directly to the Chief of the Forest Service. The Forest Service
also appointed field directors (regional foresters, research station
directors, etc.) to serve as the responsible financial accountability officers
for their units. Further, beginning in 2001, the Forest Service began to
restructure its regional offices to mirror the national office’s financial
management structure. Currently, six of the nine regional offices have
consolidated budget and finance functions, under the direction of a
financial director who is responsible for financial management activities in
the region. Another regional office is in the process of restructuring its
financial management organization. The two remaining regional offices
have no definite plans to change their financial management structure.
While this is a good first step in resolving the autonomy of the Forest
Service field offices, the Forest Service has not determined how best to
structure the regions and related suboffices to create an efficient and
effective organization to accomplish financial management activities.

At the five field offices we visited, the financial management field staff told
us that, although progress is being made, more needs to be done to move to
sustainable financial transaction processing and reporting in the field. For
example, staff reported that they need more training on FFIS and updated
policy and procedure manuals. They also stated that the national office
needs to improve communication with the field to obtain better



Page 17                                                 GAO-03-538 Forest Service
                         understanding of field business processes and to solicit more input from
                         the field staff in developing accounting and reporting policies and
                         procedures.

                         The Forest Service CFO management acknowledges that creating an
                         effective and efficient organizational structure is critical to establishing
                         sustainable processes and addressing many of the financial management
                         issues and challenges that Forest Service faces, including

                         • improving internal controls over its accounting functions, such as
                           adequate supervisory review, and over other areas of weakness noted by
                           the auditors;

                         • providing training programs and on the job training opportunities for
                           accounting field staff; and

                         • providing adequate oversight to ensure accurate and consistent
                           processing of accounting transactions.

                         In 1999, we designated financial management at the Forest Service to be
                         high risk because of serious financial and accounting weaknesses that had
                         been identified and not corrected, in the agency’s financial statements for a
                         number of years. We continued to designate financial management at
                         Forest Service as high risk in our 2003 report. In order to be removed from
                         the high-risk list, the Forest Service, at a minimum, will need to
                         demonstrate sustained accountability over its assets on an ongoing basis.



Corrective Actions Are   While the conditions discussed above present a major challenge to
                         achieving financial accountability, the Forest Service has several efforts
Underway or Planned      underway or planned, that if implemented, should help to resolve many of
to Resolve Remaining     its financial management problems and to move toward sustainable
                         financial management business processes. Such efforts are designed to
Problems                 address internal control and noncompliance issues identified in the fiscal
                         year 2002 audit report as well as address feeder system and organizational
                         issues. To assist in its efforts, the Forest Service CFO management is
                         developing a financial management strategic plan intended to provide
                         direction for continued improvement efforts and a mechanism to monitor
                         and evaluate performance. To be effective, this plan should be
                         comprehensive--providing a detailed road map of the steps, resources, and
                         time frames for achieving the end goal of sustainable financial
                         management.



                         Page 18                                                GAO-03-538 Forest Service
To address the fiscal year 2002 internal control and FFMIA audit findings,
the fund balance with Treasury reconciliation team has documented its
reconciliation procedures and is working with NFC to develop a fund
balance with Treasury reconciliation process to assist in timely research
and resolution of reconciling items related to fund balance with Treasury
activities that are processed by NFC on the Forest Service’s behalf.
According to Forest Service CFO management, the reconciliation process
should be in place by August 2003. The property, plant, and equipment
reconciliation team has started a project to update existing policies and
procedures and plans to issue revised property, plant, and equipment
manuals during fiscal year 2003. The property, plant, and equipment team
is also continuing to analyze property data files and reconcile data in
property feeder systems to data in FFIS monthly. In January 2003, CFO
management developed and implemented an automated system to track
and monitor the status of issues identified by the reconciliation teams to
help ensure timely resolution. They also hired a training coordinator to
develop standardized training programs and two additional staff to update
all financial policy and procedure manuals.

The Forest Service is also continuing to work with USDA to enhance or
replace the feeder systems in an effort to resolve data transfer problems
between feeder systems and FFIS. For example, it is currently exploring an
option for replacing the Forest Service’s three property feeder systems with
a single USDA-wide property system. A decision on the system will be
made by December 2003. The Forest Service expects to begin
implementing the system in fiscal year 2004. Also, the Forest Service is
scheduled to pilot the Integrated Acquisition System (IAS) by fiscal year
2004. IAS is a procurement system that will replace the current purchase
order system and will link to FFIS. IAS will support three major
procurement processes: requisitioning, purchasing, and contracting.

In addition to the efforts mentioned above, the Forest Service is evaluating
options for a more efficient financial management organization. In
November 2002, it formed the Financial Management Efficiency Team to
assess financial management roles and responsibilities and evaluate
models for an efficient financial management organization. In January
2003, the team submitted a draft proposal for financial management roles
and responsibilities throughout the organization and is scheduled to submit
its recommendation for a financial management organization in June 2003.
According to CFO management, the team is expected to make a detailed
recommendation for a consolidated accounting and fund control




Page 19                                               GAO-03-538 Forest Service
             organization either at each regional office or within multiregional shared
             services centers located at selected regional offices.

             The Forest Service has several strategic plans that include many of the
             financial management improvement efforts. For example, the Forest
             Service prepares agencywide strategic plans and annual performance plans
             as required by the Government Performance and Results Act. Also, the
             Forest Service’s Budget and Finance Deputy Chief units prepare annual
             project plans. However, the agencywide strategic and performance plans
             are broad in scope and focus on high-level goals and objectives. The
             annual project plans are narrowly focused on specific short-term projects.
             These plans are not an adequate substitute for a comprehensive financial
             management implementation strategy because they do not integrate all the
             improvement efforts and do not include the critical elements needed to
             effectively manage an overall strategy that will succeed in achieving and
             sustaining financial accountability.

             Forest Service CFO management is developing a financial management
             strategic plan intended to provide direction for continued improvement
             efforts and a mechanism to monitor and evaluate performance. This plan is
             designed as a working tool, evolving over 3 to 5 years, which will be
             reviewed and updated annually. In January 2003, the plan was introduced
             at the Forest Service’s Budget and Finance planning conference.
             According to Forest Service CFO management the initial plan will be
             completed by June 30, 2003.

             To be effective, the Forest Service’s plan should combine all the financial
             management improvement efforts into an overall comprehensive financial
             management implementation strategy. Such a strategy is a critical tool for
             the Forest Service, serving as a road map to help in resolving financial
             management problems. An effective plan includes long-term and short-
             term plans with clearly defined goals and objectives and specific corrective
             actions, target dates, and resources necessary to implement those actions.
             A comprehensive plan also prioritizes projects and assigns accountability
             by identifying responsible offices and staff responsible for carrying out the
             corrective actions. Without such a plan, it will be difficult to fix
             accountability for its many efforts and effectively monitor progress against
             its end goals.



Conclusion   The Forest Service has demonstrated strong leadership and commitment to
             reach its goal of obtaining an unqualified opinion on its fiscal year 2002



             Page 20                                               GAO-03-538 Forest Service
                      financial statements. At the same time, many of the financial management
                      improvement efforts implemented to date are outside of normal business
                      processes and focus mainly on obtaining reliable year-end numbers for
                      financial statement purposes. The Forest Service still must overcome
                      several major challenges before it can move to sustainable processes that
                      can routinely provide accurate, relevant, and timely information to support
                      program management and accountability. The Forest Service is at a critical
                      juncture. If the Forest Service is to achieve and sustain financial
                      accountability, it must fundamentally improve its underlying internal
                      controls, including financial management computer system controls, and
                      financial management operations. The Forest Service has various efforts
                      underway or planned, that if successfully carried through, will be important
                      steps toward addressing the financial management challenges it faces.
                      However, to date, several problems identified by the IG, KPMG, and us
                      remain. Some of Forest Service problems are deep-seated and therefore
                      will require sustained leadership and commitment of significant resources
                      and time to resolve. The number and significance of the issues still facing
                      the Forest Service emphasizes the need for a comprehensive strategy to
                      manage the various initiatives underway or planned.



Recommendations for   To help ensure sustained commitment and timely implementation of
                      financial management improvement efforts, we recommend that the Chief
Executive Action      of the Forest Service direct the Chief Financial Officer to develop a
                      comprehensive financial management strategic plan that

                      • clearly defines long-term and short-term financial management goals
                        and objectives;

                      • specifies corrective actions to address financial management
                        challenges, including internal control weaknesses, FFMIA compliance
                        deficiencies, system problems and organization issues;

                      • includes target dates and resources necessary to implement corrective
                        actions;

                      • identifies the responsible parties for carrying out corrective actions; and

                      • prioritizes and links the various improvement initiatives underway and
                        planned, including USDA financial management systems enhancement
                        efforts.




                      Page 21                                               GAO-03-538 Forest Service
Agency Comments and   In written comments on a draft of this report, the Forest Service concurred
                      with our recommendations to develop a comprehensive financial
Our Evaluation        management strategic plan that defines financial management goals,
                      specifies corrective actions, identifies target dates and resources needed,
                      identifies responsible parties, prioritizes and links improvement initiatives,
                      and provides details on financial management systems enhancements.
                      Forest Service’s response (see appendix I) stated that preparation of a
                      financial management strategic plan is in process.


                      As agreed with your office, unless you publicly announce its contents
                      earlier, we will not distribute this report for 30 days. At that time, copies of
                      this report will be sent to the congressional committees with jurisdiction
                      over the Forest Service and its activities; the Secretary of Agriculture; and
                      the Director of the Office of Management and Budget. We will also make
                      copies available to others upon request. In addition, the report will be
                      available at no charge on the GAO web site at http://www.gao.gov.

                      If you or your staff have any questions please contact me at (202) 512-6906.
                      Key contributors to this report were Alana Stanfield, Suzanne Murphy,
                      Martin Eble, and Lisa Willett.




                      McCoy Williams
                      Director, Financial Management
                        and Assurance




                      Page 22                                                  GAO-03-538 Forest Service
Appendix I

Comments from the Forest Service                           AA
                                                            ppp
                                                              ep
                                                               ned
                                                                 n
                                                                 x
                                                                 id
                                                                  e
                                                                  x
                                                                  Iis




(190066)      Page 23              GAO-03-538 Forest Service
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