oversight

Public Debt: Management Actions Needed to Ensure More Accurate Accounting

Published by the Government Accountability Office on 1990-05-31.

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

                                                       F        2


              United   States   General   Accounting   Office


  GAO         Report to the Secretary of the Treasury ’ -



‘:_ May MD0
              PUBLIC DEBT
              Management Actions
              Needed to Ensure
              More Accurate
              Accounting
 General Government Division

 B-233866

 May 31,199O

 The Honorable Nicholas F. Brady
 The Secretary of the Treasury

 Dear Mr. Secretary:

 This report discusses the results   of our review of the Bureau of the Public Debt’s internal
 control and accounting systems.     We reviewed the systems to determine whether they (1)
 enable the Bureau to accurately     account for the public debt and related interest and (2)
 conform to Comptroller General      standards as required by the Federal Managers Financial
 Integrity Act of 1982.

 This report contains recommendations to you in chapter 2. The head of a federal agency is
 required by 31 U.S.C. 720 to submit a written statement on actions taken on these
 recommendations to the Senate Committee on Governmental Affairs and the House
 Committee on Government Operations not later than 60 days after the date of the report and
 to the House and Senate Committees on Appropriations with the agency’s first request for
 appropriations made more than 60 days after the date of the report.

 The report is being sent to the Director, Office of Management and Budget; the Chairman,
 Board of Governors of the Federal Reserve System; and interested congressional committees
 and members. Copies will also be made available to others on request.

 Major contributors are listed in appendix II. Please contact me at 275-8387 if you or your
 staff have any questions concerning the report.

 Sincerely yours,           4




1 J. William Gadsby
  Director, Federal
     Management Issues
                                Executive Summary




                                Bureau believes the new Public Debt Accounting and Reporting System
                                (PARS) will correct its present problems. PARS could strengthen internal
                                controls and enable the Bureau to more accurately account for and
                                report the outstanding public debt and interest. However, to achieve
                                this, management must monitor operations better to ensure that transac-
                                tions are recorded accurately and timely, and that errors are corrected
                                promptly.



Principal Findings

Weaknesses Are Pervasive        Since the early 198Os, Bureau management has received numerous
                                reports identifying serious internal control and accounting system weak-
and Long-Standing               nesses. A recurring theme has been the lack of timely account reconcilia-
                                tions-a key internal control that helps assure current and accurate
                                accounting system data.

                                Other reported weaknesses have included (1) the lack of appropriate
                                records to efficiently detect and correct errors, (2) inadequate account-
                                ing system documentation and manuals to provide a consistent source of
                                operating procedures, and (3) a lack of training for accountants. Based
                                on Bureau reports, the Office of Management and Budget in 1989 char-
                                acterized the Bureau as having notably weak internal controls. (See pp.
                                 17 to 19.)


More Management Action          The Bureau’s key initiative to correct its weaknesses is PARS, which is
Needed                          scheduled to replace the current system beginning in October 1990. Con-
                                ceptually, PARSis a step in the right direction that, if properly imple-
                                mented, will correct or alleviate many problems. But management will
                                need to take several actions to ensure that the implementation of PARSis
                                successful and that its operation results in more accurate accounting for
                                the public debt and related interest. (See p. 19.)

Accounting Records Need to Be   To ensure that PARSis implemented with accurate and verifiable account
Current and Accurate            balances, Bureau management must complete the effort begun in Decem-
                                ber 1988 to reconcile the records that account for public debt principal
                                and interest. As of December 31, 1988, 18 principal and interest
                                accounts with balances totaling over $53 billion had not been reconciled
                                or verified since at least the early 1980s. For example, two principal and



                                Page 3                                   GAO/GGD90-64Bureau of the Public Debt
                                 Executive summluy




                                 workdays. If errors are not corrected quickly, data in the suspense file
                                 will mushroom, resulting in inaccurate accounting. (See pp. 24 to 27.)

Increased Management Oversight   For PARSto operate effectively, Bureau management needs to devote
Needed                           more attention to overseeing operations. Presently, it does not ensure
                                 that the data submitted from fiscal agents is timely and accurate; does
                                 not routinely analyze differences to see why they occur; and receives
                                 little information about the source, type, and frequency of erroneous
                                 transactions. This information is needed to correct accounting and con-
                                 trol problems. (See pp. 27 to 29.)

                                 To exercise effective oversight, Bureau management will need informa-
                                 tion from PARS. Management should identify its requirements before PARS
                                 is implemented so that it can be used to analyze operations. (See p. 29.)


                                 To ensure that PARSimproves accounting for the public debt and related
Recommendations                  interest, GAO recommends that the Secretary of the Treasury direct the
                                 Commissioner of the Bureau of the Public Debt to take several actions,
                                 including (1) completing the current reconciliation project and correcting
                                 the accounting records prior to the implementation of PARS, (2) increas-
                                 ing managerial oversight of operations to ensure that the internal con-
                                 trol and accounting systems are adequate and provide accurate
                                 information, and (3) ensuring that PARS provides management with suf-
                                 ficient data to effectively monitor operations. GAO also recommends that
                                 the Secretary monitor Bureau management’s efforts to implement PARS
                                 and other corrective actions. (See p. 30.)


                                 The Department of the Treasury accepted GAO'S recommendations and
Agency Comments                  noted that the Bureau has already taken many corrective actions and
                                 plans others to address the issues raised in the report. Treasury’s com-
                                 ments are discussed in more detail in chapter 2. (See p. 30.)




                                 page5                                    GAO/GGDSO-SIBureauofthePublicDebt
Abbreviations

FMFIA      Federal Managers’ Financial Integrity Act of 1982
OMB        Office of Management and Budget
OSAS       Office of Securities and Accounting Services
PARS       Public Debt Accounting and Reporting System


page 7                                  GAO/GGIMW54 Bureau of the Public Debt
                     Chapter 1
                     In~llction




                     Treasury’s Bureau of the Public Debt is primarily responsible for (1)
                     borrowing the money needed to operate the federal government and (2)
                     accounting for the resulting public debt and related interest. Because of
                     the size and importance of the public debt principal and interest, accu-
                     rately accounting for them is vital to effective federal financial manage-
                     ment. Accordingly, our review focused on that mission.


                     Congress delegated to the Secretary of the Treasury its authority to bor-
Overview of Bureau   row money on the credit of the United States under Article I, Section 8
Activities           of the Constitution. Title 31 of the United States Code authorizes the
                     Bureau to, among other things, prescribe the debt instruments. With this
                     authority, the Bureau (1) prepares Treasury circulars announcing and
                     offering for sale new issues of public debt securities, (2) formulates
                     instructions and regulations pertaining to the issues, and (3) directs the
                     handling of subscriptions and allocates the amounts to be sold at
                     auction.

                     The public debt is composed of several different types of securities.
                     Treasury securities sold to the public-such    as bills, notes, and bonds-
                     have maturities that range from less than 1 year to over 10 years. They
                     are transferable by sale prior to maturity in the secondary government
                     securities market.

                     Other securities are restricted and sold only for specific purposes. For
                     example, state and local government series securities are issued to
                     states, municipalities, and other government bodies with maturities and
                     characteristics tailored to their needs. Government account series secu-
                     rities represent investments by government-managed trust funds, such
                     as the Social Security Trust Fund. Table 1.1 shows the amounts out-
                     standing for each type of public debt security.




                     Page 9                                    GAO/GGD9@64Bureau of the Public Debt
                     Chapter 1
                     introduction




                     The Office of Securities and Accounting Services (OSAS), composed of
                     four divisions, is responsible for accounting for the public debt and
                     interest and conducting securities operations with Federal Reserve
                     Banks and branches. Thus, this office was the focus of our review. Fig-
                     ure 1.2 shows OSAS organization and provides brief descriptions of its
                     major responsibilities.


                     The Bureau, through OSAS, maintains accounting control over public debt
Accounting for the   receipts and expenditures, securities, and interest costs; maintains indi-
Public Debt          vidual accounts of security owners; authorizes the payment of principal
                     and interest; and makes the final audits of retired and redeemed securi-
                     ties and interest coupons. OSAS efforts are supported by the Savings
                     Bond Operations Office, which accounts for sales and redemptions of
                     U.S. Savings Bonds and provides computer system support for OSAS
                     systems.

                     The Bureau is aided in its efforts to account for the public debt by 36
                     Federal Reserve Banks and branches and two internal organizations that
                     act as fiscal agents2 Generally, the fiscal agents issue, maintain, retire,
                     and redeem securities; make interest payments; maintain detailed com-
                     mercial book-entry and other account records; account for their public
                     debt transactions; and submit to the Bureau and Treasury’s Financial
                     Management Service detailed and summary cash and securities account-
                     ing data. Figure 1.3 provides an overview of the interaction between fis-
                     cal agents, the Bureau, and the Financial Management Service, which
                     maintains the government’s central accounting system.




                     “The Bureau’s two fiscal agents are located in OSAS. The Securities Transactions Branch provides
                     services to the public through walk-up windows at Bureau headquarters. The Division of Securities
                     Accounts maintains special purpose subsystems, such as for registered and state and local goverm
                     ment securities.




                      Page I1                                               GAO/GGD9064       Bureau of the Public Debt
                                              Chapter 1
                                              lntrodllction




Figure 1.3: General Overview   of the Fiscal Agency   Process for Treasury         Securities



                                       Purchases   of securities by:

                                          Financial community
                                           Individual investors
                                                                           I




                           1                                           L                                                                    .

                                             Federal Reserve                                                         Bureau of the Public
                                                                                                                              Debt
  Financial institutions                           Banks
                                                                                                                          (Securities
                                              (fiscal agents)
                                                                                                                     Transaction Branch)




                                                                               financial transaction   data




                                               Source. Bureau of the Public Debt




                                               Page 13                                                        GAO/GGD-90.64Bureau of the Public Debt
                             Chapter 1
                             lntrodllctlon




                             We reviewed the Bureau’s internal control and accounting systems to
Objectives, Scope, and       determine whether they (1) enable the Bureau to accurately account for
Methodology                  public debt principal and interest and (2) conform to Comptroller Gen-
                             eral principles, standards, and related requirements as specified by the
                             Federal Managers’ Financial Integrity Act of 1982 (F'MFIA).


Accounting System and        Federal law (31 USC. 3512) requires agencies to establish and maintain
                             accounting and internal control systems that conform to the accounting
Internal Control             principles, standards, and related requirements and internal control
Requirements                 standards prescribed by the Comptroller General. These standards are
                             documented in GAO'S Policy and Procedures Manual for Guidance of Fed-
                             eral Agencies, Title 2. Specifically, Title 2’s Accounting Systems Stan-
                             dards require, among other things, that agencies maintain accounting
                             systems that (1) operate on a double-entry basis (i.e., both the debit and
                             credit sides of a transaction are simultaneously recorded in equal
                             amounts), (2) are on an accrual basis (i.e., transactions are recorded
                             when an event occurs rather than when cash changes hands), and (3)
                             incorporate adequate audit trails (i.e., the records and transaction docu-
                             ments that support accounting entries).

                              Title 2’s Standards for Internal Controls in the Federal Government
                              define the level of acceptable internal control quality. These standards
                              require, among other things, that

                         l managers and employees understand the importance of developing and
                           implementing good internal controls and maintain and demonstrate a
                           positive and supportive attitude toward internal controls at all times;
                         l qualified and continuous supervision be provided to ensure that internal
                           control objectives are achieved;
                         l internal control systems be clearly documented; and
                         . managers promptly evaluate findings and recommendations reported by
                           auditors, determine proper actions in response to audit findings and rec-
                           ommendations, and complete within established time frames all actions
                           that correct or otherwise resolve the matters brought to management’s
                            attention.

                               In addition, FMFIA places the ultimate responsibility for establishing and
                               maintaining adequate accounting and internal control systems with
                               management. In turn, effective financial management and reporting
                               depend on accounting systems with strong internal controls producing
                               reliable data. Failure to establish and maintain such systems may dimin-
                               ish management’s ability to manage efficiently and economically.


                               Page   16                                GAO/GGDSMI   Bureau of the Public Debt
Management Must Take Further Actions to
Improve Public Debt Accounting

                           Weaknesses in the Bureau’s internal control and accounting systems are
                           serious, widespread, and long-standing. They have resulted in billions of
                           dollars of differences in the cash and securities records that account for
                           the public debt and related interest. These differences are largely attrib-
                           utable to untimely reconciliations. However, we believe that the differ-
                           ences did not result in material inaccuracies in the reported public debt.

                           Recognizing Bureau systems’ inadequacies, management in 1986 began
                           to develop PARS, an automated accounting system scheduled to begin
                           implementation in October 1990. Management believes that PARSwill
                           eliminate its present systems weaknesses. Conceptually, PAasis a step in
                           the right direction-a  step that, if properly implemented, will correct or
                           alleviate many problems. But management will need to take several
                           actions to ensure both the successful implementation of PARS and that its
                           operation results in more accurate accounting for the public debt and
                           related interest.

                           For PARSto operate effectively, data entering the system must be timely
                           and accurate. To ensure that accurate data is available to build PARS
                           databases, management needs to complete the reconciliation and verifi-
                           cation efforts it began in December 1988. Management also needs to
                           improve its monitoring of fiscal agent operations to ensure that they
                           submit timely and accurate data and promptly correct errors and out-of-
                           balance conditions. Further, management needs to more closely monitor
                           internal operations to ensure that PARSis operating effectively and to
                           identify and correct any internal control weaknesses.

                           While fiscal agent and internal operations have not been sufficiently
                           monitored in the past, they will require sustained management attention
                           in the future if the goal of PAKS to improve the accuracy of accounting
                           for the public debt and interest is to be realized. To improve oversight,
                           management must make basic decisions regarding its information needs.
                           These needs should be programmed into PARSprior to its implementation
                           so that management can use PARSas a tool for analyzing operations.


                           Since the early 198Os, a number of studies have reported internal con-
Control and System         trol and accounting weaknesses in Bureau operations. Concern over the
Weaknesses Are             adequacy of the Bureau’s control processes continues today. Some of the
Serious, Widespread,       reported weaknesses are as follows:
and Long-Standing      l   We reported in 1982 that many Bureau account reconciliations were not
                           being completed promptly. In response, management stated that a top


                           Page 17                                   GAO/GGDsOSI Bureau of the public Debt
                       Chapter 2
                       Management Must Take Further Actions to
                       ImprovePublic Debt Accounting




                       risk area because of major accounting system problems. These problems,
                       which were reported by the Bureau, included the lack of effective gen-
                       eral ledger control and an inability to reconcile accounts in a timely
                       manner.


                       Management’s foremost effort to correct its internal control and
PARS Holds Promise     accounting system weaknesses rests with PARS It will replace the
for Correcting Many    Bureau’s current subsystems that account for public debt principal,
Weaknesses             interest, and securities. PARS is being designed to conform to Comptroller
                       General requirements, and implementation is expected to begin in Octo-
                       ber 1990.

                       PARS  will be an automated and integrated system that should enable the
                       Bureau to simultaneously account for and balance public debt cash and
                       securities transactions, thus meeting GAO’S requirement of operating on a
                       double-entry basis. The double-entry system will eliminate the need for
                       many of the reconciliations that are critical to the effective operation of
                       the current fragmented single-entry subsystems. PARS is also designed to
                       provide a general ledger and improved documentation of public debt
                       principal and interest transactions.


                       To ensure that PARS is implemented and operates successfully, Bureau
Management Actions     management needs to address inaccuracies in its current accounting
Are Needed to Ensure   records and improve its oversight of fiscal agent and internal opera-
the Success of PARS    tions. Management needs to ensure that its accounting records, which
                       will be used to establish the PARS databases, are current and accurate.
                       Thus, management will need to complete its efforts to reconcile and ver-
                       ify the records that account for interest, public debt principal, and out-
                       standing securities.

                       The effective operation of PARS will also require vigorous management
                       oversight. In the past, management did not actively monitor operations.
                       Thus, it was not able to identify and correct internal control weaknesses
                       and accounting inaccuracies. In our opinion, this must change. Manage-
                       ment needs to effectively monitor fiscal agent and internal operations.
                       Specifically, management’s information requirements need to be
                       programmed into PARS prior to implementation so that management has
                       the data necessary to determine whether (1) transactions are promptly
                       and accurately entered into PARS and (2) corrections of erroneous data
                       are made within the 2 workdays required by Bureau procedures,



                       Page 19                                   GAO/GGD90-64Bureau of the Public Debt
                                                      Chapter 2
                                                      Management Must Take Further Actions to
                                                      Improve Public Debt Accounting




Table 2.1: Accounts    Needing     Reconciliation     or Verification    as of December      31,1988
Dollars in thousands
                                                                                                                                                 Adjustments
                                                                                                                  Balance as of               identified as of
Account title                                                                     Status                     December 31,1988               January 31,199O
 1. Treasurv Bill Discount                                                        actwe                              $10.035353                         _~..,.~
                                                                                                                                                       $236.524
 2. Treasury Note and Bond Premium                                                active                                 632,870                         51,029
 3. Treasury Note and Bond Discount                                               active                               5141.143                         106.071
 4. Government Account Series Interest                                            active                                 210,331                        210,33ia
 5. Government Account Series Principal                                           active                                 185,987                        105,9a7a
 6. Government Agency-Prlnclpal   and Interest                                    InactIve (since
                                                                                  1976)                                          379                           379
 7. Government Agency-Principal        and Interest                               inactlve (since
                                                                                  19821                                      20,648                      20,648
 8 Government Agency-Principal     and Interest                                   active                                        519                       1,042
 9. Prepayments for Treasury Securities                                           lnactwe (smce
                                                                                  1983)                                     14,462                        14,462b
10. Public Debt Interest Payable                                                  actwe                                 36,635,458                              c
11. Internal Banks Suspense                                                       actwe                                    162,649                      162,6@
12. Interest Aporooriation
              .,                                                                  active
13. Accrued Interest Collected                                                    active                                     22,947                                   e
14 Undeliverable Payments                                                         active                                     13,672                             71
15. Budget Clearing                                                               InactIve (since
                                                                                  1985)                                      3,545                            3,545
16. Budget Clearing                                                               active                                        748                             740
17 Missmq Unmatured Coupons                                                       actlve                                      1.533                             201
18 Unavailable Check Cancellations                                                actwe                                          92                          92
Total                                                                                                                 $53,082,336                     $993,779
                                                      %xoncillatlon     I” process. but entwe balance will need to be adjusted
                                                      bA new prepayment account was opened I” 1983
                                                      ‘Reconclllatlon not completed
                                                      dThe Bureau decided not to reconcile this account, as the reconclliatlo” of the other listed Interest
                                                      accounts should verify Its accuracy
                                                      eThe Bureau decided it was not necessary to reconcile this account
                                                      Source Bureau of the Pubk Debt


                                                      The Bureau’s ongoing reconciliation project had verified the balances in
                                                      14 of the 18 accounts as of January 31, 1990, finding inaccuracies in
                                                      account balances totaling almost $1 billion. The inaccuracies stemmed
                                                      from a lack of control over transactions entered into the Bureau’s
                                                      accounts and inadequate supporting records. For example, according to
                                                      Bureau staff, transactions totaling about $394 million were improperly
                                                      entered among the Treasury Bill Discount Account and the Treasury


                                                      Page 21                                                     GAO/GGDW64 Bureau of the Public Debt
Chapter 2
Management Must Take Further Actions to
Improve Public Debt Accounting




records. As discussed later in the chapter, fiscal agent securities records
differ by billions of dollars each month from the Bureau’s securities and
principal records.

The second account, the Internal Banks Suspense Account, is not fully
reconciled, precluding management from knowing whether and to what
extent it has misreported public debt principal and interest. The account
is used primarily to record transactions arising from the receipt and dis-
bursement of funds when documentation is not available to enable the
Bureau to know the correct account to use. It had an unreconciled bal-
ance, as of December 3 1, 1988, of about $163 million resulting from
about 5,500 transactions occurring from March I981 to December 1988.
Because the balance in the account should normally be zero, the entire
balance will need to be adjusted.

According to Bureau officials, most of the transactions in the suspense
account originated in the Bureau’s Securities Transactions Branch. As
an internal fiscal agent, the Branch receives deposits and makes dis-
bursements through over-the-counter transactions. Problems in the
Branch have been long-standing. Since 1981, the Branch has not pro-
vided sufficient information on some of its t.ransactions to enable the
Bureau to accurately account. for them.

In addition, the Treasury Inspector General and a Bureau internal con-
trol review both reported in 1987 that the Branch’s internal controls
were so lax that unauthorized employees had access to blank Treasury
checks and the checkwriter. The lax internal controls in the Branch,
together with the untimely account reconciliation, suggest a vulnerabil-
ity to fraud and abuse. While the current reconciliation effort has
revealed no indication of fraud, the reconciliation must be completed
before management. will know if fraud occurred.

Because the Suspense Account has not been fully reconciled as of March
1990 and contains transactions that properly should be accounted for
elsewhere, management does not yet know the extent to which it has
misstated and will need to adjust public debt principal, interest, or other
accounts. At any rat,e, sizeable adjustments will be required. For exam-
ple, the reconciliation of the account identified one transaction that
understated fiscal year 1983 interest expense by about $38.4 million. To
correct the transaction. the Bureau preliminarily decided to adjust fiscal
year 1990 interest expcnsc, overstating it by $38.4 million. In December
1989, about $102 million involving 1,304 transactions-most       of which
originated in the early 198Os-remained unresolved.


Page 23                                   GAO/GGBSO64 Bureau of the Public Debt
Chapter 2
Management Must Take Further Actions to
Improve Public Debt Accounting




The system also produces daily, weekly, and monthly securities reports
that further identify all out-of-balance conditions. Bureau employees
continuously contact the fiscal agents to request correcting documents
within the 2-workday requirement. If the differences identified on the
daily and weekly reports were corrected in a timely fashion, the
monthly reports would show no out-of-balance conditions.

Finally, about 45 workdays after the end of each month the system pro-
duces a cash-actual match and monthly accountability reports, a third
and crucial control process. If all of the errors and out-of-balance condi-
tions that were identified by the two earlier control processes had been
corrected in a timely manner, virtually no differences would be reflected
by this control. However, as discussed below, billions of dollars of dif-
ferences have been identified.

The cash-actual match lists all loan differences still remaining between
the securities-based balances and the cash-based public debt principal
balances used to report the outstanding public debt. These differences
should be reconciled and corrected promptly and accurately to provide
management with assurance that its single-entry cash and securities
records are in balance, thus providing proper control over public debt
principal.

However, our analysis of fiscal year 1988 cash-actual matches found
that average monthly gross differences exceeded $3 billion. We also
found that it took on average about 9 months after the close of a trans-
action month to correct all differences for that month. The differences
and the time needed to resolve them weaken management’s assurance
that the public debt was accurately reported.

The monthly accountability reports identify all differences between the
Bureau’s securities-based loan balances and loan balances maintained by
each fiscal agent. To produce these computer-generated reports, Bureau
procedures require that fiscal agents submit their loan balances by the
8th workday after month-end. It is imperative that fiscal agent balances
be accurate because they are the basis for making interest and redemp-
tion payments to securities owners.

However, our analysis of the September 1988 monthly accountability
reports found gross differences totaling $278 billion, of which $273 bil-
lion resulted from fiscal agents’ late reporting. Twelve of the 36 Federal
Reserve Banks and branches did not promptly provide loan balances
totaling about $126 billion, and one of the Bureau’s internal fiscal agents


 Page 26                                  GAO/GGDSO-64Bureau of the Public Debt
                       Chapter 2
                       Management    Must Take Further   Actions   to
                       Improve Public Debt AcmmtLng




                       reports are prepared. Yet, as noted earlier, these two control processes
                       show billions of dollars of differences.

                       PARSwill have the same requirement as the present system concerning
                       the timeliness of corrections. Under PARS,data will be entered and
                       processed much faster than it. is now. PARSwill enable fiscal agents to
                       process cash and securities source data simultaneously, with edit rou-
                       tines permitting only balanced and correct data to enter the system.
                       Data failing the edits will be entered into a suspense file, and fiscal
                       agents will be requirthd to correct the data within 2 days.

                       For PAWto operate ef’ft%ctively, erroneous transactions must be cor-
                       rected promptly. If not. the data in the suspense file will mushroom, and
                       this will result in inacc.11rat.eaccounting and reporting of public debt
                       principal and intert,st


Better Monitoring of   For PARSto operate effectively, management needs to devote greater
Operations Needed      attention to overseeing operations (1) to ensure that data submissions
                       from fiscal agents arts timely and accurate and (2) to identify and cor-
                       rect the control weaknesses contributing to errors, adjustments, and out-
                       of-balance conditions. To accomplish this oversight effectively, manage-
                       ment needs to determine its information requirements and program
                       them into PARSprior to its implementation.

                       Bureau management acknowledges that many of its internal control
                       weaknesses and resulting accounting inaccuracies are caused by limited
                       managerial oversight.. Management does not routinely analyze differ-
                       ences and adjustments to determine why they occur and receives little
                       information about the source, type, and frequency of erroneous transac-
                       tions and the extent, of accounting discrepancies. Lacking this informa-
                       tion, management cat] neither determine the causes of the Bureau’s
                       accounting and cant rol problems nor take effective action to correct
                       them.

                       One example of the lack ot managerial oversight involves the Securities
                       Transactions Branch A Branch official acknowledged that, although
                       improvements are being made, the Branch’s internal control and
                       accounting systems arti weak. Also, officials in other OSM divisions told
                       us that management, was aware of out-of-balance conditions in their
                       operations caused by I ht, Branch’s errors. For example, almost all of the
                       unreconciled transacrions in the previously discussed Internal Banks
                       Suspense Account ist\th JJ. 23) originated in the Branch. Even though


                       Page 27                                          GAO/GGDSO-64   Bureau of the Public Debt
                  Chapter 2
                  Management   Must Take Further Actions to
                  Improve Public Debt Accounting




                  which fiscal agents process late or incorrect transactions or the types of
                  transactions necessitating adjustments. Thus, management cannot iden-
                  tify potential fiscal agent internal control weaknesses and recommend
                  actions to correct them

                  Problems in the present environment exist in large measure because
                  management has not effectively monitored operations. If PARS is to oper-
                  ate successfully, Bureau management will need information from the
                  system to enable it to monitor operations. For example, it will need suf-
                  ficient information to oversee the timeliness and accuracy of data enter-
                  ing the system and the promptness with which corrections are made.

                  However, management has not made basic decisions as to what informa-
                  tion it will need to monitor operations. Officials said they do not plan to
                  address information needs until after the system is implemented. There-
                  fore, the PARS development team is designing the system without specific
                  management information requirements. This approach will postpone the
                  use of PARSas a management tool.


                  Management has not established and maintained effective systems of
Conclusions       internal and accounting control. As a result, the Bureau is not account-
                  ing for and reporting the outstanding public debt and interest as accu-
                  rately as it could. Recognizing this, Bureau management is developing
                  PARsas a replacement system.

                  While PARS is a step in the right direction, vigorous management over-
                  sight of fiscal agent, and internal operations will be required if PARS is to
                  achieve its potential to Improve controls and more accurately account
                  for and report the public debt and related interest. Specifically, manage-
                  ment must

              l complete efforts to develop the accurate and current records needed to
                build the PARS databases,
              . ensure that fiscal agents provide timely and accurate transactions data
                and correct errors promptly,
              . actively seek out and correct any internal control weaknesses causing
                out-of-balance conditioths,
              l ensure that account reconciliations and balance verifications are done
                accurately and in a timely manner, and
              . program into PARS before its implementation the information manage-
                ment needs to oversee 1ppcrations.



                  Page 29                                     GAO/GGE-99-64Bureau of the Public Debt
Page 31   GAO/GGBsO64 Bureau of the Public Debt
       Appendix I
       comments From the Department of
       theTreasury




publie Debt has aaromplkhed or has in procus a number of mmagunenr and systems-related
a&tts whatdire& addras problans with our systemand supply medad managaaatt attention
u) acenutting, reponin#, and reeonciiition procusrs.
      As of Deemher 31. 1989, i new Office of Public Debt Aosounting waaatablished in
      Public Debt. This of&e, under the direction of a senior lavel executive, will provide
      hweased managerial oremight to accounting operatious, system contmk and the
      kttpkmeruation of PARS.
      Recoucgiations have been cnmpictad on 16 of the 18 accounts which were bacldogged.
      Ag work possble on the remaining reconciliations will be completed and a@stmenu will
      be proposed by June 30,199O.
      AU rewnciitiom    on the 66 public debt accountsare being parformed timely.
      Tbe new Public Debt Accounting and Reporting S@em it under developmentand will be
      implemented in PY 1991.
      In rcsponsc lo CIAO suggestions,additional managcmmt information on hey areas of
      accounting pufommnw k now being regularly recei~ and anatyrcd.
      Feedbackto both intemal and fil agent reporting entities has been sharpenedand made
      more timely. The senior managementof these organiutions k pmmptly notitied when
      diffe.renccsmnulin unrcaolved,when rcponing error rales are out of line, and when patterns
      of problems appear.
      Tbe bakncing of the Bureau’s securities accountingsyrtern and the closing of a transacuon
      month has been accelerated from 28 days to 12 workdays following the month. ‘Ihk
      ace&ration will continue in preparation for PARS implementation
      Operating procedures have been reviewed and written or updated as necessary. Current
      proceduresare in place for all aecaunt rcconcihitions

      ‘The p-      of making needed accounting adjustmentshas been significantly tightened.
      Supetiors and managerswithin the Ofticc of Public Deb1 Accounting are now more
      dire.@ involved in the review and approval of such adjustments.
      A key element of our current control environment k the “rash actual’ match Tbk k a
      comprehensiveautomated reconciliation of principat outstanding between our Cash and
      Securities sub-systems.Tbcsc marcheshave been acceleratedby 20 workdays.
      Ihc Cash Accounting System- an auromnlcd component of our overall debt accounting
      system- was redesignedand made more reliable

       Reporting from the Bureau’s SecuritiesTransaction Branch has dramaticallyimproved due
       to the implementation of a number al audit and internai control review and s&-initiated
       control enhancemenhover checks issuedand suspenseaccounting.
       Rfforts arc underway to improve the managementinformation available for monitoring our
       prepaymm: account
       We intend to automatethe now manual pr-       of matchingdeposit-in-transitand payment-
       in-umsit items.
                              -



         Page 33                                              GAO/GGB90-64 Bureau of the Public Debt
R&quests for copies of GAO reports     should be sent to:                    4

US. General Accounting     Office                                             I
Post of&e Box 6015                                                            1
Gaithersburg, Maryland     20877                                             3
                                                                             1
                                                                             5
Telephone   202-275-6241                                                     ‘2
                                                                             ;
The fiit  five copies of each report   are free. Additional   copies are     3
$2.00 each.                                                                  :,
                                                                             !
There is a 25% discount    on orders for 100 or more copies ma&d      tq a   ”
single address.
                                                                             1
Appendix II

Major Contributors to This Report


                                                                                                -
                        Earl F. Walter, Assistant Director
General Government      Stephen J. Saks, Evaluator-in-Charge
Division, Washington,   Marshall W. Barrett, Senior Evaluator
D.C.                    Leon H. Green, Senior Evaluator
                        Theresa M. Roberson, Senior Evaluator




(olsoaz)                Page 34                                 GAO/GGEWO-54
                                                                           Bureau of the Public Debt
Comments From the Department of
the Treasury


                                           DEPARTMENT        OF THE     TREASURY
                                                        WlS”lNGTON

                                                        April     18,    1990



             Mr. Richard     L. Fogel
             Assistant     Comptroller      General
             General    Accounting     Office
             Washington,     DC 20518

             ilear     !dr.   Fogel:

             Thank you for the opportunity                  to comment on the draft            GAO
             report     concerning      public    debt accounting.               There is no doubt
             that    our current       accounting        system is outdated           and in need
             of replacement.           As noted      in your draft         report,     we have been
             working     on the development            of a new accounting            system since
             1986 and it is scheduled              to be implemented             next year.     Ma*y
             efforts     to address       the issues        raised     in the report       have
             already     been accomplished           by the Bureau         of the Public       Debt
             and other      actions     are well underway.               A listing     of completed
             and planned       actions      is attached.           These essentially        address
             the recommendations            in the report,          which I accept.

             I share your concern              regarding         oui- difficulty             in keeping      a
             number of OUT subaccounts                  reconciled.            During        the past 15
             months,      we have given          this     area top priority.                   As a result,
             we have nearly           completed       :he reconciliation                 of old activity.
             Our reconciliation             effort      has found timing               differences,         off-
             setting      differences         between       subaccounts,           and failures         to
             obtain      supporting        docu'nentation.            HOWeVeT,         this     comprehensive
             effort      has found no payment               errors     or any case of incorrect
             securities         issuance.        Further,        we have found no instance                    or
             indication           of any inpropriety.               No losses          to the Government
             have been identified               ?nd none are anticipated.                       When the
             reconciliations            are completed,           we will       make the appropriate
             accounting         adjustments.           In this       context,        I believe       it is
             important        to ?mphszizi;        that     even though reconciliations                     have
             not always         been perforlied         on schedule,           the public         debt
             accounting          system,    when viewed          in its       entirety,         has accounted
             for the public            debt ?s-curztely          and in a manner under Control.

             We appreciate     the professional    !nanner with     which the review
             was conducted,      and want t3 assure     you that    the recommendations
             have received     serious   attention   within    the Department   of the
             Treasury,     and many ar't already   being    implemented.

                                                                Sincerely,




                     page32                                                     GAO/GGD90-64       Bureau   of the Public   Debt
                        Chapter 2
                        Management Must Take Further Actions to
                        Improve Public Debt Accounting




                        To ensure that PARSimproves accounting for the public debt and related
Recommendations         interest, we recommend that the Secretary of the Treasury direct the
                        Commissioner of the Bureau of the Public Debt to

                      . complete the current account reconciliation project prior to the imple-
                        mentation of PARS, including developing a strategy for offsetting, writ-
                        ing-off, or otherwise adjusting the numerous differences-some
                        unreconcilable-in     the Bureau’s accounts. This strategy should be coor-
                        dinated with Treasury and OMB officials because of its potential to alter
                        the reported outstanding balance of public debt and interest expense.
                      . increase managerial oversight and emphasis over internal and fiscal
                        agent operations to ensure that the systems of internal and accounting
                        control are adequate and maintain accurate data. To do this, Bureau
                        management must ensure that (1) fiscal agents furnish source docu-
                        ments in a timely manner, (2) fiscal agent and Bureau personnel make
                        timely corrections of source document and other accounting errors, (3)
                         actions are taken to identify and correct internal control weaknesses
                        which cause out-of-balance conditions, (4) timely and thorough reconcil-
                         iations are made and account balances are verified, and (5) the informa-
                        tion it needs to effectively monitor internal and fiscal agent operations
                         is built into PARSprior to its implementation.

                        We further recommend that the Secretary monitor Bureau manage-
                        ment’s efforts to develop and implement the replacement accounting
                        system, PARS, and take other necessary actions to more accurately
                        account for the public debt of the United States and related interest.


                         The Department of the Treasury, in its written comments on a draft of
Agency Comments and      this report (see app. l), accepted our recommendations. It stated that
Our Evaluation           many corrective actions have already been accomplished, and others are
                         underway to address the issues discussed in the report. Treasury said it
                         shared our concern about untimely reconciliations, leading it to give top
                         priority to reconciling the out-of-balance accounts. When the reconcilia-
                         tions are completed. Treasury said it will make all needed adjustments.




                         Page 30                                  GAO/GGD-9064Bureau of the Public Debt
chapter 2
Management Must Take Further Actions to
ImprovePublic Debt Accounting




Bureau management has knowledge of the Branch’s problems, manage-
ment has not requested information from the affected divisions on the
extent and type of operational problems caused by the Branch. This
information would enable management to identify the specific internal
control weaknesses needing correction.

In addition, management has not exercised the oversight needed to
improve the accuracy of securities records. For example, management
does not receive information available in securities error reports that
would enable it to determine the type, frequency, and source of errors-
specifically which fiscal agents are causing the most errors. The 1988
reports revealed 20,111 errors-l.2    percent of reported transactions.
Fiscal agents caused 82 percent of the errors, of which 76 percent were
due to late reporting and 13 percent to incorrect numerical data.

Management also does not receive information on (1) the number of
loans and dollars out of balance when the cash-actual match and
monthly accountability reports are run or (2) the length of time needed
to completely reconcile and adjust all securities discrepancies for a
transaction month. By receiving and analyzing this information, man-
agement could identify the areas in which fiscal agents may have inter-
nal control weaknesses. It could then recommend that corrective actions
be taken to improve the accuracy of data submissions and the timeliness
of corrections.

Further, we found that management was not monitoring the accuracy
and timeliness of cash transactions data. Although fiscal agents are
required to promptly and accurately report all cash transactions, our
analysis revealed instances in which this was not done. For example, we
found that of several thousand cash transactions reported during Sep-
tember 1988,156 were reported between 31 and 180 days late, and 90
were reported even later. One fiscal agent erroneously reported the
purchase of a security for $2.1 million, and the error was not reversed
for 36 days.

As a result of untimely and incorrect transactions, significant adjust-
ments had to be made each month to prior months’ outstanding princi-
pal balances. Our analysis revealed an average monthly gross change of
about $228 million during fiscal year 1988. This amount represented
about 1.1 percent of the average monthly growth of the public debt.

Management, however, has not required that analyses of the cash
adjustments be made. As a result, it lacks the information to know


Page 28                                   GAO/GGIWO-64Bureau of the Public Debt
-
    Chapter 2
    Management Must Take Further Actions to
    Improve public Debt Accounting




    failed to submit on time its state and local government securities bal-
    ances totaling $147 billion. As a result, Bureau employees were required
    to manually compare the $273 billion in loan balances to identify differ-
    ences-a time-consuming process.

    Additionally, our analysis of securities data pertaining to fiscal year
    1988 monthly accountability reports revealed a pattern of out-of-bal-
    ance conditions and untimely corrections. We found that of an average
    monthly total of 15,850 loans accounted for by the fiscal agents,
    1,147-over 7 percent-were        out of balance with the Bureau’s securi-
    ties records. It t,ook an average of over 4 months to correct the monthly
    loan differences with all fiscal agents. In particular, it took an average
    of over 14 months to correct the monthly loan differences of one of the
    Bureau’s internal fiscal agents.

    Further, the securities-based records are substantially out of balance
    with the two Bureau subsystems that account for about $150 billion of
    state and local government securities and about $15 billion of registered
    securities. The securities loan balances differed from those maintained
    by the state and local government subsystem by a monthly average of
    over $300 million during fiscal year 1988. It generally took between 3
    and 4 months to correct the differences. In addition, the subsystem con-
    tained long-standing differences of about $2.3 million, which the Bureau
    has been unable to rec’oncile.

    We also found average monthly differences of almost $500 million
    between the securities balances and those maintained by the detailed
    registered subsystem. Over a 5-month test period during fiscal year
    1988, an average of :314 of 421 loans were out of balance. Of the 421
    loans controlled by the subsystem, 131 were unmatured, and 127 of
    these were out of balance by about $107 million; 290 were matured
    loans, and 187 of these were out of balance by about $386 million. It
    generally took up to 3 months to correct the differences.

     The billions of dollars of loan differences in the present securities
     records and the length of time it takes to correct them cause us concern
     about whether r.41~ will be able to accurately account for the outstand-
     ing public debt. 1Inder the present system, with its requirement that cor-
     rections be made within 2 workdays, numerous errors identified a few
     days after source documents were processed remained uncorrected for
     months. Further, Bureau employees request and process correcting doc-
     uments from fiscal agents for over 2 months after the end of a transac-
     tion month before the cxsh-actual match and monthly accountability


     Page 2li                                 GAO/GGD9O-64Bureau of the Public Debt
                              Chapter 2
                              Management Must Take Further Actions to
                              Improve Public Debt Accounting




                              To ensure that PARSis implemented with accurate and verifiable account
                              balances, Bureau management will need to complete the reconciliation
                              effort and offset, write off, or otherwise adjust the numerous unrecon-
                              cilable amounts and identified differences in the accounts. However,
                              because adjustments to one account may affect other accounts, manage-
                              ment has decided to postpone making any adjustments until the recon-
                              ciliation project is finished and all needed adjustments are identified.
                              Then management will decide on a strategy for making adjustments. In
                              doing so, it should request advice from Treasury and OMB officials
                              because of the potential to alter the reported outstanding public debt
                              and interest expense.

                              Preliminarily, management has decided to increase interest expense by
                              the $117.4 million found during the reconciliations of the Treasury Note
                              and Bond Discount and Premium accounts and the Internal Banks Sus-
                              pense Account. It. believes, however, that any required changes to the
                              reported public debt will be minimal. Based on our assessment of the
                              potential effect on the reported public debt of the inaccuracies found by
                              the reconciliation effort and several billion dollars of securities differ-
                              ences, we believe that these differences are not sufficiently large to
                              cause the debt to have been materially misstated.

Corrections of Securities     To prepare for PARS implementation and to accurately account for $2.8
Differences Need to Be More   trillion in outstanding public debt securities, the Bureau needs to make
Timely                        timely corrections of the out-of-balance conditions in its securities
                              accounts. At present, the Bureau’s securities-based records differ by bil-
                              lions of dollars each month from both the cash-based records it main-
                              tains over public debt principal and the securities records kept by fiscal
                              agents. However, due to untimely corrections by fiscal agent and Bureau
                              personnel, some differences remain up to 9 months later. As a result, the
                              Bureau never knows the correct amount of outstanding public debt secu-
                              rities. It will need to know the correct amount in order to build accurate
                              PARSdatabases. Further, prompt correction of differences is vital to
                              ensuring the successful operation of PARS.

                               In the present system, the Bureau has a series of control processes that
                               enable it to promptly identify the securities transactions needing correc-
                               tion. First, the securities data submitted by fiscal agents undergo numer-
                               ous computer edits, and all transactions failing edits are identified. In
                               this way, Bureau personnel become promptly aware of all erroneous
                               data entering the system. Then they contact the fiscal agents and
                               request that correcting transaction documents be submitted within the 2
                               workdays required by Bureau procedures.


                               Page 24                                  GAO/GGDsOSI Bureau of the Public Debt
Chapter 2
Management Must Take Further Actions to
Improve Public Debt Accounting




Note and Bond Premium and Discount accounts, the net of which will
require the Bureau to increase the reported interest expense by about
$79 million. Further, improper transactions entries between the Govern-
ment Account Series Interest and Principal accounts will require the
Bureau to make adjustments of almost $400 million.

Inadequate supporting records are also hampering the Bureau’s efforts
to reconcile several other accounts. It is unable to identify and will need
to decide the disposition of over $21 million in transactions representing
the balances in its two inactive Government Agency-Principal       and
Interest accounts. Further, the Bureau is unable to reconcile the balance
of $14.5 million in its Prepayment Account. The account has been out of
balance since at least 1983. In writing off the balance the Bureau may
need to adjust the outstanding public debt.

Two accounts in particular illustrate the challenges facing the Bureau in
completing its reconciliations prior to PARS implementation and the con-
sequences of the Bureau’s inattention to timely reconciliations. Without
verifying the balance in the Public Debt Interest Payable Account,
Bureau management cannot be certain that the amount of interest it cal-
culates and reports monthly as the government’s interest expense is
accurate. The lack of reconciliation of the Internal Banks Suspense
Account has reduced management’s assurance of the accuracy of public
debt principal and interest.

The Bureau has not verified the accuracy of the $37 billion balance in its
Public Debt Interest Payable Account, which represents about 70 per-
cent of the amount needing reconciliation. The account is used to record
both the calculated monthly interest expense and related semiannual
interest payments for such securities as Treasury notes and bonds.
Interest on these securities represents over 60 percent of the reported
annual interest expense. Until the balance in the account is fully veri-
fied, the Bureau will not know whether and by how much it has misre-
ported interest on the public debt.

The Bureau will have considerable difficulty verifying the accuracy of
the account’s balance because controls do not exist to ensure that the
reported monthly interest expense equals the semiannual interest actu-
ally paid. These could differ because the monthly interest expense is cal-
culated from different records than those used for the payment of
semiannual interest. The monthly interest expense is calculated on the
basis of the principal balances recorded in the Bureau’s records while
semiannual interest payments are made from fiscal agent securities


 Page 22                                  GAO/GGINKI-64Bureau of the Public Debt
                                    Chapter 2
                                    Management Must Take Further Actions to
                                    Improve Public Debt Accounting




Accounting Records Need             The Bureau’s records will be the foundation of the PARSdatabases;
                                    therefore, they must be current and accurate prior to PARSimplementa-
to Be Accurate and                  tion. However, the failure to reconcile interest and principal accounts
Current                             since at least the early 198Os, combined with inadequate records, is com-
                                    plicating current efforts to make the records accurate. Further, untimely
                                    corrections of out-of-balance conditions have hampered the Bureau’s
                                    efforts to maintain current and accurate securities records. The success-
                                    ful implementation of PARS depends to a large degree on resolving these
                                    differences in the Bureau’s accounting records.

Interest and Principal Accounting   The Bureau’s accounting records for interest and public debt principal
Need to Be More Accurate            are not accurate. An ongoing Bureau project to reconcile 18 accounts has
                                    found almost $1 billion of inaccuracies and still must reconcile the $37
                                    billion Public Debt Interest Payable Account. Bureau management told
                                    us in December 1989, however, that the reconciliation project had found
                                    no evidence of impropriety or loss to the government. When the project
                                    is completed-management       estimates this will be by the end of June
                                    1990-the Bureau will need to decide how to adjust the identified dif-
                                    ferences. These adjustments may lead to changes in the reported public
                                    debt and related interest expense.

                                    Since at least the early 198Os, the Bureau had not verified or reconciled
                                    the accuracy of 18 interest and principal accounts, which had balances
                                    totaling about $53 billion at December 31,1988. Management took the
                                    position that reconciling these accounts was not a priority in light of the
                                    amount of resources needed. However, acting on concerns we raised dur-
                                    ing our review, management began to reconcile these accounts in Decem-
                                    ber 1988.

                                    Table 2.1 lists the 18 accounts and their balances as of December 31,
                                    1988; notes whether they are currently in use; and shows the amounts
                                    to be adjusted as of January 31, 1990. The table also shows that since
                                    1976 four accounts were placed in an inactive status because they were
                                    poorly maintained and unreconcilable, requiring new accounts to be
                                    opened. Many of the accounts listed are discussed throughout the
                                    chapter.




                                    Page 20                                   GAO/GGD9064 Bureau of the Public Debt
            Chapter 2
            Management Must Take Further Actions to
            Improve Public Debt Accounting




  priority project was to ensure that reconciliations would be kept cur-
  rent. However, internal control reviews done by Bureau employees in
  1986 and 1987 and a Department of the Treasury Inspector General
  report issued in December 1988 reported continued untimely reconcilia-
  tions. The lack of timely reconciliations and verifications precludes the
  Bureau from accounting as accurately as it could for public debt princi-
  pal and interest.
. The Bureau does not keep records that enable it to efficiently detect and
  correct errors. It does not maintain a general ledger and has weak audit
  trails-the   records and transaction documents that support accounting
  entries. These internal control weaknesses were brought to manage-
  ment’s attention through Bureau internal control reviews done in 1984
  and 1987 and the December 1988 Inspector General report. Without
  these controls, the Bureau’s efforts to reconcile or verify account bal-
   ances are much more difficult and time-consuming.
l The absence of systems documentation, manuals, and operating proce-
  dures was reported to management in internal control reviews done in
   1984, 1986, and 1987. Without this documentation, staff does not have a
   consistent source of information for understanding and operating the
   Bureau’s accounting system. This lack of documentation also hampers
   effective on-the-job training.
. In addition to on-the-job training weaknesses, management has not
   established formal training programs to ensure that its operating
   accountants maintain the skills needed to perform their assigned duties
   as well as understand the importance of developing and implementing
   good internal controls. This weakness was noted in a 1987 internal con-
   trol review. However, 13 of the 45 operating accountants employed by
   the Division of Public Debt Accounting since 1987 received no training
   in either 1987 or 1988. In 1989, on the basis of concerns we raised dur-
   ing our review, the Bureau began to provide internal controls training to
   its accountants.
   According to a March 1989 contractor’s report, the Bureau lacks the
    l


   controls needed to verify, prior to payment, the accuracy of the $50 bil-
   lion disbursed annually for interest and redemptions by its state and
   local government securities subsystem. The contractor stated that this
   was a material internal control weakness. Further, GAO'S Policy and Pro-
   cedures Manual for Guidance of Federal Agencies, Title 7, requires pay-
   ments to be reviewed and certified prior to the disbursement of funds.
   After our review, management informed us that it implemented the con-
   tractor’s recommendation to design a statistical sampling procedure for
   testing the accuracy of payments.
    In an October 10, 1989, letter to the Department of the Treasury, the
        l


   Office of Management and Budget (OMB) identified the Bureau as a high


            Page 18                                   GAO/GGD9@64Bureau of the Public Debt
                        Chapter 1
                        introduction




Scope and Methodology   To achieve our objectives, we concentrated our evaluation on the five
                        key Bureau subsystems, which account for about 96 percent of the out-
                        standing public debt. We did not review the savings bonds accounting
                        system in Parkersburg, West Virginia, because savings bonds represent
                        only 4 percent of the debt. We reviewed reports on and met with man-
                        agement about Securities Transactions Branch operations but did not
                        review the operations of the Branch. Further, we did not review the
                        operations of Federal Reserve Banks and branches or the system design
                        of PARS.

                        In the course of our review, we interviewed OSASmanagement, supervi-
                        sors, and staff. We reviewed available subsystem flowcharts and writ-
                        ten procedures and observed operating practices. We assessed the
                        potential effect of accounting inaccuracies on the reported public debt.
                        We also analyzed and tested subsystem operations to determine their
                        effectiveness and conformance with established criteria but did not per-
                        form tests to ensure the accuracy of the computer-based data we
                        reviewed.

                        We reviewed reports by GAO, the Inspector General, and contractors, and
                        examined Bureau internal control reviews to assess management
                        responsiveness in correcting identified internal control weaknesses. Fur-
                        ther, we assessed both the adequacy and the use by management of
                        information to monitor internal and fiscal agency operations. We also
                        discussed with management and the PARSdesign staff the efforts being
                        made to ensure that (1) the new system conforms to Comptroller Gen-
                        eral requirements and (2) provides necessary management information.

                        Our work was done between April 1988 and August 1989 at Bureau
                        headquarters in Washington, DC., in accordance with generally
                        accepted government auditing standards. We discussed our findings and
                        observations with Treasury officials and Bureau management through-
                        out the course of our work. The Department of the Treasury provided
                        written comments on a draft of this report. These comments are dis-
                        cussed in chapter 2 and are included in their entirety as appendix I.




                         Page 16                                GAO/GGD!30-54   Bureau of the Public Debt
                                           Chapter 1
                                           introduction




                                           To maintain accounting control over and report on all transactions
                                           affecting the public debt, the Bureau maintains numerous subsystems
                                           that account for the activity of its fiscal agents. The single-entry subsys-
                                           tems, which are manually intensive and not integrated with each other,
                                           require the Bureau to account separately for cash transactions and secu-
                                           rities transactions. For example, when an investor purchases a newly
                                           issued security, the Bureau receives two separate transaction docu-
                                           ments-one requiring an entry to increase cash and the other to
                                           increase outstanding securities. The Bureau then must verify that both
                                           sides of the transaction are in balance to assure that its records are
                                           appropriately controlled.

                                           Table 1.2 provides a brief description of the five key Bureau subsystems
                                           on which our review concentrated.

Table 1.2: Five Kev Bureau of the Public
Debt Subsystems-                           Subsystem                    Description
                                           Cash-based principal         Records and summarizes cash transactions data reported
                                           subsystem                    daily by fiscal agents-transactrons     affect the principal of
                                                                        the public debt, such as for securrtres issues, redemptions,
                                                                        and new issue prepayments.
                                           Cash-based Interest          Records and summarizes Interest payment data as reported
                                           subsystem                    daily by the fiscal agents It calculates monthly accrued
                                                                        Interest expense on the basrs of balances recorded in the
                                                                        prrncipal subsystem
                                           Securitres-based subsystem   Maintarns control over matured and unmatured securities. It
                                                                        records and summarizes the securities transactions data
                                                                        transmitted daily by the fiscal agents. The original Issue and
                                                                        redemption data should mirror the cash transactrons data
                                                          __.~        ~ recorded rn the principal subsystem
                                           Regrstered secunties         Accounts for registered Treasury notes and bonds and
                                           subsystem                    contains detailed records such as the names and addresses
                                                                        of securities owners. It controls the redemption and
                                                                        retirement of the securitres and the payment of Interest Its
                                                                        balances should aaree with those marntained bv the
                                                                        secunties-based sijbsystem.
                                           State and local aovernment   Establishes and marntains detailed accounts for owners of
                                           securities subsystem         those securitres as well as other miscellaneous securities. It
                                                                        controls the redemptron of the securitres and the payment of
                                                                        Interest Its balances should agree wrth those marntarned by
                                                                        the securitres-based subsvstem.


                                           The Bureau is currently developing an integrated accounting system to
                                           replace its current subsystems. The Public Debt Accounting and Report-
                                           ing System (PARS) is being designed as an automated, double-entry sys-
                                           tem that will enable the Bureau to simultaneously account for and
                                           balance public debt cash and securities transactions. Implementation of
                                           PARSis expected to begin in October 1990.



                                           Page 14                                            GAO/GGD9064 Bureau of the Public Debt
                                                  chapter 1
                                                  introduction




Figure 1.2: Organization   of the Office of Securities     and Accounting    Services,   Bureau of the Public Debt

                                    ;,,,:,I




                                                                                                          ..   :
                                                                                                     .: :      f
                                  Correspondence
                                       and
                                   Claims
                                     Branch                                                         sy*tsmr
                                                                                               :: Dwdopmentsnd
                                                                                                        Analysis      Branch
                                                                                               .. I
                                                                                              .j,. ,.,.
                                                                                                    .: .:...     :.

                             ‘1                                                          i:
                                                                                                        . .. . .   ,.        :   .I:




                                              u   NO, reviewed by GAO

                                                   Source Bureau of the Public Debt




                                                   Page 12                                                                GAO/GGDso-54 Bureau of the Public Debt
                                              Chapter 1
                                              introduction




Table 1 .l: Outstanding   Public Debt as of
September 30,1989                                                                                                   Dollar value
                                              Type of security                                                       (in billions)       Percent
                                              Treasury bills                                                                   $407          14.2
                                              Treasury notes                                                                  1,133          39.7
                                              Treasury bonds                                                                    338          11.8
                                              Savings bonds                                                                     114           40
                                              State and local aovernment senes                                                  159           56
                                              Government account senes                                                          664          23 2
                                              Other miscellaneous                                                                22           06
                                              Non-Interest beanno securlttes                                                    21             07
                                              Total                                                                       $2,858            100.0
                                              Source. Monthly Statement of the Pubk Debt, September 30, 1989


                                              Ownership of public debt securities may be evidenced by an engraved
                                              certificate or an accounting entry. For example, prior to 1986, registered
                                              securities were issued in certificate form. The certificates were inscribed
                                              with the name of the owner and were redeemable only by the owner.
                                              Since 1986, however, new securities have been available only in book-
                                              entry form. These are recorded by accounting entries in the records of
                                              the Bureau, Federal Reserve Banks, or financial institutions. For exam-
                                              ple, an investor may purchase a Treasury security through a commercial
                                              bank, which will account for the investor’s ownership in its records. In
                                              turn, the securities holdings of the commercial bank will be reflected in
                                              the commercial records of a Federal Reserve Bank, and the Federal
                                              Reserve Bank’s commercial securities accountability will be reflected in
                                              the Bureau’s records.


                                              The Bureau is organized into five operating offices; each is headed by an
Organization of the                           Assistant Commissioner who reports directly to the Commissioner.l The
Bureau                                        Offices of Securities and Accounting Services, Administration, Auto-
                                              mated Information Systems, and Finance are headquartered in Washing-
                                              ton, DC.; the Savings Bond Operations Office is located in Parkersburg,
                                              West Virginia. The Bureau’s Commissioner reports to Treasury’s Fiscal
                                              Assistant Secretary, and the Bureau is part of the Treasury Fiscal
                                              Service.




                                              ‘In December 1989, Treasury authorized the Bureau to establish an Office of Public Debt Accounting.
                                              During our review, Public Debt Accounting was a division within the Office of Securities and
                                              Accounting Services.




                                               Page 10                                                GAO/GGD9054       Bureau of the Public Debt
Introduction


                                              The federal government’s need to borrow funds to finance operations
                                              grew significantly during the 1980s due in part to the decade’s large ’
                                              budget deficits. Since 1980, the public debt-the money borrowed by
                                              the Department of the Treasury and not yet repaid-has increased by
                                              almost $2 trillion. As of September 30, 1989, the outstanding public debt
                                              of the United States exceeded $2.8 trillion.

                                              Concurrently, interest on the public debt has become an ever larger com-
                                              ponent  of federal outlays, rising from 10.2 percent of the budget in 1980
                                              to 16.1 percent in 1989. During this period, interest expense grew by
                                              about $164 billion. In fiscal year 1989, interest on the public debt cost
                                              taxpayers $239 billion. As shown in figure 1.1, both the outstanding
                                              public debt and related interest have grown by over 200 percent since
                                              fiscal year 1980.



Figure 1.1: Public Debt and Interest,   Percent Growth From Base Year 1980
260     percent
260
240
226
2w
160
160
140
120
100
 60
 60
 40
 20
  0




      fiscal years

        u            principal
                     interest


                                               ‘Note. Prlnclpal and interest growth for 1990 and 1991 are based on estimates
                                               Source. Budget of the Unlted States Government, Flscal Years 1990 and 1991




                                               Page 8                                                   GAO/GGEHW54       Bureau of the Public Debt
Contents


Executive Summary                                                                                     2
Chapter 1                                                                                             8
Introduction           Overview of Bureau Activities                                                  9
                       Organization of the Bureau                                                    10
                       Accounting for the Public Debt                                                11
                       Objectives, Scope, and Methodology                                            15

Chapter 2                                                                                            17
Management Must        Control and System Weaknesses Are Serious, Widespread,                        17
                           and Long-Standing
Take Further Actions   PARS Holds Promise for Correcting Many Weaknesses                             19
to ImDrove Public      Management Actions Are Needed to Ensure the Success of                        19
Debt Accounting            PARS
                       Conclusions                                                                   29
                       Recommendations                                                               30
                       Agency Comments and Our Evaluation                                            30

Appendixes             Appendix I: Comments From the Department of the                               32
                           Treasury
                       Appendix II: Major Contributors to This Report                                34

Tables                 Table 1.1: Outstanding Public Debt as of September 30,                        10
                            1989
                       Table 1.2: Five Key Bureau of the Public Debt Subsystems
                       Table 2.1: Accounts Needing Reconciliation or
                           Verification as of December 3 I, 1988

Figures                Figure 1.1: Public Debt and Interest, Percent Growth                            8
                            From Base Year 1980
                       Figure 1.2: Organization of the Office of Securities and                      12
                            Accounting Services, Bureau of the Public Debt
                       Figure 1.3: General Overview of the Fiscal Agency                             13
                            Process for Treasury Securities




                       Page 6                                   GAO/GGIMO-64   Bureau of the Public Debt
                     _.--
l!kecutive summary




interest accounts for government-managed funds were out of balance by
almost $400 million. (See pp. 19 to 22.)

The ongoing project had reconciled 14 of 18 accounts by January 31,
1990, and found inaccuracies of almost $1 billion. For example, three
interest accounts were found to contain errors totaling about $394 mil-
lion (Seep. 21.)

The Bureau still must reconcile its two most difficult accounts. One is
the Public Debt Interest Payable Account, from which the Bureau
reports over 60 percent of the government’s annual interest expense.
Until this account is reconciled, the Bureau cannot verify that the
reported interest expense equals the amount of interest actually paid.
The other account-the Internal Banks Suspense Account-was          out of
balance by about $163 million as of December 31,1988, preventing the
Bureau from knowing whether it misstated public debt principal, inter-
est, or other accounts. (See pp. 22 to 23.)

In December 1989 Bureau management told us the reconciliation project
had found no evidence of impropriety or loss to the government. While
GAO’S review was not directed at uncovering fraud and abuse (and found
no such evidence), it identified one account-unreconciled as of March
 1990-that appeared vulnerable to fraud. (See pp. 20 and 23.)

Management estimates completion of the reconciliation project by the
end of June 1990. At that time, management will need to decide how to
adjust the identified differences. So far, it has determined that public
debt interest expense will have to be increased by at least $117.4 mil-
lion, but management believes the effect on the reported public debt will
be minimal. GAO believes these differences are not sufficiently large to
cause the debt to be materially misstated. (See pp. 20 and 24.)

To ensure that accurate securities records are available for PARS imple-
mentation, the Bureau and its fiscal agents will need to more quickly
correct out-of-balance conditions in the records that account for out-
standing public debt securities. For example, during fiscal year 1988,
the average monthly gross difference between the Bureau’s securities
records and its principal records exceeded $3 billion. These differences
are usually reconciled within 9 months. Management needs to know the
correct amount of outstanding securities more quickly to build accurate
PARS databases. PARS will process data much faster, and edit routines will
accept only balanced and correct data. Data that fail edits will go into a
suspense file, and fiscal agents will have to correct errors in 2


Page 4                                   GAO/GGtMCG4   Bureau of the Public Debt
Executive Summary


                   The nation’s public debt-the funds borrowed to operate the federal
Purpose            government and finance federal budget deficits-grew       rapidly during
                   the 1980s and now exceeds $2.8 trillion. Interest on that debt cost tax-
                   payers $239 billion-about    16 percent of total budget outlays-m fiscal
                   year 1989. Because of the size and importance of the public debt and
                   related interest, accurately accounting for them is vital to effective fed-
                   eral financial management.

                   The primary mission of the Department of the Treasury’s Bureau of the
                   Public Debt is to borrow and account for funds and report the outstand-
                   ing public debt and related interest. GAO reviewed the Bureau’s internal
                   control and accounting systems to determine whether they (1) enable
                   the Bureau to accurately account for the public debt and related interest
                   and (2) conform to Comptroller General standards as required by the
                   Federal Managers’ Financial Integrity Act of 1982. This work was done
                   as part of GAO’S continuing effort to review the adequacy of agency
                   financial management systems.


                   Several types of Treasury securities make up the public debt. Some-
Background         such as bills, notes, and bonds -are sold to the general public. Others
                   are sold only to state and local governments and government-managed
                   funds such as the Social Security Trust Fund. (See pp. 9 to 10.)

                   Securities transactions are generally handled by 36 Federal Reserve
                   Banks and branches and two internal Bureau organizations that act as
                   the government’s fiscal agents. The Bureau records and summarizes the
                   transactions in its accounting system, which is primarily composed of
                   five manually intensive, nonintegrated subsystems. These subsystems
                   account for the outstanding public debt, the government’s interest
                   expense, outstanding securities, and state and local government and reg-
                   istered securities. (See pp. 11 to 14.)


                   Inadequate oversight of operations by Bureau management has resulted
Results in Brief   in long-standing internal control and accounting system weaknesses. The
                   systems do not conform to Comptroller General standards. The weak-
                   nesses have led to billions of dollars of differences in the records that
                   account for the outstanding public debt and related interest. These dif-
                   ferences are largely attributable to untimely reconciliations.

                   Bureau management began to develop a replacement accounting system
                   in fiscal year 1986 and plans to implement it in fiscal year 1991. The


                   Page 2                                    GAO/GGD96-64Boreau of the Public Debt