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
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)