Comptroller General's Annual Report 1997

Published by the Government Accountability Office on 1997-01-01.

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




MAKING                                 GOVE~NM

            s citizens, Americans expect performance and accountability from

 A          their government in return for the taxes they pay. Today, thanks to
            a set of interrelated reforms put into place by the Congress, federal
            agencies have the opportunity and the means to meet this expecta-
           tion. Like America’s private sector and governments at the state
and local level, the federal government is beginning to rise to the challenge of
improving performance and becoming more accountable for results.

 Since 1990, the Congress has passed a series of measures that, taken together,
constitute a new framework for managing the federal government, one that
imposes a common-sense, businesslike approach to fulfilling the public trust.
Once implemented, these measures will help agencies .operate with new
discipline and accountability; agencies will be able to demonstrate what results
they achieve and how much those results cost. The framework consists of
three elements: financial management reform, information technology reform,
and a basic shift in management emphasis from process to performance.


 During the 198Os, GAO warned of long-standing financial management
weaknesses that routinely cost the federal government billions of dollars and
 left it vulnerable to fraud, waste, abuse, and mismanagement. In 1990, the
 Congress passed the Chief Financial Officers (CFO) Act, creating chief
financial offrceipositions in major executive branch agencies. Four years later,
the Government Management ReformAct expanded this legislation to require
that all major government entities produce annual audited financial state-
ments. Federal agencies are now subject to the same kinds of financial
reporting that had long been required of state and local governments and in
the private sector.
Since ,the passage of the CFO Act, work has proceeded on all facets of its
imp!ementation:from        the appointment of chief financjal officers, to the develop-
ment ,of modern financial systems, to the reporting and, auditing of financial results
and management controls. T,his spring, the Secretary of the Treasury will issue the
first-ever consolidated financial statements for the federal government, which will be
subjecr to independent audit by GAO. This will be an important milestone toward
s.uccessful implementation of the CFO Act and realization of its goal of providing,
congressional and executive branch decisionmakers with the reliable financial~infor-
mation that has been absent in the, past.                 :
INFORMATION         TECHNOLOGY         REFO&         ”            ., ,   : 1 .. 1

Federal agencies spend about $25 billion each year on their information. technology
infrastructure. Computer systems, networks, and electronic records are’ now vital to
nearly every aspect of government operations and spending-from       national defense
and air traffic control to revenue collection and the payment of benefits. But the
efforts.that agencies have made to acquire and make use of information technology
have suffered numerous setbacks: schedule delays; cost overruns;.and a failure to live.
up to their potential to improve mission performance, lower,. administrative costs,
and enhance ‘service to the public.                                       i   .

Agencies’ widespread problems with information technology led the Congress to pass
the Paperwork Reduction Act of 1,992 and the ClingerCohen         Act of l996. ‘These
reforms directed agencies to follow a new approach, toward technology
management-one      based in part on GAO’s study of the practices of leading public
and private-sector orgamzations, that have s,uccessfully,used technology to improve
their performance and meet their strategic goals.          ,, ( .           , ., ,‘_ ,(

                      : ,
At .the core of the new management framework is the Government Performance and
Results Act of :1993 (also known as GPRA or the Results Act). While the CFO Act
is focused on improving agencies’ management and financial accountability, the
Results Act is aimed at improving program performance. Over the years, GAO’s
audits and -evaluations have highlighted areas in which government programs have
not achieved expected results, and traditionally agencies’have used the amount of
money directed toward programs or staff size as measures of program success. With
the Results Act, the Congress recognized that if an agency reports only these kinds of
measures, it hasnot answered the most’important question ofall: What are the
taxpayers getting for their money?

Under the Results Act, accountability for performance would now mean accountability
for results. Agencies would have to ask themselves some basic questions: What is our
mission? “What are our goals, and how, can we achieve, them? How can we measure
our performance ? How will we use performance information to make improvements?

The ansyers to these questions could not be expected to come quickly or easily. The
Congress understood this when it passed the Results Act, and provided for a pilot
program. About 70 federal entities, including components of most cabinet depart-
ments and major independent agencies, used the pilot phase to gain experience in the
annual goal-setting and performance-measurement    requirements of the act, and to
provide lessons for other agencies.

In 1997;agencies prepared their first 5year strategic plans, as required by the act.
Later this year, they will issue their first annual performance plans.


Accountability, more than any other principle, underlies these governmentwide
management reforms. The CFO Act, the Paperwork Reduction Act; the
Clinger-Cohen Act, and the Results Act were adopted separately, but all were aimed at
creating a more,‘accountable’government.    In essence, these reforms require that the
public’s business be done in accordance with sound business practices. Sound
strategic planning, for example, will heI6 agencies better define their missions and set
results-based goals in accordance with the interests and expectations of their
stakeholders. Performance measurement will allow agencies to track their progress
against the goals they have set, and give managers crucial information on which to base
their organizational and management decisions.

Improvements in accountability will open a window onto federal agencies.
Decisionmakers in the Congress, executive branch officials, and the public at large Ml
be better able to oversee where tax dollars are going and what they buy. They will have
better data with which to make and evaluate program and budgeting decisions.

Financial management reform, information technology reform, and the, reorientation         ,
toward performance-based management reflect the Congress’s growing insistence that
federal entities be accountable for their actions and expenditures. The challenges that
federal entities faceare too great, and the government’s resources are stretched too thin,
to settle for good intentions; federal agencies and programs must demonstrate that they
are getting results.

Whether in formal audit and evaluation work or through its other contributions ,to
legislative deliberations and oversight, GAO has long sought greater accountability in
government, and it has worked with the Congress in creating this new framework for
governmentviride management reform. It is now playing a continuing role in helping
the Congress ensure that the reform is successful. For example, GAO developed a set
of key questions for the Congress to ask when evaluating the strategic plans submitted
by agencies this year in accordance with the Results Act, and staff throughout GAO
assisted in a comprehensive review of the plans for the Congress. In addition, GAO is
working with the executive branch on all facets of management reform. To help
agencies better manage their information technology programs, GAO has issued
guidance to the agencies on such critical concerns as information technology invest-
ment controls and information security. It is also working closely with inspectors
general on financial audits of departments and agencies across the government.

As this report’s next section, “Highlights of GAO Reports and Testimony,” m,akes
clear, these contributions to governmentwide management reform were only a part of
GAO’s work in 1997. The agency continues to produce information and analysis
covering the full spectrum of federal agencies and programs to assist the Congress in
carrying out its legislative and oversight responsibilities. GAO’s work in the past year
addressed such diverse issues as the Federal Aviation Administration’s airline inspec-
tion program, the structure and financing of Social Security, the design of the 2000
census, and the role of federal agencies in protecting the nation from terrorism.

During fiscal year 1997, GAO produced 1,337 audit and evaluation products in
support of the Congress’s legislative and oversight needs, including 1,006 reports to
Congress and agency officials, 149 formal congressional briefings, and 182 congres-
sional testimony statements delivered by 65 GAO executives. GAO’s work contrib-
uted to legislative and executive actions that resulted in about $21 billion in measur-
able financial benefits-a reflection of the value of GAO’s audits, evaluations, and

Measurable financial benefits flowing from GAO’s work in fiscal year 1997 were the
highest of the past 5 years. But no less important a contribution were the benefits
that could not be measured in dollars but which, by improving’practices or opera-
tions, had the potential to increase taxpayer trust in government. For example, a
  GAO report led the Congress to make      unauthorized “browsing” of electronic tax
  records at IRS a criminal offense. And    a GAO report that diabetics were not being
  adequately monitored helped persuade     the Congress that Medicare recipients should
1 receive more comprehensive preventive     care.

 Accomplishments such as these reflect GAO’s continuing commitment to objective,
 fair and important work that contributes to honest, efficient management and
 greater accountability throughout government. The men and women of GAO take
 pride in this commitment and in their service to the Congress and the nation.

 James F. Hinchman
 Acting Comptroller General of the United States
        OF GAO
        REPORTS                                                   AND

         : In fk~.year 1997, GAO p
                           _                                  I

          evaluation products, inc
         itid &$n,cy dfkials, 14
        : 182 cp&ressional t$
          GAO &ecutives. .Gf
             I                      I
               ,,              ,)



                    ,;;.                                  :


  In this report GAO looks ,at the safety performance of new airlines, and the fre-
  quency with which the Federal Aviation Administration      (FAA) inspects them
  compared with inspections of established airlines. Although not concluding that the
  new airlines sacrifice safety, GAO did find that during the first 5 years of operation,
  new airlines had higher rates of accidents, incidents, and enforcement actions than
  did established airlines. GAO urges FAA to study the feasibility of developing
  airline-specific safety-related performance measures that could be published for use
  by the traveling public. (RCED-97-2)

NUCLEAR SAFETY: STATUS OF U.S. &SIST~CE’TO                             IMPROVE THE

  In 19.92 the US. government initiated a program, the Lisbon Initiative on Multilat-
  eral Nuclear Safety, to help improve the safety of Soviet-designed reactors. As of
  February 1996,22 donors, including the United @es, had pledged or contributed
  more than $1.4 billion in assistance to this effort. While the U.S. nuclear stiety
  assistance program seeks to reduce the risk of accidents and to encourage the
  shutdown of the Soviet-designed nuclear power reactors deemed at highest risk,
  none of these have been closed and one, in Armenia, has been restarted.

                          Knr DOMESTIC MARKETS

 Barriers to the entry of new airlines persist in the industry today. While access
 barriers, such as limited landing and takeoff slots and exclusive-use gate leases, can
 potentially affect any airline, they primarily affect new airlines-those begun after
 deregulation in 1978. The marketing practices of established airlines, such as
 bonuses to travel agents and frequent flyer plans, can also make it more difficult for
 new carriers to attract passengers. As a result, competition suffers, leading to higher
 airfares. (RCEDL9 7-4)


      The current system of periodic disability reviews for Supplemental Security Income
      and Disability Insurance program beneficiaries is costly. An alternative approach
      would be to focus on beneficiaries whose cases are more cost-effective to review-
      that is, those with the greatest potential for medical improvement.   The Social
      Security Administration could also contact beneficiaries to remind them of their
      responsibility to’report medical improvements and to inquire about their interest in
      returning to work. (HEHS-97-2)


      Unlike leading private and public health care purchasers, Medicare, the nation’s
      largest purchaser of managed care services, does not routinely provide its consumers
      with comparative information on benefits, premium rates, and member satisfaction.
      Medicare collects such useful data, and sharing it could help older Americans and
      their families make more informed health care decisions. As it stands, millions of
      Medicare beneficiaries are selecting plans and making health care choices with little
      or no comparative information to help them. (HEHS-97-23)


     Unlike most public and private health care plans, the Department of Veterans
     Affairs (VA) provides over-the-counter products such as aspirin, vitamins, and hand
     creams to veterans at low or no cost. One reason it does so is because veterans may
     lack the funds to purchase them. In this report GAO suggests ways to limit VA
     pharmacy costs by using copayments and limiting quantities and products dis-
     pensed. Reducing the costs of its pharmacies could better direct VA resources to
     hospitals, nursing homes, and home health care. (HEHS-97-15)
                                                   .’            8.   ,     ,,   ,.
 This publication concisely presents information on the federal debt, including how
 debt is defined, how it is measured, how much it has grown, who holds federal debt,
 and its implications for the national economy. A large federal debt constrains
 economic growth, and thus living standards of future,generations,;by reducing U.S.
 savings available for private’investment.. Interest on the federal debt-15 cents of
 every federal budget dollar-was one of the three largest.spending items in the-k396
 federal budget, behind Social Security and defense spending. &MD-97-12)’

                                                                        t   .,..
 The Rural Health Clinic (RHC) program was adrift, without focus on its original
 goal of assisting underserved rural communities and without adequate controls over
 steadily increasing costs. Nonetheless, the program continued to grow, even in
 well-populated areas where established health care systems already existed. T,here
 was little~evidence to show that such grokth
                                            . was improving access,to health care in
 underserved populations. In the Balanced Budget Act of 1997, the Congress
 adopted GAO recommendations on specific ways to refocus the RHC program to
 meet its original purpose. (HEHS-97-24)

                                            OF HUD’s PORTFOLIO

 The Department of,Housing and Urban Development’s (HUD) insured Section 8
 portfolio has three basic problems: high subsidy costs, high exposure to insurance
 loss, and the poor physical condition of some properties. HUD has proposed
 portfolio reengineering to correct these problems. GAO’s analysis found that
 although HUD’s portfolio reengineering proposal would decrease subsidy costs over
 the long term, it would also generate $6-7 billion in claims against the Federal
 Housing Administration’s insurance fund over the next 10 years. (RCED-97-7)

 This report identifies four key factors affecting the Department of Energy’s (DOE)
 ability to complete’its largest and most significant projects, called major system
 acquisitions (MS& within originally estimated cost and time schedules. Although
 there are no quick, easy solutions, DOE initiatives in contract reform, strategic
 systems and life-cycle asset management, strategic planning, information resources
 management planning, and financial planning may result in better management of
 MSAs. (RCED-97-17)

                         FORMODERNIZINGU.S. STRUCTURE
 During the congressional debate on U.S. banking regulation and the modernization
 of its oversight structure, questions were raised about how other countries structure
 and carry out their various bank regulation and central bank activities. This report
 discusses banking oversight in Canada, France, Germany, Japan, and the United
 Kingdom, and highlights characteristics of other nations that could be replicated
 here. (GGD-97-23)

     Requiring that budget authority for the full cost of acquisitions be provided before
     an acquisition is made allows the Congress to better control capital spending. But
     agency officials see such initial funding as problematic because it requires the full
     cost of an asset to be absorbed in an agency’s annual budget, although the benefits
     may accrue over many years. This report describes how five federal organipations
     plan and budget for capital assets, and their experiences with the budget process.


     Machine tools for manufacturing parts for commercial passenger aircraft in China
     were diverted to a facility that produces fighter aircraft and cruise missiles for the
     People’s Liberation Army. The Department of Commerce had approved. this
     export in lY94 after a review process that raised concerns over possible misuse of
     this export. Commerce amended the licenses, and the diverted equipment was
     relocated to a commercial aircraft facility in Shanghai, before it could be misused.
     Commerce did not begin its investigation until 6 months after the reported diver-
     sion. The Department of Justice is conducting a criminal investigation.

  This report examines a user-fee alternative proposed by a coalition of the 7 largest
  U.S. airlines that would replace the lo-percent tax on domestic airline tickets paid
  by all air travelers. The coalition proposal favors large airlines that operate
  hub-and-spoke systems at the expense of the low-fare and smah airlines, which tend
  to offer direct, point-to-point service. By shifting most of the estimated $600
  million financial burden from one segment of the industry to another, the coalition
  proposal could have substantial implications for domestic competition.


  This report ‘discussesthe growth in costs of skilled nursing facilities, which provide
  posthospital care for those needing a higher level of care than that which can be
  provided at home. Medicare payments to these facilities have grown rapidly, from
  $456 million in the early 1980s to nearly $11 billion in 1996. One cause of this
  huge cost increase is the growth of exceptions to routine cost limits. GAO recom-
  mends that Medicare revise the current exception process to differentiate nursing
  homes that provide atypical services from those that simply have higher costs.
  (HEHS-97- 18)


 GAO found that plans to privatize-in-place the depot maintenance workloads at the
 Sacramento, California, and San Antonio, Texas, air logistics centers would result in
 costly excess capacity at the remaining Air Force depots and violate the
 public-private competition requirements of federal law. Over $200 million could
 be saved annually by transferring the repair and maintenance work to other depots.
 Subsequent to the issuance of this report, the Department of Defense acknowledged
 that competition was required and began to use public-private competitions for
 repair and maintenance work at Sacramento and San Antonio. (NSIAD-97-13)
BUDGET REDUCTIONS,                                      .,I .

 GAO identifies two options for reducing the Export-Import Bank’s subsidy costs
 while remaining competitive: raising fees and reducing program risks. These
 options would not require
                         ,- legislative change in the Ba&‘s charter, but would need
 to be considered svithin the full context of their trade and foreign policyimplica-
 tions. Raising exposure fees, which are genera&lower than those of other nations’
 export credit’agencies, would be the least disruptive option. (NSIAD-97-7)          ’
                                                                             ,., 1


 This report assessesthe effectiveness of the 1995 -National Energy Policy ,l?lan in
 reducing the vulnerability of the U.S. economy to oil .supply disruptions armprice
 shocks (oil shocks). It estimates the economic benefits of importing oil, and com-
 pares these benefits with economic costs of past disruptions. It also p,rovides the
 views of oil experts ar$industry analysts on effective strategies for dealing with the
 economy’s vulnerability to oil shocks. (RGED-97-6)           .

  Placing enough physicians in underserved areas remains a long-standing problem
  in the United States. To combat it, a growing number of underserved locations are
  receiving waivers of visa requirements to attract non-U.S. citizens who have just
  completed their graduate medical education in the United States. The growing use
  of these waivers is not without controversy. While the Department of Health and
  Human Services does not support that waivers be used as a means to address
  medical underset-vice in the United States, communities that need physicians say
  that they cannot recruit qualified doctors without them. (HEHS-97-26)


  Fifteen states have turned to full-service privatization of child support enforcement
  as a way to improve performance and handle growing caseloads. In three compari-
  sons of performance, fully privatized of&es performed at least as well as or, in
  some instances, better than public programs in locating noncustodial parents,
  establishing paternity and support orders, and collecting support owed. However,
  privatized offices were not always as cost-effective as public offices. (HEHS-97-4)
ARMY RANGER TRAINING:                       SAFETY
                                                           NEED TO
 Army ranger training develops skills in infantry, airborne, air assault, platoon,
 mountaineering, and waterborne operations. It is conducted in difficult terrain and
 under mental and physical stresses that are intended to approach those found’in
 combat. The Army has improved safety following the February 1995accident that
 resulted in the hypothermia deaths of four trainees. To sustain these safety improve-
 ments, GAO believes that corrective actions need to be institutionalized and periodi-
 cally inspected by units outside the chain of command. (NSIAD-97-29)              :

                                    WHILE SOME

 Inspections of mammography facilities appear to be progressing well. However,
 GAO found that the Food and Drug Administration (FDA) needed to strengthen
 equipment inspection procedures and institute follow-up reviews of clinics where
 problems of image quality were found, to ensure that violations are promptly and
 adequately corrected. At GAO’s recommendation, FDA has taken action to estab-
 lish procedures, guidance, and training to ensure that mammography facilities are in
 compliance with quality standards. (HEHS-97-25)


 About one-third of enlistees in the military services fail to complete their first tours
 of duty. Thousands of recruits are separated in the first G months because the
 services fail to screen applicants for disqualifying medical conditions or for preservice
 drug use. Thousands of recruits are separated because they are not physically
 prepared for basic training, and are judged to lack motivation. By reducing attri-
 tion, it is estimated that long-term cost savings in the range of $15-39 million could
 be realized. (NSIAD-97-39)
                               WITH APPROVED

  Although the amount of information reported to the Food and Drug Administra-
  tion (FDA) about medical device problems has increased dramatically since the Safe
  Medical Devices Act was enacted, FDA does not systematically ensure that reported
  problems receive prompt attention and appropriate resolution. As a result, FDA’s
  adverse event reporting system is not providing sufficient early warnings about
  problem medical devices, as the law intended. Feedback to users and manufacturers
 ‘could be helpful, yet FDA does not routinely communicate the results of problems
  and corrective actions. (HEHS-97-21)


 Weak cost-estimating processes and accounting practices undermine the ability of
 the Federal Aviation Administration and the Congress to make informed air traf&
 control (ATC) modernization decisions-especially critical when making
 multimillion-dollar  investments in mission-critical ATC systems. GAO recom-
 mended that FAA implement a cost-accounting capability and define specific,
 agencywide processes for cost estimating, to incorporate, among other items, a
 historical database, audit trails, calibrated cost models, and structured approaches
 for estimating software size and complexity. (AIMD-9 7-20)
HIGH-RISKSERIES                                     ., :                   ., t
                                                                                      /c.. ,:
  Begun in 1990, this is GAO’s third series of reports on federal programs considered
  to be high risk because of vulnerab~lities to waste, fraud, abuse, and mismanage-
  ment. This 14-volume series,focuses on 25 areas that are.costing the government
  billions of dollars, including 5 newly added areas-the Year 2000 problem,‘infor-
  mation security, defense infrastructure, supplemental securityincome, and the, 2000
  decennial census., GAO has made hundreds ofrecommendations             to,he$ improve
  these high-risk situations, which have at their core a lack of fundamental account-
  ability, GAO ha+orked closely with the Congress in its efforts to address
  high-risk probiems through oversight hearings and’legislative initiatives, High-risk
  areas range from poor financial management at the Department of Defense-which
  lacks accurate financial information to manage an annual budget of about
  $250 billion and over $1 trillion in assets worldwide-to     the Internal Revenue
  Service, which attempts to handle over a billion tax returns annually with anti-
  quated information systems and outdated b.usiness processes.
  (HR-37-l through 14)                      ,               I        I

MANAGING FOR RESULTS:,USING GI?RATO ASIST                                         ’
Testimony ofjames I? Hinchman, Acting.Comptroller Geizeral of tbk                      “.
United States

  Congress can use the Government Performance and Results Act to bbta+ the vital
  information it needs to better make important, difficult decisions. Consultation
’ about strategic planning provides a useful o,pportunity for the Congress and the
  executive branch to work together to help ensure that agency missions are focused,
  goals are results-oriented, and strategies and ,fimding projections are appropriate and
  reasonable. The Results Act’s strategic planning process is a powerful vehicle for
  clarifying congressional expectations and expanding the focus on results over
  process. (T-GGD-97-43)


 While the blood supply is very safe, no amount of federal regulation can entirely
 eliminate blood-transfusion risks because of human error, technological limitations
 of state-of-the-art tests, and the biological nature of the product itself. GAO did,
 however, find areas in which the Food and Drug Administration (FDA) could act to
 further improve the safety of the blood supply. For example, unlicensed facilities-
 those that do not sell or exchange blood across state lines-are not required to
 report errors or accidents, although they collect 10 percent of the U.S. blood supply.
 Without full reporting, FDA cannot monitor or control quality in the entire
 industry. (PEMD-97:l)


 A legislative proposal to dismantle the Department of Housing and Urban Develop-
 ment (HUD), introduced in the 104th Congress, would fundamentally change the
 federal role in housing and community development by transferring some of HUD’s
 functions to other federal agencies, the states, or the private sector, and eliminating
 other functions altogether. The proposal could have far-reaching effects on renters,
 communities, and would-be home buyers. (RCED-97-36)

EMPLOYMENT-BASED                  HEALTH INSURANCE:                    COSTS

 As the cost of health insurance has escalated, many employers have restructured the
 benefits they offer. Starting in the late 1980s to 1994, increases in employers’ costs
 to provide health insurance to employees and their families have outpaced
 inflation-with    costs jumping 18 percent in 1 year alone. Some employers dropped
 health insurance coverage entirely-particularly    small employers-shifting   the full
 burden to employees. More commonly, however, employers increased the amount
 employees had to contribute, particularly for family coverage. (HEHS-97-35)

  The Social Security Administration    (SSA) faces dramatic challenges. It needs to take
  a more active role in the public policy debate on the future financing and structure
  of social security. SSA must refocus its disability income programs, emphasizing
  return to work. In the area of combating fraud and abuse, it must protect taxpayer
  dollars and dispel perceptions that SSA is not making cost-effective and efficient use
  of taxpayer funds. It must manage its technology investments, including its Year
  2000 conversion. As an agency that touches the lives of virtually all Americans,     ,:
  SSA’s success in meeting these challenges is critical. (HEHS-97-53)

 Many government computer systems, designed 20 to 25 years ago, contain millions
 of lines of software code, all of Which need to be examined for date-coding prob-
 lems. This assessment guide provides a structured approach to help organizations
 review the adequacy of their planning for the Year 2000. It is imperative that
 public- and private-sector entities identify their critical’computer systems, develop
 conversion strategies and plans; and dedicate sufficient resources to replacing or
 converting and testing systems and programs in time to ensure that such systems will
 be prepared for the next century. (AIMD-10.1.14)


 This guide provides a structure for assessing how well a federal agency is selecting,.
 and managing its information technology (IT) resources and identifying specific,
 areas for improvement. It assessesan organization from three perspectives: the
 processesit uses’in selecting, managing, and evaluating, IT investments; the cost,
 benefit, and risk data it uses in making IT decisions; and the decisions that result
 from using these processes and data. The guide focuses on common elements
 necessary for successful management of IT. investments. (AIMD-10.1.13)
                              ARE LIKELYTO VARY
               AND BUSINESSES

 TThe potential effects of the cooperative purchasing program, which would allow
 state and local governments to purchase items through federal supply schedules, are
 variable. Since participation would be voluntary, state and local governments
 would use federal schedules only if they perceived benefits, such as lower prices.
 State contracting laws and preferences to purchase from in-state sellers may limit
 the extent of these benefits. This report also noted that the potential effects on
 industry, including small businesses, are likely to vary. (GGD-97-33)

 Key assumptions that the DeRartment of Defense (DOD) made in estimating
 future health program costs are unrealistic. D’OD assumed that no cost growth
 would be attributable to advances in medical technology and the intensity of
 treatment. Technological advances such as CAT scans, MRIs, organ transplants,
 and new drug treatments increase costs. These costs are often compounded when
 new procedures increase the intensity of treatment. DOD also assumed-
 unrealistically-that  savings could be achieved through a new emphasis on
 utilization management. (NSIAD-97-83BR)

                            Is NEEDEDTO GUIDE

 Telemedicine can improve, and perhaps change significantly, how health care is
 provided in the future. Nine federal departments and agencies have invested
 heavily in telemedicine. The Department of Defense, the largest federal investor, is
 considered the leader in developing this technology. Opportunities exist for federal
 agencies to share lessons learned and exchange technology, but a governmentwide
 strategy is needed to establish near- and long-term national goals and objectives to
 ensure the cost-effective development and use of telemedicine.

 Illegal drug use continues to be a serious health problem in the United States. Over.
 the past 10 years, the United States has spent about $20 billion on international
 drug control and interdiction efforts in trying to reduce the supply of illegal drugs.
 Despite this activity, illegal drugs still flood this country. A key reason for the lack
 of success in counternarcotics action is that international drug cartels have become
 sophisticated, multibillion-dollar   industries that quickly adapt,to new U.S. drug
 control strategies. As success is achieved in one area, drug-trafficking’organizations
 change tactics, thwarting American progress? (NSIAD-97-75)

 The Army believes it can deploy sufficient support forces to meet the requirements
 of two nearly simultaneous major regional conflicts with moderate risk. Lacking
 adequate active-duty forces, the Army must rely on reserve.forces that require
 additional timeto deploy and would arrive late. High reliance on reserves for a
 second conflict may entail risk if the,second one occurs without warning, or if
 ‘mobilization is delayed. In this risk assessment, the Army used many favorable
 assumptions that understated risks. It assumed, for example, immediate deployment
 and ready accessto overseas ‘ports and airfields. (NSIAD-97-66)
                COSTSAND SCHEDULE

Testimony of Henry L. Hinton, Jr., Assistant Comptraller General, National
Security and International Affairs Division

  While there is general agreement about the need to destroy the chemical stockpile,
  progress has been slow due to a lack of consensus among the federal, state, and local
  governments as to how such destruction should take place. It now appears that
  disposal will cost more than the estimated $24 billion and take longer than currently
  planned. Key factors affecting the destruction program include public concern over
  the safety of incineration, compliance with environmental laws, and the introduc-
  tion of alternative disposal technologies. (T-NSIAD-97-118)

                         TO IMPROVEOVERSIGHTOF THE

  The low-income housing tax credit program gives developers and investors incen-
  tives to provide affordable rental housing for low-income households. The program
  is jointly administered by the Internal Revenue Service (IRS) and the states. While
  the program has stimulated low-income housing,development and generally meets
  the requirements of the Internal Revenue Code, the procedures that some states and
  IRS use for oversight should be improved. GAO makes several recommendations,
  including that IRS ensures independent verification of information submitted by
  developers and that the program be subject to audits under the Single Audit Act.
SUPERFUND:    TIMES TO COMPLETE THE ASSESSMEN?AND                                      _

  The time taken to evaluate hazardous waste sites for inclusion in the Superfund
  program and to complete their cleanup once they have been identified has increased.
  The Environmental Protection Agency (EPA) takes almost.10 years to evaluatesites
  for placement on the National Priorities List-the nation’s ,worst hazardous waste
  sites. Increasing completion times are a concern because many listing and cleanup
  activities remain‘in the Superfund program. According to EPA, cleanups are taking
  longer because projects are more complex. (RCEDi97-20)


  The federal gqvernment ‘spent nearly $1 .G billion in fiscal year 19 9 5 to provide
  food-related services such as inspecting, testing, grading, and approving agricultural I
  commodities and products. Some companies benefiting from these services paid
  user fees for the cost of the services, while in other cases no user fees were charged.
  The government could increase collections by, charging the full cost of inspection
  services and by applying,fees consistently. Charging,for regulatory compliance
  inspections, such as meat and poultry inspections, would produce the most revenue.
  (RCED+Y7-57)            -,


 A divestiture of the.federal government’s hydropower assets would consider many
 factors, such as how to balance the multiple uses of water, how to protect the
 environment, and how to regulate power generation after the sale. Further, the sale’s
 objectives-f or instance, to reduce or eliminate the government’s presence in an
 activity that may be viewed as best left to the private sector or to improve the
 government’s fiscal position-will    help to determine subsequent decisions, such as
 what specific assets to sell, what conditions and liabilities to transfer with those
 assets, and what sales method to use. (RCED-9 7-48)

  Despite federal regulations prohibiting inmates of correctional institutions from
  participating in the food stamp program, GAO used computerized records to
  identify over 12,000inmates in California, Florida, New York, and Texas who
  were included in households receiving food stamps. Households in these jurisdic-
  tions, which account for about a third of food stamp program participation
  nationwide, improperly collected an estimated $3.5 million in food stamp benefits.
  Prisoner participation goes undetected because local agencies generally do not
  verify the information on household membership provided by food stamp
  applicants. (RCED-97-54)


  When providers of health services defraud federal or state health care programs or
  give poor quality care, they can be excluded from participation in Medicare,
  Medicaid, and other federal health programs. The process for excluding providers
  has operated successfully. Yet GAO found cases in which unacceptable providers
  in one state’s Medicaid program continue to provide Medicare or Medicaid
  services in other states. This could be corrected by better tracking of exclusion
  referrals from the states, better staff training to reduce inconsistencies and improve
  timeliness, and improved outreach to states. (HEHS-97-63)


     The Federal Aviation Administration (FAA) is modernizing the air traffic control
     (ATC) systems needed to ensure safe, eficient air travel. Because computer software
     is the ‘most expensive and complex component of the ATC systems, FAA must use
     defined, disciplined processes when acquiring software. FAA’s processes are ad hoc
     and sometimes chaotic. To address this situation, GAO recommended specific
     actions, including more rigorous software-acquisition processes, tightened account-
     ability, formalized planning based on evaluation resuits, ,and adequate resource,
     allocation. (AIMD-97<47)

                          PEACE                                                            ”j

     The United Nations’ record in effectively carrying out missions requiring the use of
     force has been mixed. This is because the United Nations cannot, command re-
     sources and troops, hke sovereign nations, an,d its core principles-neutrality,
     impart&y,     and seeking consent of warring parties for, U.N. actions-are ill-suited
     for missions that may ‘require force to restore peace and order. A single nation or
     coahtion’of nations with sufficient military capability and commitment may be
     more suited to lead s,uch missions, especiahy where vital U.S., national interests are
                                                                                         _: at
     mke. (NSIp;D-97-34)         1

Testimony of Phyllis l? Scbeinberg,A ssociateDirector, Transportation Issues,
Resources,Community, and Economic Development Division

  Amtrak’s financial future has been staked on the ability to eliminate federal operat-
  ing support by 2002 by increasing revenues, controlling costs, and providing
  customers with high-quality service. Amtrak faces significant challenges in accom-
  plishing these goals, and due to its precarious financial condition, it is likely to
  require federal financial support-both    operating and capital-well    into the future.
  (T-RCED-97- 147)


  Contrary to expectations, studies have found that enrolling senior citizens in
  managed care plans costs more than their particifiation in the traditional
  fee-for-service Medicare. Recent legislation significantly changes the way Medicare
  sets HMO rates and slows the growth of future payments. However, the new
  rate-setting method contains certain inaccuracies that led to excess HMO payments
  under the previous rate-setting method. In this report, GAO recommends an
  equitable and easy-to-implement approach that could help reduce these excess
  payments. (HEHS-97-16)

                            EXISTTO REDUCE

  Federal crop insurance protects farmers against financial losses caused by droughts,
  floods, hurricanes, and other natural disasters. Private insurance companies sell,
  service, and share in the risk of federal crop insurance policies, and receive an
  expense reimbursement that covers their administrative costs. In this report GAO
  recommends that the expense reimbursement be reduced to reflect the appropriate
  and reasonable costs of selling and servicing crop insurance, and identifies different
  approaches to expense reimbursements that offer opportunities for additional cost
  savings. (RCED-97-70)

  Eight long-standing U.N. peacekeeping operations are deployed in conflicts that !
  have defied diplomatic resolution-sometimes      for decades-and have become
  costly, open-ended commitments.       To date these operations have cost about
  $6 billion-over    one-third of total U.N. spending on peacekeeping over the past 50
  years. Despite their cost and limited success in carrying out their mandates, the
  State Department supports continuing .these operations indefinitely, given the
  potential harm to U.S. foreign policy interests if the underlying conflictsresumed.

C0NTRAC.T MANAGEMENT:                         FIXING DOD’s PAYMENT
PROBLEMSIs IMPERATIVE                                                                .T _,,i
                                                                                   ‘. *
  To achieve cost-effective control over its payment process, the Department of    ” .:
  Defense (DOD) needs to act. Otherwise, it continues to risk hundreds of millions
  of dollars in potential overpayments and other financial management and account-
  ing control problems. Improving its payment system will not be an easy or quick
  undertaking, and will require continued top management attention and support for
  many years. DOD could benefit from examining best practices of commercial
  organizations that have reengineered, their contract payment processes.


Testimony by L. Nye Stevens,Director, Federal Management and Workforce
hues, General Government Division

  In studying consolidation of the various U.S. statistical agencies, GAO compared
  the U.S. system with Statistics Canada and found that the centralized Canadian
  system has more flexibility to set and change priorities, better access to all govern-
  ment administrative records, and less burden on data users and providers. Yet
  disadvantages to consolidation exist as well. GAO also found that while U.S.
  statistical agencies generally adhere to professional standards, concerns about the
  quality of statistical data and their possible effects on the consumer price index and
  the upcoming decennial census may well be valid. (T-GGD-97-78)
                        AT RISKFORDOD COMPUTER

 The Department of Defense recognizes the need to reduce the operating costs of its
 computer centers through consolidation, modernization, and outsourcing, but it has
 not yet established policies and procedures for making such decisions. GAO
 recommends that Defense develop a departmentwide plan to define such policies
 and procedures, including establishing targets for how many computer centers it
 needs, defining how operations should be consolidated, and identifying the opti-
 mum numbers and skill mix of operations staff at each location. Without better
 defined management principles to guide this decisionmaking, Defense at best will
 achieve optimization at the component level only, foregoing investment optimiza-
 tion for the Department as a whole. (AIMD-97-39)


 The decisionmaking process used by the Forest Service is costly and
 time-consuming; further, the agency often fails to achieve its planned objectives. In
 GAO’s examination of Forest Service decisionmaking, it found the inefficiency and
 ineffectiveness to be the result of a lack of attention to the process and lack of
 accountability for performance. To correct this and improve the agency’s ability to
 deliver what is expected and promised, the Forest Service, in consultation with the
 Congress, needs to establish long-term strategic goals and clearly define mission
 priorities. (RCED-97-71)

lktimony of Hen y L. Hinton, Jr., Assistht Comp@oller General, Nationhl
Security atid InterndtionalAffairs Division      I
   GAO has identified six Degartment of Defense programs and operations’as high’risk
   because of vulnerabilities to waste, fraud, abuse, and mismanagement, and has made
   hundreds of recommendations to correct problems. Defense has begun correctmg
  ‘problems in,each of the six high-risk areas,,but eliminating the risks altogether will
   require that underlying causes be addressed-which      has not yet been done.
   Top-level management within the Department needs to be given the authority and
   flexibility to achieve positive outcomes and held accountable for results.
   (T-NSIAD/AIMD-97-         143)


  The Nuclear Regulatory Commission (NRC) is tasked with ensuring that the ~
  nation’s 110 commercial nuclear power plants operate safely. To do so; NRC needs
  to take aggressive enforcement’action and hold owners of nuclear plants accountable
  for correcting safety problems on a timely basis. Addressing safety issues.at an early
  stage is key, because they are then easier and less costly to fix. Only by ensuring that
  nuclear power plants address safety deficiencies promptly and have high-quality
  management in place will NRC protect public safety from the dangers of such
  facilities. (RCED-97-145)
      HOMEOWNERSHIP:                  OFREDUCINGFHA’s
                     FORHOME MORTGAGES

       The Federal Housing Administration (FHA) insures lenders against nearly all losses
       from foreclosures on single-family homes insured by the Department of Housing
       and Urban Development. The Department of Veterans Affairs (VA) also operates a
       single-family mortgage guaranty program. Unlike FHA, VA does not fully cover
       losses; its lenders assume more risk. If the FHA program were to become more
       similar to that of VA, it is likely that interest rates would rise and the volume of
       lending fall. As a result, it could become more difficult for low-income, first-time,
       and minority borrowers- who tend to be regarded as higher risks-to obtain home
       financing. (RCED-97-93)

      WELFARE REFORM:               STATES’
                                                       WITH BENEFIT

       Terminating a family’s Aid to Families With Dependent Children benefit represents
       the loss of a significant source of monthly income. At the time of GAO’s review,
       states had seldom used such benefit termination provisions. Failure to comply with
       work requirements is the most significant reason for termination. Recipients’
       reasons for not complying include wanting to stay at home with their children and
       an unwillingness to perform community service or work for low wages.


       Surface combatants-cruisers,    destroyers, and frigates-represent   over one-third of
       the Navy’s war-fighting fleet. The Navy currently spends about $3 billion each year
       to modernize its surface combatant force, a significant portion of the Navy’s annual
       funding for new ships. This report discusses the Navy’s basis for its current and
       planned surface combatant force, its plans to sustain the current force size into the
       next century, and key factors that could affect future force requirements.
DEFENSE DEPOT MAINT,ENANCE:       UN@RTMNTIES AND                                  ,.
Zstimony of Da&d I?. Warreli, ‘Director, Defenseilhaagement Issues,
National $ecurity and Internationh Aff+irs pivision

  Waste and inefficiency in the Department of Defense’s logistics system, including
  management of its $13-billion depot maintenance program, is one of the reasons
  GAO identified Defense infrastructure,activities as a high-risk area: Privatization of
  depot maintenance is an option, .but one that should be approached carefully,
  allowing for evaluation of economic and readiness needs. If not carefully carried
  out, privatizing depot maintenance could exacerbate existing capacity problems.


  NATOlled forces have created and sustained an environment that allows the peace
  process to move, forward and Bosnians to return to. normal life. The cease-fire has
  held, general security has improved, and some progress has been made in establish-
  ing political and economrc institutions. The transition to an effective multiethnic
  government has not occurred, however, because political leaders of Bosnia’s three
  major ethnic groups have not embraced political and social reconciliation. Based on
  the current state of political and social change in Bosnia, some sort of international
  military force will likely be needed there for many years to deter an outbreak of
  hostilities while Bosnians continue the reconciliation process. (NSIAD-97-132)

                                    AND TECHNICAL

      Medicare expects to process over 1 billion claims and pay $288 billion in benefits
      per year by 2000. To handle this expected increase, the Health Care Financing
      Administration    (HCFA) planned to develop a unified claims processing system-the
 I    Medicare Transaction System (MTS). However, critical weaknesses placed the
      project at great risk of costing over $1 billion without obtaining intended benefits.
      GAO recommended that HCFA complete.appropriate            analyses before continuing
      MTS development. HCFA ultimately terminated the MTS contract after spending
      over 3 years and about $80 million. (AIMD-97-78)

     VETERANS BENEFITS COMPUTER                           SYSTEMS:         RISKS   OF

      Correcting the Year 2000 computer challenge is crucial if the Veterans Benefits
      Administration is to provide uninterrupted benefits and services to veterans and
      their dependents. Success will require a proactive strategy, whose linchpin must be
      completing the inventory and assessment of its information systems. To accomplish
      this and reduce risk, GAO made 10 recommendations-all         of which were agreed to
      by the Department of Veterans Affairs. These included strengthening Year 2000
      program management, prioritizing competing information technology projects, and
      developing contingency plans. (AIMD-97-79)

                                 AND DISEASES

      The rapid growth in international trade and travel has dramatically increased the
      amount of cargo and number of passengers entering the United States. While the
      emphasis on facilitating trade and customer service is pressuring agricultural inspec-
      tors to speed the flow of passengers and trade, inspectors struggle to keep pace with
      increased workloads. In addition to visual inspections, x-ray technology and
      contraband-detector    dogs are being used to pinpoint prohibited agricultural prod-
      ucts from entering the country. (RCED-97-102)

 The Department of Defense has taken steps to overcome the medical surveillance
 problems experienced during the Gulf War. Its record in implementing its medical
 surveillance plan in Bosnia for Operation Joint Endeavor has been mixed. Failures
 to assessall servicemembers’ health in theater and after return to their home units
 and to document medical care provided in theater raise serious questions about
 Defense’s ability to implement adequate medical surveillance should another
 high-conflict deployment such as the Gulf War occur. (NSIAD-97-136)


 About three-quarters of all banks in the United States operate automated teller
 machines (ATM). More than half of the ATMs operated by banks have a surcharge
 fee, and the average fee more than tripled from the end of 1995 to February 1997.
 About one-third of banks that operate ATMs impose surcharges on non-account
 holders. Of ATMs with surcharges, the most typical fee is $1 .OO, although fees
 range as high as $3.00. (GGD-97-90)
I                                       BETTER COURTROOM USE

     Building a courtroom is expensive. Depending on location, a typical trial
     courtroom could cost from $640,000 to $1.3 million. While the federal judiciary
     has embarked on a multibillion-dollar  courthouse construction initiative, the
     Congress has become increasingly concerned that courtrooms are not fully utilized
     and that more courtrooms than are actually needed are being built. GAO’s analysis
     of actual courtroom usage suggests many opportunities for reducing the cost of
     courthouse construction.    (GGD-97-39)

    EARNED INCOME              CREDIT:
     This report provides information on participation in the earned income credit
     (EIC) over a 5-year period. The EIC is a refundable tax credit available to
     low-income, working taxpayers. For tax years 1990 through 1994, GAO analyzes
     EIC claimants’ patterns of claiming the credit, changes in income in the years
     following an EIC claim, and income and filing status once the EIC is no longer
     being’claimed. The number of taxpayers claiming the EIC and the cost of the
     credit has increased steadily; this cost growth reflects the impact of expansion of
     EIC benefits. (GGD-97-69)
                            OF RESEARCH                  EMPHASIS
  GAO.‘s review found that neither the Department of Defense nor Veterans Affairs is
  currently able to determine whether ill Gulf War veterans are any better or worse
  today than when they were first examined., While the ongoing epidemiological
  research will provide descriptive data on veterans’ illnesses, formidable methodologi-
  cal problems are likely to prevent researchers from providing precise, accurate, and
  conclusive answers regarding the causes of the veterans’ illnesses. Evidence, to
  support off&l conclusions on stress, leishmaniasis, and exposure to chemical agents
, was weak or subject to alternative interpretations. (NSIAD-97-163)

  Ten years ago, over 60 percent of home health claims were reviewed by Medicare
  claims-processing contractors. Today, despite the steady and rapid growth in home
  health expenditures, Medicare contractors review only 2 percent of all claims in this
  category. In this report, GAO suggests an approach that would identify and penal-
  ize providers who habitually bill Medicare inappropriately. Home care providers
  found to have excessively high billing errors would be required to pay the cost of
  follow-up audit work. (HEHS-97-108)

SUPPLEMENTAL SECURITY INCOME:, TIMELYDATACOULD                                             ,I
               IN OVEFWA~ENTS
                            TO NURSNG HOME RESIDENTS                                       j
  In 19 9 5 about 1.8 million individuals in nursing homes whose care was being paid
  by Medicaid.continued      to receive Supplemental Security Income (SSI) benefits,
  contrary to law. The Social Security Administration (SSA), which administers SSI,        ’
  estimates that overpayments to individuals in nursing homes may exceed $100
  million annually. Actions to detect or prevent these overpayments have had little
  success, primarily because SSA relies on recipient self-reporting. To remedy this,
  SSA could obtain nursing home admissions data electronically from the states.

 Welfare reform will reduce public assistance benefits, making it more important that
 automated child support enforcement systems work to help offset the loss in benefits
 to custodial parents. Since 1980 the federal government spent over $2 billion to
 help states develop such enforcement systems, yet a majority of state systems do not
 meet federal requirements. GAO recommended that the Department of Health and
 Human Services take steps to ensure that critical systems development milestones
 are attained before proceeding with development. (AIMD-97-72)

                             CHANGESNEEDEDIN THE

 After 9 years and funding of over $43 1million, communities surrounding chemical
 stockpile storage sites still lack items critical to responding to an emergency.
 Progress has been slow because the Department of the Army and the Federal
 Emergency Management Agency-agencies charged with responsibility for emer-
 gency response in the event of an accident-disagree        as to their respective roles and
 responsibilities. GAO recommends that unless these disagreements can be quickly
 resolved, the Army assume full control for emergency preparedness for chemical
 weapons stockpiles. (NSIAD-97-91)


 Under the Higher Education Act, the federal government spends billions of student
 financial aid dollars to help fund occupational training at proprietary schools.
 About $3 billion in student aid, primarily subsidized loans, financed this training
 for fiscal year 1995. Millions of dollars went to students who trained in fields with
 a surplus labor supply, such as barbering and cosmetology, legal assistant, respiratory
 therapy, and appliance repair. Information on employment of recent graduates and
 future demand for certain occupations should help students make informed
 career-training decisions. (HEHS-97-104)

  Air power clearly achieved many of Desert Storm’s objectives, but fell short of fully
  achieving others. Many postwar claims made by the Department of Defense and
  manufacturers about weapon system performance were overstated, misleading,
  inconsistent with the best available data, or unverifiable. For example, the F- 117
  bomb hit rate ranged between 41 and 60 percent-considered         highly effective, but
  still less than the 80-percent rate reported after the war by Defense and the primary
  contractor. (NSIAD-97-134)


Testimony of John H. Anderson, Jx, Director, Transportation Issues,Resources,,
Community, and Economic Development Division

   The current bilateral aviation agreement between the ,United States and the United
   Kingdom places substantial limits on competition.. As a result, consumers in both
   countries, have more limited service options and likely pay higher fares than they
   would in a more competitive environment.       Only two U.S. airlines-American     and
   United-may      currently serve London’s Heathrow Airport. Capacity constraints
   exist at Heathrow, and planned construction of a new terminal has been delayed,
  ,ftuther postponing resolution of this issue for U.S. carriers. (T-RCED-97~103)
             TO PREPARE
                      FORTHE NEW MILLENNIUM

TestimonyofJoel C. Willemssen,
                             Director, Information Resource
Management,Accountingand Information ManagementDivision

  While federal agencies have made progress addressing the Year 2000 computer
  problem, they must speed up their pace to avoid widespread problems. Most
  agencies will not complete systems conversion or replacement until late 1999,
  leaving little margin of error for unexpected delays. If systems that millions of
  Americans rely on for benefits and services fail, the ensuing delays could be disas-
  trous. Since the nonmonetary cost of systems failure can be very high, agencies must
  prepare contingency plans so benefits and services can continue to be provided even
  if systems are not Year 2000 compliant in time. (T-AIMD-97-129)


Testimonyof NormanJ. Rabkin, Director, Administration ofJusticeIssues,

  Through its Institutional Hearing Program, the Justice Department seeks to place
  incarcerated criminal aliens in deportation hearings so they can be readily deported
  upon their release from prison. The Immigration and Naturalization Service is not,
  however, fully utilizing this program and fails to identify many deportable criminal
  aliens before their release from prison. As a result, nearly 2,000 criminal aliens,
  including some aggravated felons, were released into U.S. communities during a
  G-month period in 1995. Some were rearrested for crimes that included felonies.

  Required by the Constitution to reapportion seats in the House of Representatives,
  the decennial census will be the nation’s most comprehensive and expensive statistical
  data-gathering program. GAO has repeatedly raised concerns about the need for the
  Census Bureau to consult with the Congress when making final decisions on design
  and funding of the 2000 census. The census has been designated one of GAO’s
  high-risk areas because design delays could jeopardize the outcome, waste billions of
  dollars, and produce a flawed result. (GGD-97-142)                     ,,;

                                                                                 ,’ .b
 Lessons have been learned from prior base realignment and closure (BRAC) rounds ’
 that can be used to improve the BRAC process should future rounds be authorized.
 These lessons’relate to’ the amount of savings and up-front costs associated tiith
 closing bases, and the economic impact on communities confronted with the ‘loss of
 jobs. Savings from base closures are expected to be substantial. However, net savings
 were not ,generated as quickly as initially estimated because they were offset, by high
 closing and environmental cleanup costs. (NSIAD-97-15 1)               .’



 American forces are better protected today from terrorist attacks. Security improve-
 ments are most evident in areas in which the risk of terrorism is the greatest, such as
 in Turkey and the Middle East. The Department of Defense has a number of
 initiatives aimed at combating terrorism, but it still lacks a comprehensive, consistent
 approach using common standards. This lack of prescriptive, measurable standards
 leaves commanders without an objective basis for determining if antiterrorism
 measures are sufficient. (NSIAD-97-207)
U.S. COMMISSION ON CML RIGHTS:                              AGENCY LACKS BASIC

  GAO’s overall assessment of the U.S. Commission on Civil Rights suggests that its
  operations lack order, control, and coordination. Management is unaware of how
  federal funds appropriated to carry out its mission are being used. Projects embody
  a key component of the Commission’s operations, yet project management is
  haphazard. No overall standard exists for assessing project timeliness. Finally, the
  lack of project documentation and coordination among of&es that disseminate
  reports seriously hampers the Commission’s ability to produce, issue, and dissemi-
  nate reports. (HEHS-97-125)


Testimony of Leslie G. Aronovitz, Associate Director, Health Financing and
SystemsIssues,Health, Education, and Human ServicesDivision

  It is very easy to become a Medicare certified home health agency. The require-
  ments are minimal, and the Health Care Financing Administration approves nearly
  all agencies seeking certification. While many home health agencies are drawn to
  the program with the intent of providing quality care, some are attracted by the
  relative ease with which they can become certified and participate in this lucrative,
  growing industry. Once certified, these agencies can remain active with little fear of
  losing their certification, even if repeatedly found to be providing substandard care.
  (T-HEHS-97- 1SO)

  In creating the preservation program, the Congress wanted to keep multifamily
  housing affordable for lower-income families. Many of the preservation program’s
  problems are due to its complexity and the frequent changes that have been made in
  program requirements. These problems are compounded by policies of the Depart-
  ment of Housing and Urban Development and internal control weaknesses. To
  strengthen the preservation program, GAO recommends a systematic reassessment
  of policies and internal controls; this would ensure that funds are being spent wisely
  and in accordance with legislative requirements. (RCED-97-169)

                                   CHALLENGESFACING FI?!!s

 The,Environmental      Protection Agency maintains that what it terms its reinvention
 initiatives will reduce paperwork and eliminate obsolete rules, make it easier for
 businesses to comply with environmental laws, use innovation and flexibility to
 achieve better environmental protection, and/or engage communities in partnerships
 to protect the environment. Yet, unless the agency can achieve agreement among its
 internal and external stakeholders, it will continue to face significant challenges.

  As summarized in this report, GAO work has documented widespread fragmenta-
  tion and overlap covering nearly a dozen federal mission areas and involving over 30
  programs and most departments and agencies. As the Government Performance and
  Results Act shifts the focus from inputs to results, each of its key stages-defining
  missions and desired outcomes, measuring performance, and using performance
  information-should      present new opportunities for addressing crosscutting federal
  activities. (AIMD-97-146)


 This report evaluates the Social Security Administration’s (SSA) decisionmaking
 process for disability determinations. Each year, about 2.5 million people apply to
 SSA for disability benefits. The state agencies that conduct disability determinations
 for SSA award benefits to 35 percent of initial applicants. Yet administrative law
 judges typically award benefits to two-thirds of applicants who appeal the initial
 negative decision. Such inconsistent decisions are costly and time-consuming. As a
 result, SSA is redesigning the disability determination process to produce more
 consistent decisionmaking. (HEHS-97- 102)


 The goal of TRICARE, the Department of Defense’s (DOD) managed care pro-
 gram, is to improve the military community’s access to health care while maintain-
 ing quality and controlling costs. A potential cost-saving feature is resource sharing,
 in which a civilian health care provider supplements the capacity of a military
 hospital or clinic by providing civilian personnel, equipment, or supplies. DOD
 expected resource sharing to save $700 million over 5 years, but GAO estimates that
 it will realize only 5 percent of that amount. (HEHS-97-130)
 The total cost of the Air Force’s B-2 bomber appears to have stabilized, although
 costs could increase if more performance deficiencies are identified. The aircraft are
 more sensitive to climate and moisture than expected. Operational testing shows
 that the aircraft also need frequent and lengthy maintenance. The Air Force has said
 that it is unlikely that such operational issues will be resolved, even with improved
 materials and repair processes. Therefore, if B-2sare to be used, some form of
 aircraft sheltering will be a requirement. (NSIAD-97-18 1)
      1997 ,

  The Government Performance and Results Act seeks to shift the focus of govern-
  ment decisionmaking and accountability away from a preoccupation with process
  activities-such  as grants and inspections-to    a focus on the results of those
  activities -such as real gains in employability, safety, responsiveness, or program
  quality. GAO reviewed draft strategic plans of 27 cabinet departments and agen-
  cies, and found that many lacked sufficient information to serve as a basis for
  guiding agencies and helping the Congress make informed decisions about activities
  and programs. (GGD-97-180)


  The United States is a leading financial donor to the International Atomic Energy
  Agency’s (IAEA) technical cooperation program, which provides equipment, expert
  services, and training to countries that intend to upgrade and establish nuclear
  facilities. Contrary to U.S. policy goals, IAEA has provided technical assistance to
  Cuba, Iran, and North Korea-all countries for which concerns exist about nuclear
  proliferation and threats to nuclear safety. In this report GAO recommends that the
  State Department systematically review all proposed technical assistance projects
  and, where projects are inconsistent with U.S. nuclear nonproliferation and safety
  goals, make U.S. objections known. (RCED-97-192)

                             FEDERAL AGENCIES’ EFFORTSTO

  The threat of terrorist attacks against American citizens and property both at home
  and abroad is a high-priority concern, both from national security and criminal
  perspectives. This report provides information on national policy and strategy to
  combat terrorism, and federal agencies’ rorlesand responsibilities in implementing
  them. It discusses programs and activities to prevent and deter terrorism, to re-
  spond to terrorist threats, and to manage the consequences of a terrorist act, espe-
  cially one involving weapons of mass destruction, (NSIAD-97-254)
NORTH AMERICAN FREE TRADE AGREEMENT:                                       IMPACTS

Testimony of]ayEtta Z. Hecker, Associate Director, International Relations
and Trade hues, National Security and International Affairs Division

  It is difficult to evaluate the impact of NAFTA since 19 94 because the agreement’s
  provisions are generally being phased in over a 10; to 15year period. It is clear,
  however, that U.S. trade with Mexico and Canada has accelerated. Even though
  estimates of NAFTA’s impact on aggregate employment diverge widely-ranging
  from a gain of 160,000 jobs to a loss of 420,000 jobs-the agreement cannot be
  expected to substantially alter overall U.S. employment levels, which are determined
  largely by demographic conditions and macroeconomic factors such as monetary
  policy. (T-NSIAD-97-256)


  NASA and its international partners-Japan,      Canada, the European Space Agency,
  and Russia-are together building the International Space Station. The partners are
  to provide station hardware and crew, and are expected to share operating costs and
  use of the station. Russia’s ability to honor its financial commitments is a serious
  concern. Another concern is that the cost and schedule performance of the Boeing
  Corporation, the prime contractor, has continued to decline virtually unabated. In
  order to make informed decisions, the Congress will need NASA’s complete and
  current information on the program’s cost and schedule, and on likely future risks.

  The Department of Defense needs to reorient its aircraft investment strategy to
  recognize the reality of a constrained overall defense budget for the foreseeable
  future. Instead of continuing to initiate aircraft procurement programs that are
  based on optimistic assumptions about available funding, Defense should determine
  how much procurement funding can realistically be expected and structure its
  aircraft investment strategy within those levels. (NSIAD-97-88)

  The Theater High Altitude Area Defense (THAAD) program is an $1 g-billion
  ground-based weapon system designed to protect U.S. forces, population centers,
  and industrial facilities from theater missile attack. Because all four attempts at
  target intercept have failed, THAAD is currently undergoing a program review and
  evaluation. GAO suggested that the Secretary of Defense use this opportunity to
  delay low-rate initial production of the THAAD system until after sufficient testing
  provides assurances that key performance requirements can be met.


 This report reviews the Department of Defense’s oversight of its inventory of
 handheld category 1 (highly explosive and extremely lethal) missiles and rockets.
 Despite progress toward better oversight of handheld missiles, some weaknesses
 remain. Until the Department takes additional steps to further improve physical
 security and ensure accurate reporting of its inventory of missiles and rockets,
 vulnerabilities to theft from military arsenals will remain. (NSIAD-97- 175)
                                       THE FEDERAL

 The federal government incurs net costs of over a billion dollars annually to support
 the electricity-related activities of the Rural Utilities Service (RUS) and the power
 marketing administrations (PMAs); the GAO-estimated cost was $2.5 billion for
 fiscal year 1996. The financial difficulties faced by RUS borrowers, the PMAs, and
 the Tennessee Valley Authority create,the risk of further losses given the federal
 government’s $84 billion of direct and indirect financial involvement in these
 entities. The onset of competition in the electricity industry heightens this risk.
 (AND-97-       110)


 Cash-based budgeting does not adequately reflect the government’s cost or the
 economic impact of federal insurance programs; this is because costs are recognized
 when claims are paid rather than when the underwriting commitment is made. In
 any given year, the cost of the, government’s ins,urance commitments may be under-
 stated or overstated because the time between receipt of program collections, the
 occurrence of an insured event, and the final payment of a claim can extend,over
 many years. Despite significant implementation challenges, accrual-based budgeting
 is.an alternative method which could improve cost recognition. The magnitude of
 federal insurance commitments-approximately          $5 trillion in fiscal year 1995-and
 the risk for significant future costs, make this an important area for congressional
 consideration. (AIMD-97- 16)

Testimony ofJames R. White, Associate Director, Tzx Policy and
Administnation Issues,General Government Division

  Taxpayers, tax professionals, and the Congress have criticized the Internal Revenue
  Service (IRS) for treating taxpayers improperly and imposing unnecessary burdens
  during taxpayer audits. Criticisms have focused on revenue agents subjecting
  compliant taxpayers to unnecessary audits, wasting taxpayers’ time by asking for
  irrelevant documents, and treating taxpayers unprofessionally and even abusively.
  IRS recently developed a survey to determine taxpayer satisfaction with the audit
  process; GAO believes that the survey’s usefulness will need to be evaluated.


  In 1995 one of the largest multinational banks in the world reported that it had
  incurred over $1 billion in losses from illegal securities trading at one of its New
  York branches over an 1 l-year period. Concerned about possible risks to the US.
  financial system, the Congress asked GAO to assessinternal control and audit
  weaknesses at U.S. branches of foreign banks. Lack of adequate segregation of
  duties in trading and/or electronic funds transfer activities-considered     one of the
  most serious internal control weaknesses-was identified at nearly one third of U.S.
  branches of foreign banks. (GGD-97- 18 1)

cr. AL M ANA<      1                                         M E INT

 This overview’includes                      A commitment to quality is the single
                                             most important principle governing
     a description of GAO and its            GAO’s work. GAO highly values its
     mission,                                staff and the diversity and the skills
     a discussion of GAO’s performance       they bring to serve the Congress and
     a summary of quality control efforts
     and a description of GAO’s external
     Audit Advisory Committee,
     management’s assessment of internal
     controls and report on financial
     systems, and                                 GAO’s Work by Category
     a description of the scope of the            (Percent of Work)
     audit of GAO’s 1997 principal

 Immediately following the overview are
 GAO’s principal statements for. fiscal
 years 1997 and 1996, the report of the             -72
 Audit Advisory Committee, and the
 independent auditors’ report.


 The General Accounting Offrice seeks to                                                17
 encourage honest, efficient management
 and full accountability throughout the
 federal government. It serves the public           -
                                                   199519961997            199519961997
 interest by providing the Congress, other           FiscalYears             FiscalYears
 policymakers, and the public with
                                                   Congressional            GAO-initiated*
 accurate information, unbiased analysis,    *Note: Initiated under basic legislative responsibility.
 and objective recommendations on the
 use of public resources.
the public. GAO staff concentrate on       environment, aviation security, defense
specific issues that enable them to        procurement, education and employ-
become highly knowledgeable about the      ment, transportation, tax administra-
agencies and programs they audit. By       tion, income security, housing, and
maintaining expertise in key areas of      many others.
interest, GAO can respond quickly and
comprehensively to requests from the       While audits, evaluations, and investi-
Congress.                                  gations are the most visible aspects of
                                           GAO’s work and absorb the largest
As shown on the chart on the preceding     share of its resources, GAO has other
page, about 83 percent of GAO’s work       important functions. GAO prescribes
during fiscal year 1997 was done at the    accounting standards for the entire
specific request of the Congress. GAO      federal government in conjunction with
is required to do work requested by        the Offrce of Management and Budget
committees; as a matter of policy, GAO     (OMB) and the Department of the
assigns equal status to requests from      Treasury, and issues generally accepted
committee chairs and ranking minority      auditing standards for all levels of
members. Also, to the extent possible,     government entities. Finally, GAO
GAO responds to requests from              issues legal decisions on matters
individual members. Finally, GAO           involving government revenues and
undertakes assignments independently       expenditures, and on protests against
in accordance with its basic legislative   the award of federal government
responsibilities. Details on cost and      contracts.
staff days of GAO audits, evaluations,
and investigations for the past 3 fiscal   GAO’SKEY PERFORMANCE
years can be found in the Supplement
to the Comptroller General’s annual
                                           GAO monitors performance with a
GAO’s audit work is managed through        view toward continuously improving
five audit divisions. The issues exam-     efficiency and effectiveness. GAO’s key
ined by GAO span the breadth of            performance measures fall into two
national concerns, including health care   groups: (1) GAO’s service to the
financing, financial management and        Congress and the results of its work, as
accountability, law enforcement,           measured by financial benefits to the
banking, information technology,           government, other improvements in
national security, energy and the          government operations, the percentage
                                           of GAO recommendations
implemented, the number of testimony              revenue enhancements, all of which
statements delivered, and overall product         can be documented as either directly ’
output; and (2) the efficiency and                attributable to or significantly influ-
effectiveness of GAO’s work processes, as         enced by GAO’s work. Although
measured by the duration and cost of              financial benefits fluctuate from year to
jobs and timeliness in delivering work            year, GAO seeks to identify significant
results. GAO’s performance in all of              financial benefits annually. In fiscal
these key measures improved during                year 1997, GAO’s work contributed to
fiscal year 1997.                                 legislative and executive actions that
                                                  resulted in almost $21 billion in
FINANCIAL BENEFITS                                measurable financial benefits. During
                                                  the last 5 years, financial benefits
GAO recommendations and audit                     totaled $88 billion-nearly      $44 for
findings frequently contribute to signifi-        every dollar appropriated for GAO.
cant financial benefits to taxpayers.
These include budget reductions, costs            IMPROVEMENTS IN GOVERNMENT
avoided, appropriation deferrals, and             OPERATIONS AND SERVICES

                                                  Many of GAO’s recommendations and
                                                  audit findings result in or contribute to
                                                  improvements in the effectiveness and
                                                  efficiency of government operations
                                                  and services, although their impact
   Financial          Benefits                    cannot always be quantified in mon-
   by Year                                        etary terms. GAO documents these
    (Dollars in Billions)                         improvements with two performance

                                           20.9   First, GAO monitors corrective actions
               19.5                               taken and program improvements

                                    17.3          made in response to either a GAO
                          15.8                    recommendation or an audit finding.
                                                  GAO documented over 390 of these
                                                  accomplishments in 1997, an increase
                                                  of 45 percent from last year. The

                                                  accomplishments that result in finan-
                                                  cial benefits that GAO can quantify are
                                                  excluded from the chart that follows
                                                  because they are reflected in the
                                                  financial benefits performance measure.
                      : 11995    1996 1997
                 Fiscal     Years
Second, GAO follows up on its recom-           mented within 4 years. The time
mendations to determine whether they           needed to implement the recommenda-
have been implemented. If past                 tions depends on the passage of imple-
experience is a good indication, over 70       menting legislation, the pace at which
percent of the key recommendations             agencies take corrective action, and the
GAO made in 1997 will be imple-                scope of the corrective action recom-

Actions   Taken as a Result of GAO Recommendations             or Audit   Findings

   1987    1988   1989   1990     1991      1992       1993   1994   1995     1996   1997
CONGRESSIONALTESTIMONY                         testified 182 times before 84 congres-
                                               sional committees and subcommittees.
Responding to congressional requests for                                    ,..
testimony is one of GAO’s most important       PRODUCT OUTPUT
services. Although the number of testi-
mony appearances varies from year to year,     In fiscal year 19 9 7, GAO produced
congressional requests for GAO testimony       1,337 audit and evaluation products,
are an indicator of the agency’s contribu-     including 1,006 reports to, the Congress
tion to the legislative process. In support-   and agency of&&,        149 formal con-
ing Congress this year, 65 GAO witnesses       gressional briefings, and I82

    Testimony                                     ‘Products                     ~,   s
    Delivered                                      Issued





     1993 1994 1995 1996 1997                       993 1994 1995 1996 1997
             Fiscal     Years                                  FiscaI      Years
congressional testimony statements.          with which it is done. Accordingly, in
This represents an increase of about 2       June 1996 GAO reengineered its
percent over last year.                      process for doing audits and producing
                                             reports in order to reduce job duration
DURATION     AND COST OF JOBS AND            and cost, and improve timeliness
TIMELINESS                                   relative to agreed-upon commitments.

                                             Nineteen ninety-seven was the first full
GAO recognizes that success requires
                                             year under GAO’s reengineered job
continuous improvement in both the
                                             process. During 1997 GAO’s perfor-
quality of its work and the efficiency
                                             mance as measured against all three key

    verage Duration               werage Cost of                Timeliness of All
    f GAO Jobs                    iA0 Jobs                      External Products
    Months)                       Dollars in Thousands)         (Percent on Time)

                                  -244 -
                                             -224   219

                            6.7                                                             67

                                                          169                  56


    993 1994 1995 1996 1997                         ,996 1997   1993 1994 1995 1996 1997
           Fiscal   Years                FiscaI Years                  HscaI        Years
efficiency measures-duration,      cost, and   regulations relevant to GAO’s opera-
timeliness-improved     significantly. The     tions. The Committee consists of the
chart on the preceding page shows’the          following three distinguished
average duration and cost of jobs, as well     individuals:
as GAO’s timeliness in delivering the
results of its work.                               SheldonS. Cohen (Chairman) is a
                                                   CPA and a practicing attorney in
                                                   Washington, D.C.; former’
QUALITY AND INTERNAL CONTROL                       Commissioner and ChiefCounsel
                                               j   of the Internal Revenue Service;
Quality is the hallmark of GAO’s work.             and Secretary and Trustee of the
To ensure that GAO maintains a high                National Academy of Public
level of quality, management maintains a           Administration.
quality control program and seeks advice
and evaluation from both internal and              Alan B. Levensonis a practicing
external sources.                                  attorney in Washington, DC., and
                                                   a former senior official at the
Through an internal Quality Control                Securities and Exchange
Assessment Program, GAO ensures that its           Commission.
quality control policies and procedures are
providing reasonable assurances that its           Katherine D. Ortegais a CPA,
audit and evaluation work conforms with            former Treasurer of the United
the applicable professional requirements,          States, former Commissioner of
including generally accepted government            the Copyright Royalty Tribunal,
auditing standards.                                and former member of the
                                                   President’s Advisory Committee on
AUDITADVISORYCOMMITTEE                             Small and Minority Business.

The Comptroller General established an         MANAGEMENTRJP~RT~NINTERNAL
external group in 1992 to advise GAO on        CONTROLS             ,.
its internal financial operations and
controls. The Audit Advisory Committee         GAO is committed to fulfilling the
discusses, reviews, and reports to the         internal control objectives of the
Comptroller General on the effectiveness       Federal Managers’ Financial Integrity
of GAO’s financial reporting and audit         Act (FMFIA) of i982. Although GAO
processes, internal controls over financial    is not subject to. FMFIA, it has elected
operations, and processes to ensure            to comply with its requirements.
compliance with applicable laws and            GAO’s internal control structure is
designed to provide reasonable assur-      effective internal controls in the federal
ance that                                  government. On the basis of this
                                           assessment, GAO believes that it has an
 I#4 obligations and costs are in          effective internal control structure in
..-* compliance with applicable laws       place as of September 30, 1997.
     and regulations;
 a funds, property, and other assets       GAO’s independent     auditors have
     are safeguarded against loss from     provided
     unauthorized acquisition, use, or
     disposition; and                      gj  an opinion on GAO’s assertion on
 ;g revenues and expenditures                  the internal control structure, and
     applicable to GAO’s operations are    fzd report citing any material
     properly recorded and accounted           conflicts between the
     for to enable GAO to prepare              more-comprehensive GAO report
     accounts and reliable financial           on internal controls, dated
     reports and maintain accountability       December 12, 1997, voluntarily
     over its assets. I                        prepared under FMFIA, and the
                                               results of their examination of
 GAO management assessescompliance             GAO’s assertion.
with its controls through a series of
comprehensive internal reviews, apply-     The independent auditors’ opinion can
 ing the evaluation criteria in OMB’s      be found on page 77.
guidance (Circular A-123, Management
Accountability and Control, and
                                           MANAGEMENTREPORTON FINANCIAL
Circular A- 127, Financial Management
Systems) for implementing FMFIA.
The results of these reviews are dis-
cussed with GAO’s Audit Advisory           GAO is committed to fulfilling the
Committee, and action is taken             objectives of the Federal Financial
promptly to correct deficiencies as they   Management Improvement Act
are identified. It should be noted that    (FFMIA) of 1996. Although not
any internal control structure has         subject to FFMIA, GAO has elected to
inherent limitations, including the        comply with its requirements. GAO
possibility of circumvention or overrid-   believes that it has implemented and
ing of controls.                           maintained financial systems that
                                           comply substantially with federal
GAO has assessedits internal ‘control      financial management systems require-
structure as of September 30, 1997,        ments, applicable federal accounting
based on criteria mentioned above for      standards, and the United States
Government Standard General Ledger at          preparation of its fiscal year 1996
the transaction level as of September 30,      principal statements, believing that
1997, and for the year then ended.             doing so provided the user with
GAO made this assessment based upon            information of greater relevance to the
criteria established under FFMIA, and          government environment.
OMB Memorandum dated
September 9, 1997, Implementation              The audit of the statements was
Guidance for the Federal Financial             performed by the independent auditors
Management Improvement Act of 1996.            Clifton Gunderson L.L.C. The
                                               independent auditors’ report on the
GAO’s independent auditors have I              principal statements, internal controls,
provided an opinion on GAO’s asser-            financial systems, and compliance with
tion on its financial systems. The             certain laws and regulations accompa-
independent auditors’ opinion can be           nies the principal statements.
found on page 77.

GAO’s 1997 hINCIl?AL
STATEMENTS                                                     troller General for
The accompanying principal statements
summarize GAO’s financial position,
show the net cost of operations and the
changes in net position during fiscal
years 1997 and 1996, provide informa-          Xistant Comptroller General for
tion on budgetary resources, and               Planning and Reporting
reconcile the difference between
accrual-based financial accounting and
obligation-based budgetary accounting.
GAO’s 1997 principal statements’have
been prepared in accordance with the           Acting Comptroller   General of the
requirements of the Chief Financial            United States
Officers Act of 1990, federal accounting
standards, and OMB.Rulletin 97-01,
Form and Content of Agency Financial
Statements. The provisions of this
bulletin are effective in their entirety for
the preparation of financial statements
for the fiscal year ending September 30,
1998. However, GAO implemented the
provisions of this bulletin with the
As        OF SEPTEMBER      30, 1997      AND   1996
Dollars    in Thousands                                         1.937        1936

Entity Assets
          Funds with the U.S. Treasury                      $63,003      $65,562
         Accounts receivable                                  2,009        1,354
         Accounts receivable                                      22          33
         Travel advances                                           6           18
     Supplies                                                   304          244
     Property and equipment, net                             68,261       70,39 1
    Total entity assets                                     133,605      137,602
Total Assets                                               $133.605     $137.602
Liabilities Covered by Budgetary Resources
         Accounts payable                                    $3,381       $4,932
         Salariesand benefits                                12,749       11,919
         Employee travel                                        788          947
         Accounts payable                                    10,463       10,139
    Total liabilities covered by budgetary resoukes          27,38 1      27,937
Liabilities Not Covered by Budgetary Resources
       Accrued annual leave                                  25,302       26,360
       Workers’ compensation                                 11,685        9,948
       Comptrollers General retirement plan                   2,531        2,546
       Severancepay                                               6          563
       Capital leases                                           288          278
    Total liabilities not covered by budgetary resources     39,812       39,695
Total Liabilities                                           $67,193      $67,632
Net Position
    Unexpended appropriations                               $37,659      $39,030
    Cumulative results of operations                         28,753       30,940
    Total Net Position                                       66,412       69,970
Total Liabilities and Net Position                         $133.605     $137.602

The accompanying notes are an integral part of these statements.
FOR FISCALYEARS ENDED SEPTEMBER 30,197                                AND 1996

Dollars in Thousand                                                   1997                   1936

Net Costsby ProgramArea
   Financial Audits, Systems,Information Management
   and Technology Issues                                        $85,010                $80,836
       Less reimbursable services                                 (3,102)                (3,534)
       Net program cost                                          81,908                 77,302

   National Defense, Security and International,
   Relations, and Other Related Issues                           81,771                 87,058
       Less reimbursable services                              (34)                       (146)
       Net program cost                                          81,737                 86,912

   Energy, Agriculture, Environment, Housing,                                .’
   Transportation, and NaturalResources Issues                     64,264         :     74,635
       Less reimbursable services                                                           (47)
       Net program cost                                        -z-E >                   74,588

   Education and Employmenr, Health Care
   and Income Security Issues                                      56,008               61,741
      Less reimbursable services                               0                             -
      Net program cost                                .1           56,004               61,741

   Justice, Tax Policy, Financial Institutions, and
   General Management Issues                                       52,028               58,314
       Less reimbursable services
       Net program cost                                        *                        58,314

   Legal Services                                                  22,825               27,480
      Less reimbursable services                               (15)                          (149)
      Net program cost                                             22,810               27,331

   Special Investigations and Investigative Support                 4,589                5,586
      Less reimbursable services                                     -                (83)
      Net program cost                                              4,589                5,503
   Senior management and staff                                      3,405                3,949

   Lessreimbursable servicesnot attributable to programs           (1,589)                   (512)’
Net Cost of Operations                                         $364,970               $395,128

The accompanying      notes are an integral part of these statements.

FOR FISCALYEARSENDED                SEPTEMBER      30,1997      AND      1996
Dolkmsin Thomands                                               1997                1996

Net Cost of Operations                                     $364,970             $395,128
Financing Sources (other than reimbursable services)
       Appropriations used                                  340,670              383,962
       Pension and other retirement benefit costspaid by
          OPM and imputed to GAO                             22,032               23,739
       Other costsimputed to GAO                                 178               -
       Intragovernmental transfer of property and equipment      (97)                (573)
Total Financing Sources                                      362,783             407,128
Net Results of Operations                                      (2,187)            12,000
Prior Period Adjustments                                        -                  -

Net Change in Cumulative Results of Operations                 (2,187)            12,000
Net Decrease in Unexpended Appropriations                      0,371)            (12,203)
Change in Net Position                                         (3,558)              (203)
Net Position - Beginning of Fiscal Year                       69,970              70,173
Net Position - End of Fiscal Year                            $66,412             $69,970

The accompanying     notes are an integral part of these statements.
Dollars in Thousmch                                               1997             1996

   Current year appropriations                               $332,520     ./‘, ,$374,406
   Transfers of budget authority, net                           9,148                (661)
   Unobligated appropriations, beginning of fiscal year        11,964             i4,083
   Reimbursable services                                        4,930      j        4,47 1
   Cost sharing and pass-through CPA contract
       reimbursements                                            9;3\14           4,519
Total Budtzetarv
                     MadeAvailable                           $368,476        $396,818
Statusof BudgetaryResources
   Obligations incurred                                   ’ ’ $350,232       $382,868
   Unobligated, appropriations, end of fiscal year              15,874           11,964
   Lapsed budget authority                                       2,370            1,986
Total,Statusof BudgetaryResources                            $368,476        $396,818
   Obligations incurred                                      $35O,i32 :      $382,868        I
   Less: Reimbursable services                                  (4,930)         (4,471)’
         Cost sharing and pass-through CPA
         contracts reimbtirsements            .’                (9,914)          (4,519)
   Obligated balance, net - beginning of fiscal year            53,598           80,354
   Less: Obligated balance, net - end of fiscal year           (47,119)         (53,598)
Total Outlays                                                $341,857        $400,634

The accompanying      notes are an integral part of these’statements.
Dollars in Thousad                                                 1997         1996

Obligations tid Nonbudgetary Resources

   Obligations incurred                                       $350,232     $382,868
   Less: Reimbursable services                                   (4,930)      (4,471)
          Cost sharing and pass-through CPA
          contracts reimbursements                               (9,914)      (4,5 19)
   Financing imputed from OPM for pension and
        other retirement benefit cost subsidies                 22,032       23,739
   Other imputed financing                                          178
   Intragovernmental transfer of property and equipment             (97)       773)
   Total obligations as adjusted, and nonbudgetary
   resources                                                   357,501      397,044

Resources That Do Not Fund Net Cost of Operations

   Net decreasein unliquidated obligations                       5,281       10,084
   Costs capitalized on the balance sheet                      (12,251)     (24,874)
   Expensesto be funded by future appropriations
   (Appropriations provided to reduce unfunded liabilities)        ‘107         ww
   Total iesources that do not fund net cost of operations       (6,863)    (15,670)

Cost That Do Not Require Resources

   Depreciation                                                 14,332       13,754
Net Cost of Operations                                        $364,970     $395,128

The accompanying     notes are an integral part of these statements.
S TO P ‘I II?K                                            AL         I


 Note 1. Summary       of Significant   Accounting        Policies

 Reporting   Entity

 The accompanying principal stat&ems .’ present the financial position, net cost of
 operations, changes in net position, budgetary resources, and financing of&e United
 States Gerieral Accounti& Offke (GAO), an age.“? of the legislative bra$ch of the
 federal government. The financial activity presented relates primarily to the execution
 of GAO’s congressioklly approved budget. GAO’s budget consists of an a,pnual
 appropriation covering salaries and expenses and a building expenditure fund. The
 principal statenients, except for pension and other retirement benefit costs paid by the
 Office &Personnel Management (OPM) and imputed to GAO, do not include the
 effects of centrally administered assets and liabilities related to the federal government as
 a whole, such as interest on the federal debt, which may in part be attributable to GAO;
 they also do not include activity related to GAO’s ‘trust function described’in Note i0.

 Ba$s of Accounting

 Under the authority of the Chief Financial Offkers (CFO) Act of 1990, GAO partici:
 pated with the Office of Management and Budget (OMB) and the Department of the
 Treasury in the establishment of the Federal Accounting Standards Advisory Board
 (FASAB). FASAB’s purpose’ is to consider and recommend accounting principles,.
 standards, and requirements to GAO, Treasury, and OMB. The Comptroller General,
 the Secretary of the Treasury, and the Director of OMB (the three principals of FASAB)
 decide upon new principles, standards, and requirements after considering FASAB’s
 recommendations.     The resulting standards are concurrently issued by GAO and OMB.
 GAO prepared its principal statements based upon the f?ll?w+g hierarchy of account-
 ing principles and standards:

        the accounting principles, standards, and requiretients          approved by the   I
        three principals and issued by GAO and OMB;

        interpretations related to the standards issued by OMB in accordance with
        OMB Circular A-134, Financial Accounting Principles and Standards; and
       form and content requirements for financial statements included in
       OMB Bulletin 97-01 (Form and Content of Agency Financial Statements).

These principles differ from budgetary reporting principles. The differences relate
principally to the capitalization and depreciation of property and equipment, as well as
the recognition of other long-term assets and liabilities in the accompanying principal
statements. Also, for purposes of the principal statements, budgetary appropriations are
realized as a financing source as accrued expenses are recognized.

Basis of Presentation

GAO’s 19 97 principal statements have been prepared in accordance with the require-
ments of the CFO Act of 1990, federal accounting standards, and OMB
Bulletin 97-01. The provisions of this bulletin, which incorporates federal accounting
standards recommended by FASAB and issued by’GA0 and OMB, are effective in
their entirety for the preparation of financial statements for the fiscal year ending
September 30, 199 8. However, GAO implemented the provisions of this bulletin with
the preparation of its -1996 principal statements.

Funds With the U.S. Treasury

GAO’s receipts and disbursements are processed by the U.S. Treasury. Funds with the
U.S. Treasury represent appropriated funds available to pay current liabilities and to
finance authorized purchase commitments.

Accounts Receivable

GAO’s accounts receivable are due principally from federal government corporations
and other federal agencies for audit and other reimbursable services.

Property and Equipment

On October 28, 1988, Public Law loo-545 transferred control of the GAO building
and land in Washington, D.C., from the General Services Administration to GAO
without a monetary exchange. At the time of transfer, the depreciated value of
 the building was $15664,000 and the book value of land was $1,191,000. GAO
 recorded the building and the land as assets’at the values stated above.. The GAO
 building is listed in the National Register of Historic Places, and has been designated as
 a heritage asset. Statement of Federal Accounting Standards Nos. 6 and’8 require that
 heritage assets be reported in a separate stewardship reporting section and not on the
‘Statement of Financial Position (SOFP). GAO removed the building and land from
 the SOFP with the preparation of its 1396 principal statements. Property and equip-
 ment costing more than $5,000 is capitalized at cost. Bulk purchases oflesser-value
 items that aggregate more than $100,000 are also capitalized at cost. These assets are
 depreciated on a straight-line basis over the estimated useful life of the property,
 ranging from 2 to 20 years.


Liabilities represent the amounts that are likely to be paid by GAO as ‘a result of
transactions that have already occurred; however, no’liability is paid by GAO absent an
appropriation. Liabilities for which an appropriation has not been enacted are, there-
fore, classified as liabilities not covered by budgetary resources. Although future
appropriations to fund these liabilities are likely and anticipated, it is not certain that
appropriations will be enacted to fund these liabilities.

Pension and Other Retirement     Benefits

Statement of Federal Accounting Standards No. 5, Accounting for Liabilities of the
Federal Government, requires that GAO recognize its share of the cost of providing
future pension benefits to eligible employees over the period of time that services are
rendered. The pension expense recognized in the principal statements equals the
current service cost for GAO’s employees for the accounting period less the amount
contributed by the employees.. The measurement of the service cost requires the use of
an actuarial cost method and assumptions, with the factors applied by GAO provided
by OPM, the agency that administers the plan. The excess of the recognized,pension
expense over the amount contributed by GAO represents the amount being financed
directly through the Civil Service Retirement and Disability Fund administered by
OPM. This amount is considered imputed financing to GAO.

The standard also requires that GAO recognize a current-period expense .for the future
cost of post-retirement health benefits, and life insurance for its employees tihile they
are still working. This expense is GAO’s Other Retirement Benefit (ORB) expense.
GAO accounted for and reported the ORB expense in its principal statements in a

         manner similar to that used for pensions, with the exception that employees and GAO
         do not make current contributions to fund these future benefits.

         Annual Leave, Sick and Other Leave

         Annual leave is recognized as an expense and a liability as it is earned; the liability is
         reduced as leave is taken, The accrued leave liability is principally long-term in nature.
         Sick leave and other types of leave are expensed asleave is taken.


         GAO has certain claims and lawsuits pending against it. When claims are expected to
         result in payments, and the payment amounts can be reasonably estimated, appropriate
         provision is included in the accompanying principal statements. In the opinion of
         management and legal counsel, the resolution of other claims and lawsuits will not
         materially affect the financial position or operations of GAO.


         Certain amounts for 1996 have been reclassified to conform with the 1997 presentation
         of those amounts.

         Note 2. Property       and Equipment,          Net

         The composition of property and equipment as of September 30, 1997, is as follows:

         Dollarsin Thousands
         Chses of Property                Acquisition          Accumulated               Net Book
           and Equipment                     VaZue             Depreciation                Value
         Buildingimprovements                  $75,416               $34,738              $40,678
         Computer and other
           equipment, Ad
           ADP sofnnrare                        52,748                26,280               26,468
         Leasehold improvements                  4,384                 4,074                  310
         Assetsunder capital lease               2,559                 1,754                  805
         Total Property   and Equipment      $135,107                $66,846              $68,261
The composition       of property and equipment   as of September 30, 1996, is as follows:
                                                                         .i                ‘2,

Dolkars in Thousand                                                      ,’

Classes of Property              Acquisition             Acwmulated                Net Book
and Equipment                       Value                Depreciation               WUe
Building improvements               $67,992                   $28,902               $39,090
Computer and other
  equipment, and
  ADI? software                       50,311'                  20,401                 29,910
Leasehold improvements                 5,305                    +,84>                    460
Assetsunder capital lease              2,589                    1,658                    931
Total Property and Equipment       $126197                    $55,806,              $70,391      (

Note 3. Net Position

 GAO’s operations do not require permanent capital and are not expected’ to generate an
 operating surplus or deficit. Net Position is composed of two ‘elements-unexpended.
 appropriations and cumulative results of operations. Unexpended appropriations
 includes appropriations not yet obligated or expended, i.e., unobligated appropriations
 and unliquidated obligations, Unobligated appropriations were $15,874,000 as of
 September 30, 1997, and ,$l 1,964,000. as of September 30, 1996; unliquidated obliga-
.tions were $21,785,000 as of September 30, 1997, and $27,OG,G,OOOas of September
 30, 19% Cumulative results of operations inchtdes the amounts.accumulated        over the
years by GAO from its financing sources less its expenses, including donations and
 transfers of capitalized assets and an amount representing GAO’s liabilities not covered
 by budgetary resources. The former represents GAO’s investment in capitalized assets,
 including supplies, net of capital lease liability.

Liabilities not covered by budgetary resources represent aggregate amounts of congres-
sionally authorized long-term liabilities (annual leave, workers’ compensation, retire-
ment benefits for Comptrollers General, and severance pay) that are expected to be
funded by future years’ appropriations.

Note 4. Net Cost of Operations

The Statements of Net Cost show the full and net operating costs of GAO’s major
programs. Expenses for salaries and related benefits for fiscal years 1997 and 1996
        amounted to $270,679,000 and $283,125,000, respectively. In fiscal years 1997 and
         1996;salaries and related benefits were 74 percent and 72 percent, respectively, of
        GAO’s net cost of operations. Included in the net cost of operations are pension and
        other retirement benefit costs paid by OPM and imputed to GAO of $22,032,000 in
        fiscal year 1997 and $23,739,000 in fiscal year 1996. Revenues from reimbursable
        services earned by a program area are shown as an offset against the full cost of the
        program to arrive at its net cost. These revenues consist primarily of billings to federal
        government corporations for financial statement audits performed by GAO, and to
        federal agencies for detailed GAO employees performing GAO mission-related work.
        Earne,d revenues that are insignificant or cannot be associated with a major program
        area are shown in total. Revenues from reimbursable services for fiscal years 1997 and
         1996 amounted to $4,930,000 and $4,471,000, respectively: The net cost of opera-
        tions represents GAO’s operating costs that must be funded by financing sources other
        than revenues earned from reimbursable services. These financing sources are presented
        in the Statements of Changes in Net Position.

        Note 5. Net Financing       Sources

        GAO’s financing sources, other than reimbursable services, consist of appropriations
        used and imputed financing, less transfers-out. Appropriations are considered used as a
        financing source when goods and services are received or benefits are provided. This is
        true whether the goods, services, and benefits are paid prior to the reporting date or are
        payable as of that date, and whether the appropriations are used for items that are
        recorded as expenses or are capitalized. Imputed financing is the offset to the pension
        and other retirement benefit costs paid by OPM and imputed to GAO that are re-
        ported on the Statement of Net Cost. Transfers-out represent the book value of
        capitalized assets transferred from GAO to other federal agencies without reimburse-

        Note 6. Spending     Authority    from Budget    Transfers   and Reimbursements

        Budgetary resources made available to GAO include spending authority from budget
        transfers and reimbursements arising from both revenues earned by GAO from provid-
        ing services to other federal entities for a price (reimbursable services) and cost sharing
        and pass-through contract arrangements with other federal entities. Fiscal year 1997
        budget transfers consist primarily of budget authority transferred-in from the Depart-
        ment of Health and Human Services for GAO-directed work related to medical savings
        accounts. Budget transfers in fiscal year 1996 consist of budget authority


transferred-out to executive branch agencies related to the~transfer of GAO’s claims .’
functions. Reimbursements from cost sharing and pass-through contract arrangements
consist primarily of collections from other federal entities for the support of the Joint
Financial Management Improvement. Program and FASAB, and collections from other
federal entities that utilize standing GAO contracts for obtaining accounting and
auditing services from CPA firms. The costs and reimbursements for these activitiesare
not included in the Statements of Net Cost.      ’

Note 7. Leases                                                                         ;

Capital Leases         ‘.

GAO has entered into several ,noncancelable capital leases under which the ownership
,of the equipment covered under the leases transfers to GAO. when the leases expire.
When GAO enters into these leases, the present value of the future lease payments is          I
capitalized and recorded as a liability.                 ,

Operating     Leases
GAO leases.ofIke space from the GeneralServices Administration and has entered into.
various other operating leases for o&e communication and ADP equipment. Gener-,
ally, leases are cancelable by either party without penalty, upon 120 days’ notice, and
future lease payments are not accrued as liabilities. Lease costs for office space and j
equipment for fiscal years 1997 and 1996 amounted to approximately $9,200,000 and
$16,700,000, respectively. The decrease in lease costs from fiscal year 19 9 6 to 13 9 7 L 1
resulted primarily from the closing,of audit sites in Washington, D.C., and the result-
ing relocation of affected employees into the GAO building., GAO’s estimated future
minimum lease payments are as follows:

Dollars in Thou-sad
FiscalYear end September 30                                                           Total
1998                                                                                $7,095
1999                                                                                 5,674
2000                                                                                 5,113
2001                                                                                 4,164
2002                                                                                 3,837
Thereafter                                                                           7,963
Total Estirriated Future Lease P&vwnts                                             $33,846
         Note 8. Retirement andOther Benefits

         Allpermanent employees participate in the contributory Civil Service Retirement
         System (CSRS) or the Federal Employees Retirement System (FERS), which became
         effective January 1, 1987. Temporary employees and,employees participating in
         FERS are covered under the Federal Insurance Contributions Act (FICA). GAO
         makes matching contributions to the CSRS, FERS, and FICA and matches employee
         contributions to the thrift savings component of FERS up to 5 percent of basic pay.
         The pension expense recognized in GAO’s principal statements for fiscal years 1997
         and 1996 amounted to approximately $34,250,000 and $37,324,000, respectively.
         These amounts include pension costs financed by OPM and imputed to GAO of
         $14,535,000 and $17,006,000, respectively. To the extent that employees are
         covered by FICA, the taxes they pay to the program and the ,benefits they will
         eventually receive are not recognized in GAO’s principal statements. However, the
         payments to FICA that GAO makes are recognized as operating expenses. These
         payments amounted to approximately $8,387,000 and $8,847,000 during fiscal years
         1997 and 1996, respectively. Similarly, to the extent that GAO employees are
         covered by the thrift savings component of FERS, GAO payments to the plan are
         operating expenses. GAO’s costs associated with the thrift savings component of
         FERS during fiscal years 1997 and 1996 amounted to approximately
         $3,813,000 and $3,867,000, respectively.

    ‘1   In addition, all permanent employees are eligible to participate in the contributory
         Federal Employees Health Benefits Program (FEHBP) and Federal Employees Group
         Life Insurance Program (FEGLIP) and may continue to participate after retirement.
         GAO makes matching contributions to the FEHBP and FEGLIP for active employ-
         ees to pay for their current benefits. GAO’s contributions for active employees are
         recognized as operating expenses and, during fiscal years 1997 and 1996, amounted
         to approximately $8,392,000 and $9,002,000, respectively. Using the cost factors
         supplied by OPM, GAO has also recognized an ORB expense in its principal
         statements for the future cost of post-retirement health benefits and life insurance for
         its employees. These costs amounted to approximately $7,497,000 and $6,733,000
         during fiscal years 1997 and 1996, respectively, and are financed by OPM and
         imputed to GAO.

         Comptrollers General and their surviving beneficiaries who qualify and so elect to
         participate are paid retirement benefits by GAO under a separate retirement plan.
         These benefits are funded from current year appropriations and amounted to
approximately,$239,500    and $102,300 during fiscal years 1397 and 1996, respectively.
Since GAO is responsible for future payments under this plan, the estimated-present
value of accumulated plan benefits is recorded as an unfunded liability. The estimated
present value of accumulated plan benefits was $2,531,000 as of September 30, 1997,
and $2546,000 as of September 30, 1996.

Note 9. Workers’     Compensation

The Federal Employees’ Compensation Act (FECA) provides income and medical cost
protection to covered federal civilian employees injured on the job, employees’who
have incurred a work-related occupational disease, and beneficiaries ofemployees whose
death is attributable to a job-related injury or occupational disease. Claims incurred for
benefits for GAO employees under FECA are administered by the Department of
Labor (DOL) and are ultimately paid by GAO.

GAO recorded an estimated liability for claims incurred as of September 30, 1997 and
 19 9 6 and expected to be paid in future periods. The estimated future liability for such
claims was calculated using historical payment data and lo-year Treasury bond interest
rate projections published by OMB to project future costs. GAO calculated the
estimated future liability using an actuarially based model developed for DOL and
modified for use by GAO. The increase in the estimated liability from fiscal year 1996
to 1997 of $1,737,000 resulted primarily from a 20-percent reduction in the interest
rate projections used for the fiscal year 1997 calculation. Estimates of this nature are
sensitive to changes in interest rates. Lower interest rates result in a higher estimated
liability because, if the future.liability were funded, a larger initial investment would be
required to provide a given amount of future benefits. Likewise, higher interest rates
require a smaller initial investment. Therefore, fluctuations in interest rate projections
have an immediate effect on the estimated future liability even if historical payments
remain relatively stable. The total liability also includes amounts paid to claimants by
DOL as of September 30, 1997 and 1996 of $2,310,000 and $2,154,000, respectively,
but not yet reimbursed to DOL by GAO.

Note   10. Davis-Bacon     Act Trust Function

GAO is responsible for administering for the federal government the trust function of
the Davis-Bacon Act receipts and payments. GAO maintains this fund to pay claims
relating to the Davis-Bacon Act and Contract Work Hours and Safety Standards Act
violations. Under these acts, DOL investigates violation allegations to determine if
federal contractors owe additional wages to covered employees. If DOL concludes
that a violation has occurred, GAO collects the amount owed from the contracting
federal agency, deposits the funds into an account with the U.S. Treasury, and remits
payment to the employee. GAO is accountable to the Congress and the public for
the proper administration of the assets held in the trust. Trust assets under GAO’s
administration totaled approximately $4,937,000 on September 30, 1997. These
assets are not the assets of GAO or the federal government and are held for distribu-
tion to appropriate claimants. During fiscal year 1997, receipts and disbursements in
the trust amounted to $894,000 and $1~546,000, respectively. Since the trust assets
and related liabilities are not assets and liabilities of GAO, they are not included in
the accompanying principal statements.
     3-E       ASSETS
U.S. GENERAL       ACCOUNTING        OFFICE              >
ANNUAL     STIW~RDSHIP       INFORMP~TION                                                     :.
As O;F SEPTEMB&        $0,. 1397                                                        .;

Heritage assets are property, plant, and equipment @P&E) possessing one-or               I
more of the following characteristics: historical or natural significance; cultural,  !.
educational, or aesthetic value; or significant architectural characteristics. In
general,, the cost of heritage assets is not often relevant or determinable, and the  :, *
useful life of heritage assets is not reasonably estimable for depreciation purposes.
Rather, the most relevant information about heritage assets is their existence and
condition. Therefore, heritage assets are required to be reported only in terms of
physical units. However, in the case of the GAO building, its value is known as
described below.

On October 28, 1988, Public Law loo-545 transferred control of the General
Accounting Office building and land in Washington, D.C., from the General
Services Administration to GAO without a monetary exchange. At the time of
transfer, the depreciated value of the building was $15,664,000, and the book
value of land was $1,191,000. GAO recorded the building and the land as assets
at the values stated above.                 \

The GAO building is listed in the National Register of Historic Places as a symbol
of a new age in federal office design. The building holds historical significance as
the first structure erected exclusively for occupancy by the General Accounting
Offrce. It is one of the first federal office buildings to be completely
air-conditioned and artificially lit; and the first modern, block-type building to be
constructed for the federal government. Its construction marked a distinct
departure from the “fish-bone”‘type of office building, which used either interior
courts or a series of wings branching from a central spine in order to provide both
air and light.

Statement of Federal Accounting Standards Nos. 6 and 8 requirethat heritage
assets be reported in a separate stewardship reporting section and not on the
statement of financial position (SOFP). GAO removed the building and land
from the SOFP with the preparation of its 1996 principal statements.
Since acquiring control of the building, GAO has expended considerable resources for
renovation and improvement of the building, including asbestos abatement, major
redesign of office space, installation of communication wiring for local area network,
upgrading of fire alarm system, and renovation of the parking garage-all to enhance
use of the building for operating purposes. The costs of these projects have been
capitalized as general l?I?&E and depreciated over their expected useful lives. Building
improvement for operational efficiency is expected to continue.

Maintenance of the building has been kept on a current basis, and the expense is
recognized as incurred. There is no significant deferred.maintenance cost.

The Audit Advisory Committee was established to advise the Comptroller General
on the U.S. General Accounting Of&e’s (GAO) financial operations. As part of
that responsibility, the Committee meets with agency management and its internal
and external auditors to review and discuss GAO’s external financial audit coverage,
the effectiveness of GAO’s internal controls over its financial operations, and its
compliance with certain laws and regulations that could materially impact GAO’s
principal statements. The Committee reviews the findings of internal and external
auditors, and GAO’s responses to those findings, to ensure that GAO’s plan for
corrective action includes appropriate and timely follow-up measures. In addition,
the Committee reviews and comments on drafts of GAO’s annual report, including
the principal statements. The Committee met twice during fiscal year 1997,
including sessions with the Acting Comptroller General and with GAO’s external
auditors. On occasion, the Committee met with the external auditors without
GAO management being present.

Sheldon S. Cohen
Audit Advisory Committee
IND E rPEND E                                                                  AUDIT

                                     Independent Auditor’s Report

  Comptroller General of the United States

    We have audited the General Accounting Office’s Principal Statements, referred to below, as of
    and for the years ended September 30, 1997 and 1996, and have examined management’s
    assertions, included in the accompanying management reports on internal controls and iinancial
    systems, that the General Accounting Office has an effective internal control structure over
    financial reporting, safeguarding of assetsand compliance with applicable laws and regulations in
    place as of September 30, 1997 and that the General Accounting Office has implemented and
    maintained fmancial systems that comply substantially with federal financial management systems
    requirements, applicable federal accounting standards and the United States Government Standard
 ,. General Ledger at the transaction level as of September 30,1997 and for the year then ended.’
  In our opinion:
     l   The Principal Statements are presented fairly, in all material respects; and
     l   Management’s assertion that the General Accomu.ing Office has an effective internal control
         structure over financial deporting, safeguarding of assets and compliance with applicable
         laws and regulations in place as. of September 30, 1997 is fairly stated, in all material
         respects, based upon criteria established under the Federal Managers Financial Integrity Act
         of 1982, and the Office’ of Management and Budget Ciicular A-123, Management
         Accountability and Control.
     l   Management’s assertion that the General Accounting Office has implemented and
         maintained financial systems that comply substantially with federal financial management
         systems requirements, applicable federal accounting standards and the ,United States
         Government Standard General Ledger at the trsnsaction levelas of September 30, 1997 and
         for the year then ended is fairly stated, in all material respects, based upon criteria
         established under the Federal Financial Management Improvement Act of 1996 (FFMIA),
         and the Office of Management and Budget Memorandum dated September 9, 1997,
         Implementation Guidance for the Federal Financial Mmiagemeizt Improvement Act
         @?WU)     of 1996.

  We found:
     l   No material conflicts with the General Accounting Office’s report on internal controls dated
         December 12, 1997, voluntsrily prepared under the Federal Managers’ Financial Integrity
         Act of 1982; and
     l   No instances of noncompliance with the selected provisions of applicable laws and
         regulations tested.
  Each of these conclusions is discussed in more detail below. This report also discussesthe scope
  of our work.                                                                               Membrmof
                                    Opinion On Principal Statetients
In our opinior~ the accompanying Principal Statements including the ‘notes thereto on pages 59
through 73 present fairly, in all material respects, the GeneraLAccounting Office’s:

       l   firiancial position as of September 30,1997 and 1996;
       l   net cost bfoperations;
   l       c)anges in net position;
   l       stat& ofb@g&uy reso@es; ahd                         ,, ‘
   l       hnc~gfort+.        yearsthen ende$

in co&h&y     with federal generally accepted accounting pri&ples,‘as d&&bed in Note 1 to the
Pr$icip$ Statemtints.’

                Opinion on Management’s Assertion on the Internal Control Structure
                  Over Financial Reporting, Safegkwding vf Assets and Compliance
                                with Applicable Laws and Regulations

We $a&:exhi&d          ma&geme~t~s.assertipq,included in‘the accompanying management report on
inteeal oonvols, ‘&a$ t& &neral Accounting Office has an effective internal control &ructure
over finq@l reporting, saf&uard&g of’ assets and compliance with applicable laws and
regulations in~place as of September .30, 1997. These internal controls are designed by
management to provide reasonable, but not absolute, assurance that the following objectives are
     ”             .,’
   l   obligations and costs are in compliance with applicable laws zindregulations;
  l  funds, proberty and other assetsare safeguarded igainst loss from unauthorized acquisition
  a’ use, or disposition; and                                        J<

   l       revetlUe and expenditures applicrible to the General Accchn~ ‘&de’s operations are
           properly recorded and accounted for to enable the General Accounting O&e to prepare
           accounts and reliable ,$inancialrep@s,and to maintain accountabiity over its assets.

In our opinion management’s assertion that the General Acckmting. Office %as an effective
internal control structure over financial reporting, safeguarding of asgets and compliance with
aljplicable lirws and regulations in place as’of September 30,’ 1997 is fairly stated, in all material
respects, based upon critkia established under the Federal Manageis’ Fihancial Integiity Act of
 1982 and the Office of Management and Budget Circular A-123, Management &c&ntability
and Control, insofar as the objectives stated above pertsin to the prevention or detection of errors
and irregularities in amounts that would be material to&e Principal Statements. In addition, we
found no material conflicts between the results of our examination and the General Accounting
Office’s report on intekl controls dated,Deceqber 12, 1997, volimta+y preptied under the
Fedeisil Managers’ Financial Integrity Act of 1982.
                           Opinion on i%Janagement’s Assertion on Financial Systems
        We have examined management’s assertion, included inthe accompanying management report on
        financial systems, that the General Accounting Office has implemented and maintained tinancial
        systems that comply substantially with federal tinancial management systems requirements,
        applicable federal accounting standards and the United States’ Government Standard General
        Ledger at the transaction level as of September 30,1997 and for the year then ended.
         In our opinion management’s assertion that the General Accounting ,Office has implemented and
         maintained kancial systemsthat comply substantially with federal t@ui&il management systems
        requirements, applicable federal accounting standards and the United States Government Standard
         General Ledger at the transaction level as of September 30, 1997 and for the year then ended is
         fairly stated, in all material respects, based upon criteria established under the Federal Financial
         Management Improvement Act of 1996 (PPMtA), and the Office of Management and Budget
        Memorandum dated September 9, 1997, Implementation Guidance for the Federal Financial
        Management Improvement     . ,.Act @TMLj) of 1996.                                       :
                                     CompliGce With Laws and Rkgulatidns
        As part of obtaining reasonable assurance about whether the Principal Statements are free of
        material misstatement. we performed tests of the General Accounting Office’s compliance with
        selected provisions of laws and regulations: However, the objective of our audit of the Principal
        Statements, including our tests of:compliance with selected provisions of applicable.laws and
        regulations, was not to provide an opinion on overall compliance with such provisions.
        Accordingly, we do not express such an opinion.                                          _, ‘.

        The results of our tests disclosed no instances of non-compliance that are required to be reported
-2      herein under Government Auditing Stanabrdx
        This. conclusion with respect to our tests of compliance with selected provisions of applicable
        laws and regulations is intended solely ,for the information of Congress and the General
        Accounting Office’s management. However, this report is a matter of public record and its
        distribution shouldnot belimited.                                  ‘-      :
r                                    ’ -Responsibilities and ,Metliodofogy
        Management has the responsibility for:
           l   preparing the PrincipaJ Statements m conformity,with federal generally.accepted accounting
               principles as described in Note 1 to the Principal Statements;          I
           l   establishing and maintaining an effective internal control structure; and
          l    complying with applicable laws and regulations.
        Further, management has elected to comply with ah of the relevant provisions of the Federal
        Managers’ Finankd Integrity Act of 1982 and the Federal Financial Management Improvement
        Act of 1996.
Our responsibility is to express an opinion on the Principal Statements, b,asedon our audits and
express opinions on management’s assertions (1) .that the General Accounting Office has an
effective internal control structure over tinancial reporting, safeguarding of assetsand compliance
with applicable laws and regulations, and (2) that the General Accounting Office has implemented
and maintained financial systems ‘that comply substantially with federal financial management
systems requirements, applicable federal, accounting standards and the U. S. Government
Standard General Ledger at the Transaction level; based on our examinations. Accordingly, we
planned and performed the audits and examinations to obtain reasonable assurance about whether
(1) the Principal Statements are free of material misstatement and are presented in accordance
with federal generally accepted accounting principles as described in ,.Note 1 to the Principal
Statements, (2) management’s assertion that the General Accounting Office ,has an effective
internal control structure over financial reporting, safeguarding of assets and complianke with
applicable laws and regulations in place as of September 30, 1997 is fairly stated, in alI material
respects, based upon criteria established under the Federal Managers”~Financial Integrity,Act of
1982, and the Office of Management and Budget Circular A-123, Manugement Accountability
und Control, and (3) management’s assertion that the General Accounting O&e has
implemented and maintained financial systems that comply substantially with federal fjnancial
management systems requirements, applicable federal accounting standards and the United States
Government Standard General Ledger at the transaction level as of September 30, 1997 and for
the year then ended is fairly stated, in all material respects, based upon criteria established under
the Federal Financial Management Improvement Act of 1996 (J?FMlA), and the Office of
Management and Budget Memorandum dated September 9, 1997, Implementution Guidance for
the Federal Financial Management. Improvement Act (l?I?MiX) of 1996. We are also responsible
for testing compliance with selected provisions of applicable laws and regulations that may
materially affect the Principat Statements.             (
In order to fblflll these responsibilities, we
   l   examined on a test basis, evidence supporting the amounts and disclosures in the Principal
   . assessedthe accounting principles used and. sign&ant estimatesmade by management;
   l   evaluated the overall presentation of the Principal Statements;
   T obtained an understanding of the. internal control structure over financial reporting,
     safeguarding of assetsand compliance with applicable laws and regulations;
   . tested and evaluated the design and operating effectiveness of relevant internal controls over
     significant cycles, classesof transactions, and account balances;
   . tested compliance with selected provisions of the following laws and regulations that ,may
     materially affect the Principal Statements:
       -   Antideficiency Act;
       -   Fair Labor Standards Act;
       -   Civil Service Retirement Act;
       -   General Accounting Office Personnel Act of 1980;
       -   Federal Employees’ Compensation Act;
       -   Federal Employees’ Health Benefits Act of 1959;

       - Federal Employees’ Group Life Insurance Act of 1980: and
       - Federal Managers’ Financial Integrity Act of 1982;
       - Federal Financial Management Improvement Act (FFMIA) of 1996.
   l   performed other procedures as we considered necessy in the circumstances; and
   l   compared, at management’s request, the General Accounting Office’s most recent Federal
       Managers’ Financial Integrity Act of1982 report on internal controls dated December 12,
       1997 with the results of our examination of management’s assertion, included in the
       accompanying management report on internal controls, that the General Accounting Office
       has an effective internal control structure over financial reporting, safeguarding of assetsand
       compliance with applicable laws and regulations in place as of September 30, 1997.
 We did not evaluate the internal controls relevant to operating objectives as broadly defined by
 the Federal Managers’ Financial Integrity Act of 1982, such as those controls relevant to ensuring
 efficient operations. We limited our work to accounting and other controls necessary to achieve
 the objectives identified in our opinion on management’s assertion on the internal control
 structure over financial reporting, safeguarding of assetsand compliance with applicable laws, and
 regulations. Because of inherent limitations in any internal control structure, errors or
 irregularities may nevertheless ocour and not be detected. We also caution that projecting the
 results of our examination to future periods is subject to the risk that controls may become
 inadequate because of changes in conditions or that the degree of compliance with controls may
 Gur audits were conducted in accordance with generally accepted auditing standards; Government
Auditing Sfan&ra%, as issued by the Comptroller General of the United States; and OMB Bulletin
 93-06, Audit Requiremenfs for Federal Financial Statemenfs. Our examinations of
management’s assertions, included in the accompanying management reports on internal controls
and financial systems, that the General Accounting Office has an effective internal control
structure over financial reporting, safeguarding of assetsand eomplisnoe with applicable laws and
regulations in place as of September 30, 1997, and that the General Accounting Office has
implemented and maintained financial systems that comply substantially with federal financial
management systems requirements, applicable federal accounting standards and the United States
Government Standard General Ledger at the transaction level as of September 30, 1997 and for
the year then ended, were conducted in accordance with standards established by the American
Institute of Certified Public Accountants; Government Auditing Stan&r&, as issued by the
Comptroller General of the United States; and OMB Bulletin 93-06, Audit Requirements for
Federal Financial Statements. We believe that our audits and examinations provide a reasonable
basis for our opinions.
Supplemental Information. Our audit was made for the purpose of forming an opinion on the
Principal Statements taken as a whole. The accompanying annual stewardship information on
pages 74 and 75 is presented for purposes of additional analysis and is not a required part of the
Principal Statements but is required supplementary information. Such information has been
subjected to the auditing procedures applied in the audit of the Principal Statements and in our
opinion, is presented fairly, in sll material respects, in relation to the’principal Statements taken as
a whole.
Consbtency of Other Information. The Overview of Operations and Financial Management
and other supplemental information in “Highlights bf GAO Reports and Testimony” and in
 “Supplement to the Comptroller General’s 1997 Amtual Report” contain a wide range of data,
some of which is not directly related to the Principal Statements. Professional standards require
the auditor to read this information and consider whether such information, or the msnner of its
presentation, is materially inconsistent with the information or the manner of its presentation
appearing in the Principai Statements. Ifbased on such reading the auditor concludes that there is
a material inconsistency, the auditor should determine whether the Principal Statements, the
report, or the other information require revision. Nothing came to our attention to indicate that
this hrformation is materially inconsistent with the Principal Statements.
PHOTO                            INDEX


Photo1 James F. Hinchman, Acting Comptroller
          General of the United States

Photo2 Henry L. Hinton, Jr., Assistant
          Comptroller General, National Security and
          International Affairs Division

Photo3 Lynda D. Willis, Director, Tax Policy and
          Administration Issues, General Government

Photo4 William J. Scanlon, Director, Health
          Financing and SystemsIssues,Health,
          Education and Human ServicesDivision

Photo5 Cynthia M. Fagnoni, Acting Associate
          Director, Veterans’ Affairs and Military
          Health Care Issues, Health, Education and
          Human ServicesDivision

Photo6 Gerald L. Dillingham, Associate Director,
          Transportation Issues,Resources,
          Community, and Economic Development

Photo7 Joel C. Willemssen, Director, Information
          Resource Management, Accounting and
          Information Management Division