Forest Service's Efforts to Improve Its Financial Management Systems

Published by the Government Accountability Office on 1990-05-02.

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

                   United States General Accounting   mace   /   / 1 o( w

For Release        Forest Service's  Efforts    to
on Delivery        Improve Its Financial     Management Systems
Expected at
1O:OO a.m.                                 .
May 2, 1990

                   Statement of
                   Brian P. Crowley
                   Director   of Planning and Reporting
                   Accounting   and Financial Management
                   Before the
                   Subcommittee on Interior    and
                   Related Agencies
                   Committee on Appropr:ations
                   House of Representatives


GAO/T-AFMD-go-19                                                     GAO Fom   Ma(12/87)
. ,

      Mr. Chairman             and Members of the                    Subcommittee:

                I am pleased                to update        the     Subcommittee          on the Forest
      Service's          efforts            to improve        its     financial         management systems.                    At
      your      request,            the torest        Service         and GAO have continued                   efforts         to
      outline         an all-resource                cost     reporting           system over the             past     year.
      As part         of our ongoing                work on the          Forest        Service's         financial                  ,
      management,             we also         reviewed        other      areas        of continuing           interest         to

                --    proposed             changes    in the         Service's         Timber      Sale Program
                      Information             Reporting         System (TSPIRS) and

                --    an initiative                undertaken         by the         Service      to assure         that
                      costs         are properly            reflected         in their         records      ("charged-as-

      Also      at your        request,            we examined          the    Service's          appraisal         process
      to determine             if     it     (1)    set     advertised         prices      that     were adequate              to
      recover         even the minimum costs                        of preparing         the      sale     and (2)
      ensured         that     the government                received         fair     market      value      for    the
      timber         sold.

           Let  me now take                    a few minutes             to advise         you on the          status      of
      these efforts.

          Subsequent        to our work associated                      with    the design           for     TSPIRS,
you asked that             we cooperate            in designing             a similar        system         to    report
the    costs       of certain        Forest        Service        natural       resource        programs.               Our
1989 report           to you described              the       Forest     Service's          progress         in
'outlining         this    system.1

                                        .                                               ,
          Since     that    time,     the     Forest          Service       has refined,            developed,
and documented             the    system design.                Our most recent              report2
describes          the Forest        Service's         preliminary             design       at nine         national
forests        and the      areas     where we believe                  the    design       could     be

System Design

          The all-resource            cost        reporting        system       will    account        for        all
National          Forest    System appropriations                      and cooperative              agreements
involving          the management of the                  national          forests.         Costs         related
to the        Research      or State         and Private           Forestry        appropriations                 would
not be included             unless     they        are incurred           to support          national            forest

lForest Service:                 Status of the All-Resource                       Cost Reporting                 System
 lGAO/AFMD-89-65,                April  14, 1989).
2Forest Service:  The All-Resource   System's Cost Features                                            and Areas
 for Future Improvements    (GAO/AFMD-90-62, May 1, 1990).
. .

                The system would                    report         costs      incurred        in connection                  with
      operating            the     following             natural        resource         programs:           (1) timber,                     (2)
      range,         (3)    minerals,              (4)     recreation,           (5)     wildlife       and fish,                  and (6)
      watershed.             Costs      which            do not appear            to provide           direct          benefits                 to
      the    natural         resource              programs,          but     rather        are undertaken               to fulfill
      the    Service’s             overall          land       ownership         responsibilities,                    will         be
      separately            reported'within                    the     "protectionV1          program.

             'For      those        programs             which       receive      income,           revenues          will         also         be
      reported.             Costs      and revenues                  are expected            to be matched               on an
      accrual         basis,        allowing             the    user        to view,the         revenue         or costs                of a
      particular            program          area.

                The national            forests             are the organizational                     units      held
      accountable            for     planning,              implementing,              and managing             resource
      programs.             As such,          they        are to be the              cost     accounting              centers             for
      reporting            costs     and revenue.                    Cost and revenue                information              will
      also      be summarized                for     each Forest              Service        region     as well              as the
      Forest         Service        in total.

                In order           to disclose              the      cost     of the        national         forest
      operations,            the     system will                produce        the     following         reports             for        each

                --    A Program Activity                       Statement        of Revenues and Expenses                                is

                *     expected         to display               expenses        and revenue            for      each program's

. .

                      activities            on an accrual                                    basis.           For example,                    the    statement
                      for     the    recreation                    program                     would          report            expenses            and
                      revenues         connected                   with              wilderness,                    cultural              resources,

                      developed           recreation,                       and other                     activities                    which       comprise           a
                      forest’s         recreation                        program.                       The excess               of either               expenses
                      or revenue            would be shown for                                          the    program.

               --     A Program Summary Statement                                                of Revenues and Expenses                                  is
                      expected to provide a summary of revenues and expenses on
                      an accrual basis for each of the natural  resource programs
                      administered                by the                 forest.

      Weaknesses             Identified            in
      Proposed          System       Design

                In working           with     the           Forest                   Service              on this               project,            we
      identified             several        areas           where we believe                                   the Service                    can improve
      the basic             design     proposed                   for      the                system.              These areas                 include           the

                In considering               how to organize                                     and report                    costs      relating             to
      its     natural         resource            programs,                     the Forest                     Service             concluded              that
      costs         such as insect                and disease                                suppression,                     law enforcement,                   and
      fire      protection           are incurred                         to fulfill                      legal,               regulatory,               and
      congressional              mandates           separate                         from the goals                            of the         Service's
      natural         resource         programs.                        The Service                       proposes               to report            these

                                                        .   ,_,     _.      _ ..,                 ,..                .
                                                                                                                                   ..     _
                                                                                    .-                         :         .,
    ’ .

          costs     in the        all-resources               protection                 category.                However,            we
          believe        that     some of these               costs             may be more appropriately                                  related
          to one or more of the                     Service's               resource          programs.

                   For example,               the Forest            Service           proposes         to         report            law
          enforcement            activities             as a protection                   cost.        Our study                   suggests
          that     the    Service            incurred        some of these                   costs     directly                   to support
          timber       or recreation              program           operations.                   In such cases,                     we believe
          law enforcement                activities           should             be reported           directly                   as a timber
          or recreation             program        cost.

                   In contrast,               law enforcement                    activities           that             do not        directly
          help     to achieve            resource          program              objectives,           such as those
          undertaken            to train        forest        law enforcement                      personnel,                    should        be
          allocated         as an indirect                 cost      of other             programs           if         possible.

                   We also        believe         that      the      system           design         could             be improved                 by
          better       distinguishing              between           revenue             and nonrevenue                         producing
          activities            in its        reports.             The system             design       currently                   being
          tested       does not clearly                  disclose               activities           which 'receive                   revenues
          separately            from those         which           do not.            For example,                     forests        incur
          costs     in operating               campgrounds                 and recover             a portion                    of these           costs
          from users            who purchase             camping            permits.              The net              revenue        or cost
          of the       campground             permit       program              would     be better           disclosed                   if       the
          costs     incurred          in this           activity            were separated               from recreation
          program        activities            which       do not           earn        revenue,       such as the

                                                                                                                  ._      .._             .,   .

                                         I                           .,.

management of wilderness                                   areas.

              I would      now like                    to update            you on the                     Forest     Service's           efforts
to   implement             the Timber                     Sale        Program             Information                Reporting          System


              We have continued                         to monitor                  the     implementation                    of TSPIRS
during          the     past          year.             Also,         we are currently                         conducting           an audit
of the          Forest          Service's                 financial                 statements               for     fiscal       year        1988
and will              report          as to whether                       the       financial               statements          are      in
conformity              with          generally                 accepted             accounting                principles.              For
fiscal          year      1989,         the Forest                    Service             released             the    first       official
TSPIRS reports                   after                testing         the        system         during             the prior        2 years.

              During      the testing                     period,           the Forest                     Service      received          a wide
range          of comments concerning                                 TSPIRS from congressional                                 sources,
public          interest              groups,             and GAO.                  In order               to obtain          further
suggestions               for         improving                 the       system,           the        Service        hired       a public
accounting              firm          to conduct                 an independent                        review        of TSPIRS.               The
objective              of the public                      accounting                 firm         study        was to determine
whether           the     system's                    accounting            methodologies                      were in conformance
with          generally          accepted                 accounting                 principles                and whether
alternative               methodologies                         would           provide           a fairer           presentation              of

 .     ,..-                       .           .   _                                         .          .


the    timber     sales        program's                  financial          results.

           The public         accounting                  firm      completed             its     study        in 1989,
concluding        that        the design                  of TSPIRS appeared                      to be based on
appropriate           principles             of cost              accounting.                   However,        the    firm
recommended specifi?                    improvements                     in certain              TSPIRS accounting

           In response         to this             study,          the      Forest         Service         is changing              some
TSPIRS accounting                methodologies                      in the         sale         and growth        pool
activity        costs        to better             comply           with     generally              accepted          accounting
principles.           These changes                 will          be implemented                  in fiscal           year    1991.

           The Forest         Service             recently              analyzed       the        impact       of these
changes       on TSPIRS financial                          results          for     74 forests             and concluded
that       45 forests         will     report              either          a greater             excess     of    revenues
over       expenses      or a lesser                 excess             of expenses              over-revenues.               Based
on our knowledge               of TSPIRS, we agree                           that      many of the               changes       will
decrease        the     annual        expenses               shown in TSPIRS reports.                             However,              it
is expected           that     for     the         life          cycle      of the         forest       the      effects           of
the    changes        in accounting                 methodologies                   will         not   alter      the      total
amount of expense,                   with         the      exception              of road costs.

Changes in Accounting                       for      Sale Pool              Costs

       "The first            significant                change           involves          the transfer               of brush


    disposal        and reforestation                   costs         from the           sale    activity          cost      pool
    to the growth              activity       cost       pool.           The sale          activity         cost       pool        was
    intended        to accumulate             costs           directly         related          to specific            timber
    harvests.           Brush disposal                 and reforestation                   costs        were accumulated
    in the       sale       activity      cost     pool          because         they      relate        to activities
    funded       by purchasers            who, contract                with      the      Forest        Service        to
    harvest        timber.

               However,       on review          the     Service          believes             the objectives               behind
    these       activities         were more closely                     related          to growing          rather         than
    selling        timber.         Therefore,            the      Forest         Service         will      begin
    accounting          for     brush     disposal             and reforestation                   costs      in the growth
    activity        cost      pool.

    Changes in Accounting                  for     Growth Pool Costs

              The second significant                     change relates                   to the accounting                  for
    costs       accumulated            in the growth              activity          pool.          The Forest           Service
    plans       to change the method forests                             use to estimate                 the total           volume
    of timber         expected         to be harvested                   during        the timber           life       cycle.
    This      volume        is a component             of the          formula           used to compute annual
    growth       activity         cost    pool     expense.               The Forest             Service        also        intends
    to remove road costs                  from the growth                     activity          cost    pool.

               Based on an analysis,                   we noted           that      the     Service         could       also
    expldre        other       alternatives             for     estimating             total       volume expected                 to


    be harvested,                 In this         regard,        the       Forest          Service      believes             that       the
    most correct               method of estimating                      total       expected          volume would be to
    count       harvestable              timber      on representative                      tracts      of forest             land.
    Each year            the     projected         volume on the                   forest      would be reduced                     for
    volume actually                harvested             and increased               for     volume grown.                   The
    Service       may adopt              this     method        in future            years         as its      estimation
    techniques            improve.

             In the        interim,             to compute the total                       volume of timber                  expected
    to be harvested                over the timber                  life      cycle,         each forest              will
    average       several          years'         actual        harvest            volumes         and multiply              the
    average       by the number of years                           in the timber               life     cycle.             The
    Forest       Service          believes         the      revised         method will               provide         a more
    realistic            estimate         of timber          expected              to be harvested                 than      the
    current       method,          which         involves        certain            assumptions             that      tend        to
    overestimate               the total          volume        expected            to be harvested                 during          the
    timber       life      cycle.           Although         these         efforts          will      work to eliminate
    obvious       errors,          the Forest             Service          should          continue         efforts          to
    ensure       that      the costs             of growing          timber          are properly              reflected               and
    matched       with          the costs         of timber             actually           harvested.

              Timber           road costs         will      also        be removed from the growth
    activity            cost     pool.          Since     the      Forest          Service         believes         that
    roadbeds        have an indefinite                      useful         life,       the costs            of constructing
    them will            be capitalized              as an addition                   to land value                in the Forest
    Service's            balance         sheet      instead         of being           recognized            as multiyear


    expenses         in the growth           activity           cost      pool.        Since      road surfacing,
    culverts,         and bridges          depreciate              over    time,       the Fores% Service                 will
    remove them from the                  growth        activity          pool     and depreciate              them over
    their       useful       lives     in a separate              TSPIRS line             item.


             Next,       I will       discuss      the       Forest       Servicel's        efforts          to'more
    accurately           charge       the costs         of     resource       operations           to the
    applicable           programs,

             For a number of years,                     your     Subcommittee              has been concerned
    that     the     Service         has charged         labor,        equipment,           and overhead               in ways
    which     conformed           more to budgeted               amounts than              to the ways
    resources         were actually             used.         To address           your     concerns,          the
    Forest       Service       issued      a directive              in 1988 which mandated                     that
    costs     be charged             to reflect         the actual          use of resources.                   The
    directive         described         managers'            authority        and responsibility                    for
    implementing             the guidance          and discussed              control         standards          for
    charging         costs     to the      appropriate              activities.

    Implementation             Problems

             The directive,             along     with        subsequent           measures,          increased
    employee         awareness         of the      need to accurately                   record        cost
    information.              However,      during           our review           we identified              some

problems              in the       Forest         Service's           implementat,ion                 of the        charged-as-
worked          policy.

          For example,                   some Forest              Service         units      detail      employees              to
work on projects                     occurring                 on another         unit.        The fiscal            year       1988
directive              mandated           that         field      units       generally         should        charge         the
costs          for     detailed           employees              to the       unit        where the project               was
occurring               rather      than         the 'employee's                home unit.             However, *
implementation                    of this         guidance          varied           in the     nine     Forest          Service
regions              we visited.                Some charged              costs       to the        benefiting           unit         if
the detail               was longer              than          2 weeks,       while        others      did     so only          if            the
detail          was longer               than     1 week.            Still        others       charged        all     costs           to
the      benefiting               unit     regardless              of the         length       of detail..

          In addition,                   not     all      units     were charging               identical            costs           to
the      same accounting                   codes.               For example,              one region         charged         costs
*for computer                services            to general           administration,                  timber,        and
recreation               activities,              while          another        charged        computer          costs
entirely              to general           administration                    activities.

          If         units     charge           identical          costs        differently,            the total            cost              of
certain              activities           and programs               will       be overstated             and others                 will
be understated.


     Some Procedures                       Inhibit       Compliance
     With      Charqed-As-Worked

              During             our       review,       we also                      found             that     some Forest           Service
     budget          and accounting                    procedures                      may inhibit                   compliance         with        the
     charged-as-worked                        policy.           These include                                  procedures         used to
     reprogram                funds.

              For example,                    units      may need to                           reallocate                funds     from          completed
     projects          to projects                   needing          additional                           funds.         Field     staff
     indicated                that     they      do not         always                  receive                 timely       responses            to their
     reprogramming                    requests          due to the                      number of approvals                         required           at
     higher      management levels.                             If      the             requests                 are not approved                  when
     needed,          the        costs        of completing                           required                 work would have to be
     charged          to other               work activities.                                 As a result,                cost     information
     does not          accurately                reflect             the              actual             use of resources.


              At your                request,          we examined                      two issues                   regarding         the        Forest
     Service          appraisal               process.               First,                   we determined                  whether      the
     current          Forest           Service          appraisal                      methods                 set minimum advertised
     timber          prices           that      are adequate                          to cover                 the   costs       of preparing
     these      sales.

              Of tha             3,030        fiscal        year        1988 sales                             we reviewed,         we found           that

_.                                     -         .         _.    .               -_            .
                 -      i”.
                                                                           .,’           .,        ~_


            40 percent               w e r e a d v e r tise d          for        prices        th a t,          if      a c c e p te d ,     w o u ld n o t
            h a v e c o v e r e d th e p r e p a r a tio n                   a n d a d m inistration                       costs.            The
            p o te n tial          unrecovered             costs        w o u ld h a v e to ta l e d                     $ 6 2 m illion.
            B e c a u s e c o m p e titio n            resulte d             in h i g h e r       a c tu a l           selling         prices,            th e
            unrecovered                  costs      in o u r s a m p l e to talled                       $ 2 2 m illion.                    This
            fig u r e ,       h o w e v e r , d i d n o t consider                      th e a d d i tio n a l               costs          associate d
            w ith     g r o w i n g th e tim b e r             or w ith            tim b e r      program overhead,                           w h ich
            w o u ld h a v e m a d e th e d n r e c o v e r e d                    cost        even higher.

                      T h e Forest               S e rvice     believes              th a t     th e r e         a r e cases w h ich justify
            below-cost                  sales.       C u r r e n tly         it    h a s u n d e r ta k e n              th r e e    initiatives
            u tilizin g            T S P IR S d a ta w h ich d e a l w ith                      sales th a t                 d o n o t recover               all

                      W e believe                th e Forest"S e rvice                   n e e d s to consider                       all      relate d
            costs          b e fo r e     a w a r d i n g sales         c o n tra c ts.             If          th e S e rvice's              costs
            e x c e e d th e e s tim a te              o f th e tim b e r 's                  values,            a fo r m a l        decision             needs
            to b e m a d e to eith e r                   (1) raise                th e a d v e r tise d                price        to cover th e
            costs,           (2) n o t p r o c e e d w ith              th e       sale,        or (3) sell                    th e tim b e r         but
            d o c u m e n t th e          r e a s o n s for      doing so.

                          T h e s e c o n d issue w e e x a m i n e d w a s th e e ffe c tive n e s s                                        o f th e
            S e rvice's            appraisal           m e th o d s in e n s u r i n g              th a t            th e g o v e r n m e n t
            receives              fair      m a r k e t v a l u e for             th e tim b e r           it         sells.         T o m a k e this
            e v a l u a tio n ,          w e d e v e l o p e d a n e c o n o m i c m o d e l w h ich e x p l a i n e d                             th e
            relatio n s h i p s             b e tw e e n fair          market value,                     g o v e r n m e n t a d v e r tise d
prices,             appraisal         methods,                 and other                 factors.           Using the             Service's
fiscal         year         1988 sales               data,           we estimated                  the     parameters             of the
model with                regression              analysis.                   These estimates                     then     served              as our
basis         for     comparing                the      two appraisal                     methods          the     Service              uses to
arrive         at advertised                    prices              that      approach             fair     market         value.

          These two methods                          are called                   the     "transaction              evidence"                  and
"rhsidual             value"         methods.                  The first                 establishes              an appraisal
price         based on an average                             for          comparable             timber      sales,        while              the
second         establishes                 an appraisal                      price        that      would         enable      a
purchaser             of average                efficiency                   to harvest             and process             the          timber
at a "reasonable                     profit."                  Three          Forest          Service         regions         use the
residual             value         method,           while           the      remaining             six     regions         use the
transaction                 evidence            method.

          Our analyses                    of fiscal                 year      1988 Forest                 Service         timbe:          sales
data      suggest            that         if    the      transaction                     evidence          method is used
consistently,                 it     results             in advertised                      prices         that     range         from          14
to     37 percent             higher            than          those          determined             by the         residual              value
method.              This     means that                 the         government               may be able            to sell'its
timber         for        more money in cases                               where there              is only        one bidder                  and
the      Service            uses the transaction                              evidence             method of appraisal.

          Six of the                nine        Service              regions             have switched              to transaction
evidence             appraisal,                citing              not only           data        problems         with     the          other
method,             but     also     their           perception                   that       the    new method better


                                      .                   .    .     _ .          ,                                                        .
                                                                              ,                                                    .’
    estimates                    fair      market         value         and costs               less.        Nonetheless,           the
    Service's                   two main timber-producing                                 regions           continue      to use the               .
    residual                value          method.           Officials             in these               regions      cite      limited
    staff              resources            and,historic                 use as the                primary       reasons         for        not
    changing                their          appraisal            method.

                      Since           Service      regions             have received                   limited      guidance           or
    oversight                    from headquarters                      in developing                   the transaction                evidence
    appraisal                   method,           they     have developed                       differing        approaches             to
    implementation.                              One appreciable                 difference                 we identified              was in
    the         "rollback"                 or reduction                 the     regions            made to appraisal                   estimates
    in arriving                        at advertised              prices         that           will      stimulate       competition
    and compensate                         for     any inaccuracies                       in those           estimates.            One region
    reduced               the          appraised          price         by an average                   of 47 percent            in 1988 and
    sold              18 offerings                at advertised                 prices           in single-bidder                auctions.
    If         a smaller                percentage           rollback            fiad bc;,::n applied                 in this          region,
    the government                         might         have received                   more money on these                   sales.             The
    other              regions            reduced         their         prices           only      5 to 25 percent.

                      Finally,           we found          that         the     Service            does not exercise                   adequate
    internal                  control            over the         timber         appraisal                process.        For example,
    headquarters                        does not          routinely             monitor            how well         regional           appraisal
    systems               are establishing                      bid      prices           that         approximate        fair      market
    value.                We believe               that      the        Service           needs to provide                better
    guidance                  and oversight                to         improve      the timber                appraisal         process.
    This              should           include      discontinuing                  the          use of the          residual        value


_        .-.    . .            .*.I                                                -.,             _
        .   .
    ?           appraisal           method when sufficient                           comparable      sales            data     exist       and
                developing            and using          the transaction                  evidence        qethod             in all

                           In conclusion,              the Forest               Service     has spent            a good deal               of
                time       focusing          on financial                 management issues              during         the past           year.'
                The Service                (1)    finished          and began testing              the preliminary                     design       a
                of a system            to report             the         cost   and revenues         of its            natural         r&ource
                programs,            (2)     continued             its     efforts       to refine        TSPIRS, and (3)                   began
                to take        the     steps         necessary             to ensure       that    its         cost     information
                reflects        the         actual     use of financial                   resources.             More work needs to
                be done in the                   area of minimum bid                   analysis      to assure               the
                government            receives         the highest               value     for    timber         sold.          We believe
                the       Service      is ccx~~~iz-:sd to a stronger                        financial            management
                environment,                and we will             continue          to monitor         its     progress             in
                designing           and implementing                      the   all-resource         reporting                system.

                           Mr. Chairman,              thdt     concludes             my statement.               I will         be happy to
                answer any additional                        questions           you may have.