oversight

Financial Management: Financial Audit Results at GSA, EPA, and DOT

Published by the Government Accountability Office on 1999-09-30.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Oversight and Investigations
                          and Emergency Management, Committee on
                          Transportation and Infrastructure, House of
                          Representatives

For Release on Delivery
Expected at
2 p.m.
                          FINANCIAL
Thursday,
September 30, 1999        MANAGEMENT

                          Financial Audit Results at
                          GSA, EPA, and DOT
                          Statement for the Record by Linda M. Calbom
                          Director, Resources, Community, and Economic
                          Development Accounting and Financial Management
                          Issues
                          Accounting and Information Management Division




GAO/T-AIMD-99-301
             Mr. Chairman and Members of the Subcommittee:

             We are pleased to provide a statement for the record for this hearing on
             financial data quality at the General Services Administration (GSA), the
             Environmental Protection Agency (EPA), and the Department of
             Transportation (DOT). Our statement today will provide a summary of the
             financial statement audit results of these three agencies. These audit
             results are key indicators of the quality of agency financial data. As you
             know, in March of this year, we reported on the results of our financial
             statement audit of the 1998 consolidated financial statements of the United
             States government.1 We found that because of serious deficiencies in the
             government’s systems, recordkeeping, documentation, financial reporting,
             and controls, amounts reported in the financial statements do not provide a
             reliable source of information for decision-making by the government or
             the public. We have designated the most serious examples of these
             deficiencies as high risk, including financial management at the Federal
             Aviation Administration (FAA)−a major component of DOT. Our statement
             will also discuss the problems that led to this designation.



Background   Federal decisionmakers need reliable and timely financial information to
             ensure adequate accountability, manage for results, and make timely and
             well-informed judgments. However, historically, such information has not
             been available across the government. Agencies’ independent auditor
             reports, Inspector General (IG) reports, as well as our own work, have
             identified persistent limitations in the availability of quality financial data
             for decision-making. Major reforms, such as the Chief Financial Officers
             (CFO) Act, set expectations for agencies to develop and deploy more
             modern financial management systems and to routinely produce sound
             cost information. Toward that end, the 24 agencies covered by the CFO Act
             have been required to annually prepare financial statements and have them
             audited since the fiscal year 1996 financial statements. These audits have
             shown how far many agencies have to go to generate reliable year-end
             information. As of September 27, 1999, of the 24 CFO Act agencies, 9
             agencies had received unqualified audit opinions on their fiscal year 1998
             financial statements, indicating that their financial statements were reliable
             in all material respects; 4 agencies had received qualified opinions,
             indicating that at least one significant item on the financial statements was

             1
              Financial Audit: 1998 Financial Report of the United States Government (GAO/AIMD-99-
             130, March 31, 1999).




             Page 1                                                              GAO/T-AIMD-99-301
unreliable; 5 agencies had received disclaimers, meaning that the auditor
was unable to determine on an overall basis if the financial statements
were reliable; 2 agencies had received mixed opinions2; and 4 agencies had
not yet issued their audited financial statements, which were due by
March 1, 1999.

For some agencies, the preparation of financial statements requires
considerable reliance on ad hoc programming and analysis of data
produced by inadequate financial management systems that are not
integrated or reconciled. These systems problems often require significant
adjustments to the financial statements. While obtaining unqualified
“clean” opinions on federal financial statements is an important objective,
it is not an end in and of itself. The key is to take steps to continuously
improve underlying financial and management information systems and
internal controls as a means to ensure accountability, increase the
economy, improve the efficiency, and enhance the effectiveness of
government. These systems must generate timely, accurate, and useful
information on an ongoing basis, not just as of the end of the fiscal year.
The overarching challenge in generating timely, reliable data throughout
the year is overhauling financial and related management information
systems.

More fundamentally, the Federal Financial Management Improvement Act
of 1996 (FFMIA) requires that agency financial management systems
comply with (1) financial systems requirements,3 (2) federal accounting
standards, and (3) the U.S. Government Standard General Ledger at the
transaction level. As of September 27, 1999, financial statement audits for
fiscal year 1998 had been completed for 20 of the 24 CFO Act agencies. Of
the 20 agencies whose fiscal 1998 audited financial statements had been
issued as of September 27, 1999, financial management systems for 17
agencies were found by auditors to be in substantial noncompliance with
FFMIA’s requirements.



2
 One of these agencies received an unqualified opinion on its balance sheet and a disclaimer
on the rest of its statements. The other agency did not prepare consolidated statements and
received unqualified opinions on three of its components and disclaimers on the remaining
two of its components.
3
 The financial management systems requirements have been developed by the Joint
Financial Management Improvement Program, which is a joint and cooperative undertaking
of the Department of the Treasury, Office of Management and Budget, GAO, and Office of
Personnel Management.




Page 2                                                                  GAO/T-AIMD-99-301
                    The following discussion focuses on the results of the fiscal years 1998
                    and/or 1997 audits of GSA,4 EPA,5 and DOT,6 including the results of the
                    auditor’s review of FFMIA compliance. These audits were performed by the
                    Inspector General of the agency or, in the case of GSA, by an independent
                    public accountant (IPA) contracted for by the IG.



GSA Audit Results   GSA is the federal government’s business manager and is responsible for
                    space acquisition and management; retail and wholesale supply sales; fleet
                    management; travel and transportation management; telecommunications
                    and information management; and governmentwide policy on
                    procurement, travel and transportation, and electronic commerce. GSA’s
                    mission is to work with industries, businesses, and federal agencies to
                    provide competitively priced products and services to keep the government
                    running smoothly. Its expenses for fiscal year 1998 totaled $ 11.7 billion.

                    GSA received an unqualified audit opinion on its fiscal years 1997 and 1998
                    financial statements. For fiscal year 1998, GSA’s IPA, whose audit report
                    was timely issued, concluded that internal controls over financial reporting
                    were effective. However, the IPA identified three reportable conditions7
                    and reported noncompliance with FFMIA financial systems requirements
                    related to weak information technology access controls and application of
                    security policies and procedures. These issues are described in the
                    appendix.




                    4
                        GSA 1998 Annual Report and U.S. General Services Administration 1997 Annual Report.
                    5
                      Office of Inspector General Audit Report, Financial Management, EPA’s Fiscal 1997 and
                    1996 Financial Statements, E1AML7-20-7008-8100058, March 2, 1998.
                    6
                      Office of Inspector General Audit Report, Fiscal Year 1998 Consolidated Financial
                    Statements, Department of Transportation, Report Number: FE-1999-081, March 30, 1999,
                    and Office of Inspector General Audit Report, Fiscal Year 1997 Consolidated Financial
                    Statements, Department of Transportation, Report Number: FE-1998-105, March 31, 1998.
                    7
                     Reportable conditions are matters coming to the auditor’s attention that, in his or her
                    judgment, should be communicated because they represent significant deficiencies in the
                    design or operation of internal controls that could adversely affect the organization’s ability
                    to meet the objectives of reliable financial reporting and compliance with applicable laws
                    and regulations.




                    Page 3                                                                    GAO/T-AIMD-99-301
EPA Audit Results   EPA was established in 1970 to control pollution and other environmental
                    risks to public health and the environment. The agency is responsible for
                    carrying out various statutory authorities directed at controlling pollution
                    and other human health and environmental risks. The states have the
                    primary responsibility for day-to-day implementation of most
                    environmental programs. EPA works with other stakeholders−including
                    other federal agencies, business and industry, and environmental and
                    public interest groups−and its activities include providing funds to states to
                    implement programs to prevent pollution. A major program that EPA
                    manages is the federal Superfund program to clean up the nation’s most
                    hazardous waste sites. It is primarily financed by the Superfund Trust Fund,
                    which is funded primarily by taxes on crude oil and chemicals. EPA’s
                    expenses for fiscal year 1997 totaled $6.9 billion.

                    Although EPA received an unqualified opinion on its timely issued fiscal
                    year 1997 financial statements, as of September 27, 1999, it had not
                    released its audited fiscal year 1998 financial statements, which were due
                    March 1, 1999.8 According to agency officials, the delay results from
                    difficulties in preparing the Statement of Budgetary Resources, which was
                    required for the first time in fiscal year 1998 and contains certain budget
                    information required by the Statement of Federal Financial Accounting
                    Standards No. 7.9 This statement, which reports the sources, availability,
                    and uses of budgetary resources, includes balances related to unexpended
                    obligations. Historically, EPA has not been prompt in closing out grants,
                    contracts, and interagency agreements and deobligating related
                    unexpended funds that are no longer available. Consequently, a major time-
                    consuming effort was necessary to analyze agency obligations in order to
                    prepare the fiscal year 1998 Statement of Budgetary Resources.




                    8
                     On September 28, 1999, the EPA Office of the IG advised us that EPA had issued its fiscal
                    year 1998 audited financial statements on that date. We have not received a copy of those
                    audited financial statements. Therefore, this statement for the record is based on our review
                    of the fiscal year 1997 EPA financial statements.
                    9
                      Statement of Federal Financial Accounting Standards No.7, Accounting for Revenue and
                    Other Financing Sources and Concepts for Reconciling Budgetary and Financial
                    Accounting, is effective for fiscal years beginning after September 30, 1997.




                    Page 4                                                                   GAO/T-AIMD-99-301
                    Although EPA received an unqualified opinion on its fiscal year 1997
                    financial statements, the EPA IG reported one material weakness,10 which
                    related to the difficulties encountered by EPA in estimating the Superfund
                    Trust Fund’s year-end unbilled oversight costs for monitoring the cleanup
                    of hazardous waste sites. At the request of the IG, the agency performed
                    additional analyses and recalculated the accounts receivable balance
                    related to these unbilled oversight costs. The IG was then able to determine
                    that the September 30, 1997, balance for unbilled oversight costs was
                    reasonably correct. However, because the agency’s systems do not readily
                    provide the data necessary to properly estimate these receivables on an
                    ongoing basis, the IG concluded that internal controls related to tracking
                    Superfund site information need to be strengthened.

                    The OIG also cited eight reportable conditions and three areas of
                    noncompliance with laws and regulations, including FFMIA, which are
                    described in the appendix. Noncompliance with FFMIA was related to Year
                    2000 (Y2K) computer requirements, financial systems security, financial
                    systems inventory data requirements, and updating the CFO-required Five-
                    Year Plan.



DOT Audit Results   DOT establishes and implements national transportation policy for the
                    federal government. It is responsible for ensuring the safety of all forms of
                    transportation, protecting the interests of consumers, establishing
                    international transportation agreements, conducting transportation
                    planning and research for the future, and helping cities and states meet
                    their local transportation needs through financial and technical assistance.
                    DOT fulfills its mission through 11 operating administrations including
                    FAA, the U.S. Coast Guard, the Federal Highway Administration, and the
                    Federal Transit Administration. DOT’s reported net costs for fiscal year
                    1998 were $41 billion.

                    The DOT Inspector General was unable to express an opinion (disclaimer
                    of opinion) on DOT’s fiscal years 1998 and 1997 consolidated financial
                    statements. Both reports were issued about 1 month after they were due.



                    10
                      A material weakness is a reportable condition that precludes the entity’s internal controls
                    from providing reasonable assurance that material misstatements in the financial
                    statements or material noncompliance with applicable laws or regulations will be prevented
                    or detected promptly.




                    Page 5                                                                   GAO/T-AIMD-99-301
The reasons cited for the disclaimer for fiscal year 1998, which were also
described as material internal control weaknesses, were as follows.

• Property, plant, and equipment (PP&E) reported at $21 billion could not
  be substantiated due to continuing property accounting weaknesses in
  FAA and the U.S. Coast Guard.
• Inventory reported at $2.3 billion could not be substantiated primarily
  because the U.S. Coast Guard was unable to determine the cost of its
  inventory using acceptable inventory valuation methods.
• In the Statement of Net Cost, $41 billion of operating costs for the
  Surface Transportation, Air Transportation, and Maritime
  Transportation reporting categories was not linked to the related 32
  performance measures that address program results shown in the
  agency’s performance plan as required. DOT’s accounting systems were
  not able to determine cost accounting data by program in order to
  provide information for this linkage.
• The Statement of Budgetary Resources had six material financial line
  items that could not be substantiated, including the beginning
  unobligated balance, obligations incurred, and the ending obligated
  balance. DOT’s accounting systems were unable to provide detailed
  supporting records for obligations incurred and obligated balances had
  not been properly determined.
• The Statement of Financing identified $11.6 billion of reconciliation
  and/or unexplained differences between financial and budgetary data.
  DOT accounting practices did not ensure that these data were properly
  reconciled.

These deficiencies mean that DOT’s financial statements were not reliable
for fiscal year 1998. Similar deficiencies concerning PP&E and inventory,
reported at $28.5 billion as of September 30, 1997, were reported by the
DOT Inspector General for DOT’s fiscal year 1997 financial statements.
Serious financial management weaknesses at FAA, whose PP&E and
inventory were reported at $12.4 billion as of September 30, 1997,
contributed to this situation. Consequently, in January 1999, we designated
financial management at FAA as high risk.11

In addition, for fiscal year 1998, the DOT IG found that DOT was not in
compliance with FFMIA and two other laws and regulations, which are
described in the appendix. FFMIA noncompliance was due to


11
 High-Risk Series: An Update (GAO/HR-99-1, January 1999).




Page 6                                                      GAO/T-AIMD-99-301
                       (1) inaccurate PP&E and inventory amounts on the Balance Sheet, (2) not
                       using the general ledger system to prepare financial statements, and
                       (3) unavailability of cost accounting data to evaluate performance against
                       performance goals.



FAA Financial          We designated FAA financial management as a high-risk area in January
                       1999 because of serious and long-standing accounting and financial
Management High-Risk   reporting weaknesses, particularly relating to PP&E and inventory. These
Designation            weaknesses render FAA vulnerable to waste, fraud, and abuse; undermine
                       its ability to manage operations; and limit the reliability of financial
                       information provided to the Congress.

                       Recently, we performed an analysis of the weaknesses concerning PP&E
                       and inventory as reported by the DOT Inspector General to determine
                       (1) the key issues FAA must resolve in order to achieve accountability over
                       its PP&E and inventory and (2) whether FAA is taking appropriate actions
                       to resolve these issues promptly. As we reported in July 1999,12 FAA’s lack
                       of accountability for PP&E and inventory generally stems from

                       • an historical lack of attention to basic recordkeeping,
                       • the continuing use of outdated systems that were not designed for
                         financial management, and
                       • poor systems of internal controls to prevent and detect errors in
                         accounting for these assets.

                       We reported that in order to address these issues for PP&E, FAA needs to
                       determine what assets it has and then reconstruct its records to establish
                       an historical cost baseline for those assets. Next it needs to establish
                       adequate systems and controls to account for the assets on an ongoing
                       basis.

                       During fiscal year 1999, FAA undertook an extensive effort to identify and
                       record the baseline cost of unrecorded PP&E assets and to adjust its
                       detailed records. Also, in fiscal year 1999, FAA began to comprehensively
                       address its systems needs; however, it does not expect full implementation
                       of these new systems until 2001. Without systems capable of maintaining
                       PP&E accountability on an ongoing basis, accounting for the acquisition of

                       12
                        FAA Financial Management: Further Actions Needed to Achieve Asset Accountability
                       (GAO/AIMD-99-212, July 30, 1999).




                       Page 7                                                             GAO/T-AIMD-99-301
                   these assets will continue to require costly, time-consuming manual
                   processes. Because these manual processes are inherently prone to error,
                   strong internal controls are needed to ensure accurate accounting. While
                   some improvements have been made, FAA has not implemented such a
                   system of controls.

                   With regard to inventory, FAA has made improvements in its Logistics
                   Center (warehouse) inventory accounting, but still needs to strengthen its
                   procedures and controls. However, it has made less progress with its field
                   spares (spare parts) inventory located throughout the country that
                   supports various systems. An accurate baseline of inventory quantities and
                   costs needs to be established for field spares, and new procedures and
                   controls need to be implemented in order to maintain accountability on an
                   ongoing basis.

                   As a result, we made several recommendations in our July report regarding
                   FAA’s need to

                   • establish accountability for billions of dollars expended for PP&E in the
                     past and institute upgraded systems, procedures, and controls to ensure
                     that accountability is maintained on an ongoing basis and
                   • complete improvements over its inventory accountability, particularly
                     those related to field spares.

                   In order to ensure financial accountability across the federal government, it
                   is essential that attention to financial management issues be given high
                   priority. Considerable effort is now being exerted throughout the
                   government to address these issues, and several agencies have made good
                   progress toward achieving financial management reform goals. While much
                   remains to be done, these efforts, if sustained, will continue to move us
                   step by step towards a more economic, efficient, and effective federal
                   government.

                   This completes our statement.



Contact and        For information about this statement, please contact Linda M. Calbom at
                   (202) 512-9508. Individuals making key contributions to this statement
Acknowledgements   included John Fretwell, Don Campbell, and Meg Mills.




                   Page 8                                                      GAO/T-AIMD-99-301
Page 9   GAO/T-AIMD-99-301
Appendix I

Internal Control and Compliance Audit
Results                                                                                                AA
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                          The following summarizes the reportable conditions, including those that
                          are classified as material weaknesses, and noncompliance with laws and
                          regulations as reported by the IPA for GSA, and the IGs for EPA and DOT in
                          their most recent financial statement audit reports discussed in this
                          statement.



GSA’s Fiscal Year 1998
Financial Statement
Audit Report

Reportable Conditions     None were reported.
Classified as Material
Weaknesses


Other Reportable          • With regard to the Federal Buildings Fund, calculating errors, missing
Conditions                  data, inadequate documentation, and failure to update leasing data led
                            to overpayments to lessors, inaccurate rent bills, a lack of transaction
                            level history needed for space management, and possible adverse
                            funding effects for new leases.
                          • Data access security policies and procedures were incomplete and
                            outdated and were not consistent with GSA requirements.
                          • Access controls over mission-critical systems that support GSA’s
                            financial statements were weak.


Noncompliance With Laws   GSA was not in compliance with FFMIA systems requirements because
and Regulations           (1) logical and physical access controls over its information technology
                          environment were weak and (2) security policies and procedures were not
                          uniformly applied across GSA’s service lines.




                          Page 10                                                    GAO/T-AIMD-99-301
                           Appendix I
                           Internal Control and Compliance Audit
                           Results




EPA’s Fiscal Year 1997
Financial Statement
Audit Report

Reportable Condition       Internal controls related to tracking Superfund site information need to be
Classified as a Material   strengthened to allow the preparation of estimates of unbilled costs.
Weakness


Other Reportable           • Accounts receivable were not recorded and billed promptly.
Conditions                 • Personal property that should have been capitalized was not capitalized,
                             property was undervalued, and unresolved reconciliation differences
                             existed in the property accounts.
                           • Financial managers did not have sufficient financial information to
                             evaluate accounting activity, perform trend analysis, and identify
                             accounting errors on an ongoing basis. This resulted in EPA officials
                             being unable to effectively monitor various asset and liability accounts
                             during the year.
                           • Although the process used to estimate grantee expenses owed at the
                             end of the year was sufficient to allow for an unqualified opinion, it did
                             not permanently resolve estimation process issues, which have been
                             identified in previous audit reports on EPA’s financial statements.
                           • Invoice approval forms for interagency agreements were not always
                             promptly approved and returned to the finance office responsible for
                             their payment.
                           • Adequate processes to identify, track, and report EPA’s environmental
                             liability were not implemented.
                           • Regional finance officials did not properly recognize revenues for
                             Superfund State Contracts. As a result, accounts associated with
                             Superfund State Contracts were misstated by nearly $29 million.
                           • Documentation for EPA’s Integrated Financial Management System did
                             not contain the level of detail necessary for a financial statement audit.



Noncompliance With Laws    EPA was not in compliance with
and Regulations
                           • FFMIA with regard to the Office of Management and Budget’s (OMB)
                             Y2K requirements for financial systems activities, Y2K maintenance



                           Page 11                                                    GAO/T-AIMD-99-301
                          Appendix I
                          Internal Control and Compliance Audit
                          Results




                            activities for financial systems, financial systems security, financial
                            systems inventory data requirements, and the annual update of its CFO
                            Financial Management Report and Five-Year Plan for 1994-1999;
                          • the CFO Act, because EPA had not performed required biennial reviews
                            of fees; and
                          • Title 31 U.S.C. section 1301, because EPA made disbursements for
                            grants from the oldest available funding/appropriation first, without
                            establishing that this was the appropriation that benefited from the
                            work performed.



DOT’s Fiscal Year 1998
Financial Statement
Audit Report

Reportable Conditions     • Due to continuing property accounting weaknesses, PP&E reported at
Classified as Material      $21 billion could not be substantiated.
                          • Due to the inability of the U.S. Coast Guard to determine the cost of its
Weaknesses                  inventory using acceptable inventory valuation methods, the amount
                            reported for inventory could not be substantiated.
                          • DOT accounting systems are not able to determine cost accounting
                            information by program in order to link program performance
                            information with the costs incurred.
                          • DOT accounting systems were unable to provide detailed supporting
                            records for six material financial statement budgetary line items.
                          • DOT accounting practices did not ensure that the Statement of
                            Financing was properly reconciled.



Other Reportable          None were reported.
Conditions


Noncompliance With Laws   DOT was not in compliance with
and Regulations
                          • FFMIA, because (1) PP&E and inventory amounts presented on the
                            Balance Sheet were inaccurate and not supported by financial records,
                            (2) the Departmental Accounting and Financial Information System was
                            not used for preparation of the financial statements, and (3) the cost



                          Page 12                                                    GAO/T-AIMD-99-301
                   Appendix I
                   Internal Control and Compliance Audit
                   Results




                     accounting data needed to effectively evaluate performance against
                     performance goals and outcomes was not available;
                   • Title 31, United States Code Sections 1108 and 1501, because
                     unliquidated obligations were not reviewed prior to certification; and
                   • OMB Bulletin 97-01, because performance measures did not provide
                     information about cost-effectiveness and fiscal year financial data were
                     not linked to performance measures.




(913875)   Leter   Page 13                                                   GAO/T-AIMD-99-301
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