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According to the Department of Defense's (DOD) fiscal year 2007 budget estimates, working capital fund activity groups (depot maintenance, ordnance, and research and development) will have about $6 billion of funded work that will be carried over from fiscal year 2007 into fiscal year 2008. The congressional defense committees recognize that these groups need some carryover to ensure a smooth work flow from one fiscal year to the next. However, the committees have previously raised concern that the amount of carryover may be more than is needed. GAO was asked to determine if (1) the Naval Air Warfare Center's (NAWC) reported actual carryover was reliable for fiscal years 2003 through 2006 and (2) NAWC was utilizing the required triannual review process to improve the reliability of its carryover information and underlying financial data. GAO's analysis of NAWC reports determined that NAWC's reported carryover information was not reliable. Since DOD changed its carryover policy in December 2002, NAWC reports showed that while under the ceiling for fiscal year 2006, it exceeded its carryover ceiling by tens of millions of dollars from fiscal year 2003 through fiscal year 2005, as shown in the following table. To the extent that carryover is too high, Congress can redirect the customers' funds for other priorities. GAO's analysis of accounting information on customer orders and discussions with NAWC officials determined that its fiscal year 2003 and 2004 carryover information was unreliable due to (1) NAWC converting to a new accounting system in fiscal year 2003 and (2) NAWC not performing reviews of obligations, including the required DOD triannual reviews. To better manage carryover and improve the reliability of carryover information, starting in fiscal year 2005, NAWC (1) issued guidance on the acceptance of orders at year end and (2) began reviewing orders to correct its old financial records. While the reliability of carryover information improved in fiscal years 2005 and 2006, GAO determined that problems still exist. For example, GAO found that funds on some customer orders totaling $19.5 million were deobligated at fiscal year end and then reobligated at the beginning of the next fiscal year on these same orders. This artificially lowered reported NAWC carryover at fiscal year end. Further, even though DOD's 1996 guidance required NAWC as well as other activities to conduct triannual reviews of its financial information, NAWC did not perform these reviews until fiscal year 2006. If implemented properly, these reviews would improve the reliability of reported carryover information and the underlying financial data. In addition, as of September 2006, the two NAWC divisions were still not fully complying with several of the 16 specific DOD tasks required as part of the triannual reviews. For example, because the two divisions were not always effectively reviewing some obligations, especially dormant obligations (obligations... [ABSTRACT FROM AUTHOR]

In November 2006, we issued our report on the results of our audit of the Internal Revenue Service's (IRS) financial statements as of, and for the fiscal years ending, September 30, 2006, and 2005, and on the effectiveness of its internal controls as of September 30, 2006. We also reported our conclusions on IRS's compliance with significant provisions of selected laws and regulations and on whether IRS's financial management systems substantially comply with requirements of the Federal Financial Management Improvement Act of 1996. A separate report on the implementation status of recommendations from our prior IRS financial audits and related financial management reports, including this one, will be issued shortly. The purpose of this report is to discuss issues identified during our audit of IRS's financial statements as of, and for the fiscal year ending September 30, 2006, regarding internal controls that could be improved for which we do not currently have any recommendations outstanding. Although not all of these issues were discussed in our fiscal year 2006 audit report, they all warrant management's consideration. This report contains 21 recommendations that we are proposing IRS implement to improve its internal controls. We conducted our audit in accordance with U.S. generally accepted government auditing standards. During our audit of IRS's fiscal year 2006 financial statements, we identified a number of internal control issues that adversely affected tax data, tax receipts, tax refunds, taxpayer penalties and fees, tax liens, and property and equipment. These issues concern: (1) encryption of off-site taxpayer data files, (2) placement of security cameras at tax return processing facilities, (3) manual refund policies and procedures, (4) refunds to taxpayers who owe payroll taxes, (5) assessment of taxpayer penalties, (6) timeliness of tax lien releases, (7) processing of Installment Agreement fees, and (8) procurement and security of property and equipment. The issues noted increase the risk that (1) taxpayer receipts and information could be lost, stolen, misused, or destroyed; (2) erroneous tax refunds could be issued; (3) taxpayers could be charged excess penalties or incorrect user fees; (4) tax liens may not be released promptly; and (5) physical assets could be stolen. [ABSTRACT FROM AUTHOR]

The Internal Revenue Service's (IRS) tax filing season performance is a key indicator of how well IRS serves taxpayers. This year's filing season was expected to be risky because of tax system changes, including the telephone excise tax refund (TETR) which can be requested by all individuals and entities that paid the excise tax. GAO was asked to describe IRS's service to taxpayers so far this filing season (including the impact of this year's tax systems changes). GAO was also asked to provide updates of previous assessments of the performance of paid tax preparers, IRS's efforts to modernize its information systems, and what IRS is doing to better measure taxpayer compliance. GAO compared IRS's filing season performance to prior years' and goals and based analyses of paid preparers, information systems, and compliance research efforts on recent reports. IRS's interim filing season performance is improved in some areas. The number of individual income tax returns processed to date is comparable to last year, and the number filed electronically is almost 6 percent greater. Taxpayers' ability to reach an IRS telephone assistor was somewhat less than last year, but the accuracy of answers to taxpayers' questions was about the same. Use of IRS's Web site increased, important because it is available 24 hours a day and is less costly than some other types of assistance. However, there have been challenges. Taxpayers' use of the Free File program, which provides free tax preparation and electronic filing through IRS's Web site--is 5.2 percent below last year at this time. Also, the Customer Account Data Engine (CADE), a modern tax return processing system, became operational 2 months behind schedule. IRS still expects to post 17 -19 million taxpayer accounts to CADE, which is about two and a half times more than last year. Tax systems changes have not had a significant effect on filing season performance. For example, IRS has received a fraction of the TETR-related telephone calls it expected to date. Because paid preparers prepared over 62 percent of all individual income tax returns last year, they are a critical quality control for tax administration by helping to prevent noncompliance. Last year, GAO reported to this Committee about errors made by paid preparers. Some of the most serious errors involved not reporting business income and failing to itemize deductions. GAO's limited work last year did not permit observations about the quality of the work of paid tax preparers in general and undoubtedly, many preparers do their best to prepare tax returns that are compliant with tax laws. In response to GAO's report, IRS has scheduled compliance reviews of some preparers. In addition, recent Justice Department suits to stop fraudulent return preparation at more than 125 outlets of one preparation chain for allegedly taking part in tax preparation scams highlight the importance and obligations of paid preparers. Despite progress made... [ABSTRACT FROM AUTHOR]

GAO continues to have concerns about restatements to federal agencies' previously issued financial statements. During fiscal year 2005, at least 7 of the 24 Chief Financial Officers (CFO) Act agencies restated certain of their fiscal year 2004 financial statements to correct misstatements. To study this trend, GAO reviewed the nature and causes of the restatements made by certain CFO Act agencies in fiscal year 2004 to their fiscal year 2003 financial statements. Eleven CFO Act agencies had restatements for fiscal year 2003. Nine of those 11 received unqualified opinions on their originally issued fiscal year 2003 financial statements. GAO's view is that users of federal agencies' financial statements and the related audit reports need to be provided at least a basic understanding of why a restatement was necessary and its effect on the agencies' previously issued financial statements and related audit reports. This report communicates GAO's observations on the transparency and timeliness of the 9 federal agencies' and their auditors' restatement disclosures. The nine agencies GAO reviewed did not consistently communicate financial statement restatements. GAO found that all nine agencies could have greatly enhanced the adequacy, effectiveness, and timeliness of their restatement disclosures to users. Similar transparency issues existed with the associated audit reports regarding disclosure of all the essential information that would clearly explain the restatements. GAO highlighted the following issues as among the more prevalent issues to be addressed: 1) columns of the agencies' restated financial statements were not labeled as "Restated"; 2) agencies' restatement footnote disclosures lacked clarity or sufficient detail regarding the nature of the restatements and the effect on balances reported in previously issued financial statements; 3) restatement information was not sufficiently disclosed in the agencies' Management Discussion and Analysis; 4) audit reports did not disclose that the respective agencies had restated certain of their fiscal year 2003 financial statements; 5) audit reports did not provide a statement that the previously issued audit report was withdrawn and replaced by the opinion on the restated financial statements; and 6) material misstatements and potential material misstatements were not timely communicated by agencies to either their auditors or to the users of the financial statements. The primary contributing factor for the restatement disclosure issues that GAO identified was insufficient guidance available at the time to both the agencies' management and their respective auditors for disclosure of the restatements and the timeliness of such disclosures. GAO believes that information regarding restatements should be disclosed in a transparent and timely manner consistent with the qualitative characteristics of information in financial reports described in Statement of Federal Financial Accounting... [ABSTRACT FROM AUTHOR]

This e-supplement is a companion to GAO's correspondence entitled Financial Restatement Database, GAO-06-1053R (Washington, D.C.: Aug. 31, 2006). The e-supplement contains a database of financial restatement announcements for the periods July 1, 2002, through September 30, 2005, and October 1, 2005, through June 30, 2006. It also describes the scope and methodology of the study, for which GAO complied this database. The database consist of two files: (1) a file that lists 1,390 restatement announcements that we identified as having been made because of financial reporting fraud and/or accounting errors between July 1, 2002, and September 30, 2005, and (2) a file that lists 396 restatement announcements that we identified as having been made because of financial reporting fraud and/or accounting errors between October 1, 2005, and June 30, 2006. Having verified our financial restatement announcement data with various sources, we found them to be sufficiently reliable for reporting purposes. We conducted our work between June 2006 and August 2006 in accordance with generally accepted government auditing standards. [ABSTRACT FROM AUTHOR]

On July 24, 2006, we issued a report to Congress entitled, Financial Restatements: Update of Public Company Trends, Market Impacts, and Regulatory Enforcement Activities. That report included a listing of 1,390 financial restatement announcements that we identified as having been made because of financial reporting fraud and/or accounting errors between July 1, 2002, and September 30, 2005. As part of that work, Congress asked that we provide a limited update of that database for the period October 1, 2005, through June 30, 2006. This updated database, along with the database included in our July 2006 report, can be viewed at http://www.gao.gov/cgi-bin/getrpt?GAO-06-1079SP. This correspondence provides information about restatement announcements since October 2005. We encourage researchers and the public to consider our objective, scope, and methodology and engage in their own analyses of the data contained in our restatements database. [ABSTRACT FROM AUTHOR]

The Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate, and readers of the restated financial statements understand, that the financial statements originally issued by management in the previous year and the opinion thereon should no longer be relied on and instead the restated financial statements and related auditor's opinion should be used. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter... [ABSTRACT FROM AUTHOR]

The Secretary of Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate, and readers of the restated financial statements understand, that the financial statements originally issued by management in the previous year and the opinion thereon should be used. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter. This report communicates our observations regarding the National Science Foundation's (NSF) fiscal year 2003 restatements. Going forward, we hope that the lessons learned from the fiscal year 2003 restatements, together with our recommendations, will help (1) NSF avoid the need for restatements to its future financial statements and (2) ensure that NSF's auditor applies appropriate audit procedures in future audits to test for unrecorded and unbilled licensee fees and related internal controls. We reviewed four key areas with respect to the restatements of NSF's fiscal year 2003 financial statements: (1) the nature and cause of the errors that necessitated the restatements, including planned corrective actions by the agency and its auditors; (2) the timing of communicating the material misstatement to users of the financial statements; (3) the extent of transparency exhibited in disclosing the nature and impact of the material misstatement in the financial statements and the reissued auditor's report; and (4) audit issues that contributed to the failure to detect the errors that necessitated the restatements during the audit of the agency's fiscal year 2003 financial statements. Failure to properly record the H-1B Nonimmigrant Petitioner Fees (H-1B) account funds for fiscal years 1999 through 2003 led to the material misstatement of about $216 million that necessitated the restatements of NSF's originally issued fiscal year 2003 Balance Sheet and Statement of Changes in Net Position. According to the NSF contracted independent public accountant's (IPA) management letter report dated November 4, 2004, NSF's Division of Financial Management (DFM) did not have adequate internal controls to ensure that it provided accurate financial data, which may have contributed to the recording error that necessitated the restatements. NSF's IPA did not discover the error during its audit of NSF's fiscal year 2003 financial statements. In our view, the IPA did not understand that the H-1B account funds are special funds, which are to be accounted for differently than certain other NSF receipts. In addition, we found that the IPA was not aware of the U.S. Department of the Treasury's Financial Management Service (FMS) guidance relating to the recording of H-1B account funds. Consequently, the IPA did not design or perform adequate audit procedures to detect the accounting errors. We are making a recommendation to NSF's CFO to address the issues we identified with respect to the H-1B account funds recording error that necessitated the fiscal year 2003 restatements. We are also making a recommendation to NSF's Inspector General to work with the IPA so that audit procedures to detect any future material H-1B account funds recording errors are fully and effectively implemented. In commenting on a draft of this report, the NSF's CFO and Inspector General, in separate letters, offered their views regarding the materiality of the errors and the impact of the errors on Net Position. We have clarified our perspective on both points. The report notes that the recording errors in individual years may not have been material, but that the cumulative effect of the errors on the fiscal year 2003 financial statements was deemed material by NSF's IPA. We also note that Total Net Position was unchanged, but that the two distinct components of net position, were misstated. NSF's Inspector General concurred with our recommendation and stated that her office had instituted procedures to ensure that the IPA designed and performed audit steps to detect any future H-1B account fund recording errors. [ABSTRACT FROM AUTHOR]

The Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate, and readers of the restated financial statements understand, that the financial statements originally issued by management in the previous year and the opinion thereon should no longer be relied on and instead the restated financial statements and related auditor's opinion should be used. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter. This report communicates our observations regarding GSA's fiscal year 2003 restatement. Going forward, we hope that the lessons learned from the fiscal year 2003 restatement, together with our recommendations, will help GSA and its auditor avoid the need for restatements to GSA's future financial statements. We reviewed four key areas with respect to the restatement of GSA's fiscal year 2003 financial statements: (1) the nature and cause of the errors that necessitated the restatement, including planned corrective actions by the agency and its auditors; (2) the timing of communicating the material misstatement to users of the financial statements; (3) the extent of transparency exhibited in disclosing the nature and impact of the material misstatement in the financial statements and the reissued auditor's report; and (4) audit issues that contributed to the failure to detect the errors that necessitated the restatement during the audit of the agency's fiscal year 2003 financial statements. Improperly transferring costs related to one major construction project out of the Construction in Process (CIP) account and into the Buildings account led to the material misstatement that necessitated the restatement of two separate and distinct line items on GSA's originally issued fiscal year 2003 Balance Sheet. Specifically, at fiscal year 2003 year end, GSA recorded an adjusting journal entry to transfer about $952 million of construction costs from the CIP account to the Buildings account. This amount was derived based on a statistical sample of construction projects included in GSA's unadjusted year-end balance for the CIP account. The largest project included in GSA's statistical sample was a multiphase project totaling about $68.6 million, which was incorrectly classified as substantially complete at that time. This incorrect classification, when projected to the population of CIP projects, was the basis for about $921 million of the $952 million, or over 96 percent, of the estimated costs transferred at year end. GSA's auditor did not detect the error because its fiscal year 2003 audit tests were not adequately designed to test the validity of GSA's transfers of construction costs between the two accounts. Although the journal entry used to record the transfer between the accounts involved a material amount and GSA's contracted independent public accountant (IPA) had reported a reportable condition relating to CIP transfers in its previous two years audit reports, in our view, the IPA did not adequately understand the significant components underlying this journal entry. As a result, the IPA randomly selected 10 projects from GSA's statistical sample of 99 projects and did not review the above noted project that GSA had incorrectly classified. Further, in our view, the title of GSA's note disclosure of the restatement could be misinterpreted. [ABSTRACT FROM AUTHOR]

The Secretary of Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate, and readers of the restated financial statements understand, that the financial statements originally issued by management in the previous year and the opinion thereon should be used. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter. This report communicates our observations regarding the Nuclear Regulatory Commission's (NRC) fiscal year 2003 restatements. Going forward, we hope that the lessons learned from the fiscal year 2003 restatements, together with our recommendations, will help (1) NRC avoid the need for restatements to its future financial statements and (2) ensure that NRC's auditor applies appropriate audit procedures in future audits to test for unrecorded and unbilled licensee fees and related internal controls. We reviewed four key areas with respect to the restatements of NRC's fiscal year 2003 financial statements: (1) the nature and cause of the errors that necessitated the restatements, including planned corrective actions by the agency and its auditors; (2) the timing of communicating the material misstatement to users of the financial statements; (3) the extent of transparency exhibited in disclosing the nature and impact of the material misstatement in the financial statements and the reissued auditor's report; and (4) audit issues that contributed to the failure to detect the errors that necessitated the restatements during the audit of the agency's fiscal year 2003 financial statements. NRC's lack of effective internal controls over unrecorded and unbilled licensee fees led to the material misstatement that necessitated the restatement of NRC's originally issued fiscal year 2003 financial statements. NRC's management representation letter, dated November 20, 2003, included representations that NRC's fiscal year 2003 financial statements were fairly stated and that the agency had effective internal controls. As of the same date, the contracted independent public accountant (IPA) dated its audit report, which contained an unqualified, or clean, audit opinion on NRC's fiscal year 2003 financial statements. On December 17, 2003, certain NRC officials became aware that (1) there was an underbilling error of at least $500,000 for fiscal year 2003, (2) the underbilling error may have resulted from an internal control deficiency within NRC's licensee fee billing system that could affect the reliability of NRC's fiscal year 2003 financial statements, and (3) further research was needed to determine the cause of the error and whether the error was an isolated incident or a systemic billing system weakness. Nevertheless, on December 19, 2003, over 1 month prior to OMB's required January 30, 2004 due date for federal agencies to issue their fiscal year 2003 financial statements, NRC submitted its management representation letter and financial statements to OMB. Consistent with OMB Bulletin 01-02, NRC should have timely notified the IPA of the error and related internal control deficiency, but never did. According to the IPA, it was not aware of the material error until May 2004 when it independently discovered that NRC had recorded and billed licensee fees during fiscal year 2004 that instead should have been recorded and billed during fiscal year 2003. The IPA determined that the underbilling error resulted from certain internal control deficiencies related to NRC's fee billing system. Based on its interpretation of the American Institute of Certified Public Accountants (AICPA) Codification of Auditing Standards, the IPA stated that upon discovery of the error in May 2004, it discussed the material error with NRC but did not advise NRC to make appropriate disclosures of the newly discovered facts and their effects on the fiscal year 2003 financial statements to persons who may have been relying on such financial statements and related auditor's report. In addition, the IPA did not provide us with documentation of the basis for its conclusion that users were not likely to still be relying on the fiscal year 2003 financial statements and would not attach importance to the correction of the material error. In our view, such documentation should include the identification of potential users, such as Congress, OMB, GAO, and the Department of the Treasury (Treasury), and an analysis of whether the users would likely be relying on the fiscal year 2003 financial statements. We have some concerns that, without notification, anyone who may have been relying on the fiscal year 2003 financial statements would not have known from May to mid-November 2004, or for more than 5 months, that NRC's originally issued financial statements, which received an unqualified opinion, were materially misstated and should not be relied on. In addition to NRC's lack of effective internal controls over licensee fees, we noted two areas where additional audit procedures could have identified the problem at the time of the fiscal year 2003 audit. [ABSTRACT FROM AUTHOR]

In February 2005, we issued our opinions on the calendar year 2004 financial statements of the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF). We also issued our opinion on the effectiveness of the Federal Deposit Insurance Corporation's (FDIC) internal controls as of December 31, 2004, and our evaluation of FDIC's compliance with significant provisions of selected laws and regulations for the three funds for the year ended December 31, 2004. The purpose of this report is to discuss issues identified during our audits of the 2004 financial statements regarding accounting procedures and internal controls that could be improved, and to recommend improvements to address these issues. Although these issues were not material in relation to the financial statements, we believe they warrant management's attention. During 2004, we identified several internal control issues that affected FDIC's accounting for the funds it administers. Although the amounts would not have been material to the financial statements taken as a whole, these issues would have resulted in reporting errors had they not been detected by our audit and corrected by FDIC. Specifically, we found that FDIC made errors in calculations supporting its allowance for losses on receivables from thrift resolutions. These errors would have led to misstatements in SAIF's and FRF's financial statements. Further, FDIC did not have effective compensating controls in place to ensure the accuracy of pay computations related to the National Finance Center's (NFC) Thrift Savings Plan (TSP). Other payroll expenses could have been misstated in the funds' financial statements. Finally, FDIC did not detect billing errors made by a contractor, resulting in overpayments to the contractor. The lack of effective invoice review procedures increases the risk of overcharges for goods and services and that they may not be detected and recovered. [ABSTRACT FROM AUTHOR]

Over the years, the Department of Defense (DOD) has recorded billions of dollars of disbursements and collections in suspense accounts because the proper appropriation accounts could not be identified and charged. DOD has also been unable to resolve discrepancies between its and Treasury's records of checks issued by DOD. Because documentation that would allow for resolution of these payment recording problems could not be found after so many years, DOD requested and received legislative authority to write off certain aged suspense transactions and check payment differences. The conference report (H.R. Conf. Rep. No. 107-772) that accompanied the legislation (Pub. L. No. 107-314) required GAO to review and report on DOD's use of this write-off authority. After decades of financial management and accounting weaknesses, information related to aged disbursement and collection activity was so inadequate that DOD was unable to determine the true value of the write-offs. While DOD records show that an absolute value of $35 billion or a net value of $629 million of suspense amounts and check payment differences were written off, the reported amounts are not reliable. Many of the write-offs represented transactions that had already been netted together (i.e., positive amounts offsetting negative amounts) at lower level accounting sites before they were recorded in the suspense accounts. This netting or summarizing of transactions misstated the total value of the write-offs and made it impossible for DOD to locate the support needed to identify what appropriations may have been under- or overcharged or determine whether individual transactions were valid. In particular, DOD could not determine whether any of the write-off amounts, had they been charged to the proper appropriation, would have caused an Antideficiency Act violation. It is important that DOD accurately and promptly charge transactions to appropriation accounts since these accounts provide the department with legal authority to incur and pay obligations for goods or services. DOD has hundreds of current and closed appropriation accounts that were authorized by law over the years. Similar to a checking account, the funds available in DOD's appropriation accounts must be reduced or increased as the department spends money or receives collections that it is authorized to retain for its own use. Just as an individual who maintains multiple checking accounts must be sure that transactions are recorded to the proper account, DOD also must ensure that the proper appropriation account is charged or credited for each specific disbursement and collection. Our review found that DOD's guidance and processes developed to ensure compliance with the legislation provided reasonable assurance that amounts were written off properly except that check payment differences did not have the required written certification. The write-off process did not correct underlying records and significant DOD resources were needed to ensure that write-off amounts were properly identified and handled. Also, using staff resources to process old transactions resulted in fewer staff to research and clear current problems. At December 31, 2004, DOD reports showed that after the write-offs, more than $1.3 billion (absolute value) of suspense amounts and $39 million of check differences remained uncleared for more than 60 days. However, DOD has acknowledged that its suspense reports are incomplete and inaccurate. Until DOD complies with existing laws and enforces its own guidance for reconciling, reporting, and resolving amounts in suspense and check differences on a regular basis, the buildup of current balances will likely continue, the department's appropriation accounts will remain unreliable, and another costly write-off process may eventually be required. [ABSTRACT FROM AUTHOR]

In response to a January 2003 GAO report that identified significant anomalies in the Small Business Administration's (SBA) disaster loan accounts and raised serious concerns about its ability to account for loan sales and estimate program costs, SBA conducted an extensive analysis to identify causes of the anomalies and implemented a number of corrective actions. In light of SBA's actions, GAO undertook a follow-up review to (1) describe the nature of the deficiencies SBA identified, (2) determine whether its corrective actions resolved the deficiencies, and (3) assess whether its procedures provide a reasonable basis for future credit estimates. SBA took prompt action with a comprehensive review of its financial records and systems to identify the deficiencies related to accounting for its disaster loans and loan sale program. SBA's review found (1) the cash flow model used to estimate the cost of the disaster loan program was unreliable and underestimated the cost, (2) the model used to determine whether sales were beneficial had errors and incorrectly indicated that loans were sold at gains, (3) incorrect loan values used to calculate the results of loan sales led to inaccurate reporting in SBA's financial statements, and (4) incomplete tools provided by OMB to calculate interest payments on borrowings from Treasury resulted in excess payments to Treasury and an insufficient balance in SBA's financing account and subsidy allowance. To resolve these deficiencies, SBA implemented a number of corrective actions during fiscal years 2003 and 2004. To address the first three, SBA developed a new cash flow model to estimate the costs and loan values for the disaster loan program. This improved the agency's ability to prepare more reliable cost estimates and determine the gain or loss on prior loan sales. To address the fourth deficiency, SBA analyzed its interest payments to Treasury and found that it had overpaid by about $134 million. SBA included this amount in its reestimates for the disaster loan program to correct prior interest payments and also implemented a different approach to update or "reestimate" its cost estimates, which will adjust its transactions with Treasury going forward. However, until OMB updates its tools for computing these interest payments, other credit agencies may also be over- or underpaying interest to Treasury. Further, SBA improved its policies and procedures to help ensure that future loan program cost estimates will be reasonable. For example, SBA implemented new standard operating procedures for calculating reestimates and prepared documentation to support the rationale and basis for key aspects of the cash flow model. However, because of the complexities associated with estimating loan program costs, additional actions by SBA would help improve the long-term reliability of cost estimates. These include (1) further documentation of the model and disaster data to readily provide for knowledge transfer between staff and contractors to help ensure proper maintenance, updating, and running of the model; (2) periodic assessments of the model's ability to predict loan performance; and (3) additional procedures to ensure the disaster data used in the model are tested to verify and document that they are reliable. In addition, there may be opportunities to improve the model with additional variables, such as financial strength of borrowers, as well as revisions to simplify the estimation process that warrant further consideration by SBA. [ABSTRACT FROM AUTHOR]

In light of GAO's November 2003 report highlighting significant pay problems experienced by Army National Guard soldiers mobilized to active duty in support of the global war on terrorism and homeland security, GAO was asked to determine if controls used to pay mobilized Army Reserve soldiers provided assurance that such payments are accurate and timely. GAO's audit used a case study approach to focus on controls over three key areas: processes, people (human capital), and automated systems. The processes and automated systems relied on to provide active duty pays, allowances, and tax benefits to mobilized Army Reserve soldiers are so error-prone, cumbersome, and complex that neither DOD nor, more importantly, Army Reserve soldiers themselves, could be reasonably assured of timely and accurate payments. Weaknesses in these areas resulted in pay problems, including overpayments, and to a lesser extent, late and underpayments, of soldiers' active duty pays and allowances at eight Army Reserve case study units. Specifically, 332 of 348 soldiers (95 percent) we audited at eight case study units that were mobilized, deployed, and demobilized at some time during the 18-month period from August 2002 through January 2004 had at least one pay problem. Many of the soldiers had multiple problems associated with their active duty pays and allowances. Some of these problems lingered unresolved for considerable lengths of time, some for over 1 year. Further, nearly all soldiers began receiving their tax exemption benefit at least 1 month late. These pay problems often had a profound adverse impact on individual soldiers and their families. For example, soldiers were required to spend considerable time, sometimes while deployed in remote, hostile environments overseas, seeking help on pay inquiries or in correcting errors in their active duty pays, allowances, and related tax benefits. The processes in place to pay mobilized Army Reserve soldiers, involving potentially hundreds of DOD, Army, and Army Reserve organizations and thousands of personnel, were deficient with respect to (1) tracking soldiers' pay status as they transition through their active duty tours, (2) carrying out soldier readiness reviews, (3) after-the-fact report reconciliation requirements, and (4) unclear procedures for applying certain pay entitlements. With respect to human capital, weaknesses identified at our case study units included (1) insufficient resources allocated to key unit-level pay administration responsibilities, (2) inadequate training related to existing policies and procedures, and (3) poor customer service. Several automated systems issues also contributed to the significant pay errors, including nonintegrated systems and limited processing capabilities. [ABSTRACT FROM AUTHOR]

In February 2004, we issued our opinions on the calendar year 2003 financial statements of the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF). We also issued our opinion on the effectiveness of the Federal Deposit Insurance Corporation's (FDIC) internal controls as of December 31, 2003, and our evaluation of FDIC's compliance with significant provisions of selected laws and regulations for the three funds for the year ended December 31, 2003. The purpose of this report is to discuss issues identified during our audits of the 2003 financial statements regarding accounting procedures and internal controls that could be improved and to recommend improvements to address these issues. Although these issues were not material in relation to the financial statements, we believe they warrant management's attention. We conducted our audits in accordance with U.S. generally accepted government auditing standards. During 2003, we identified several internal control issues that affected FDIC's accounting for the funds it administers. These weaknesses would have resulted in reporting errors had they not been detected and corrected. Specifically, we found the following: (1) FDIC erroneously accounted for funds it received related to securitizations that terminated in prior years, which would have caused the related FRF account balances to be misstated, (2) FDIC did not always follow its procedures relating to time and attendance reporting, which would have resulted in an improper allocation of operating expenses among the funds, and (3) FDIC made errors in calculations supporting its allowance for losses on receivables from thrift resolutions. These errors would have led to misstatements in FRF's financial statements. At the end of our discussion of each of these issues in the following sections, we make recommendations for strengthening FDIC's internal controls. Implementation of these recommendations is intended to bring FDIC into conformance with the internal control standards that federal agencies are required to follow. [ABSTRACT FROM AUTHOR]

The Supplemental Security Income (SSI) program paid about $36 billion in benefits to about 6.9 million recipients in 2003. In recent years, the Social Security Administration (SSA) has identified a general increase in the amount of annual overpayments made to recipients who are not present in the U.S. as required by SSI program guidelines--a problem we refer as "residency violations." This problem has caused concern among both program administrators and policy makers. As such, GAO was asked to determine what is known about the extent to which SSI benefits are improperly paid to individuals who are not present in the United States and to identify any weaknesses in SSA's processes and policies that impede the agency's ability to detect and deter residency violations. Overpayments resulting from residency violations totaled about $118 million between 1997 and 2001. Additionally, the extent of violations appears to vary by geographic region, with overpayments being more prevalent in several large metropolitan areas. GAO found that 54 percent of all overpayments detected by SSA during this period occurred in just 15 counties. In addition, we found that recipients born outside the United States accounted for at least 87 percent of all residency overpayments. SSA's ability to detect and deter residency violations is impeded by three kinds of weaknesses. First, the agency relies heavily on self-reported information from recipients to determine domestic residency, often without independently verifying such information. Second, SSA makes insufficient use of existing tools to detect violations, such as its "risk analysis" system, redeterminations, and home visits. Finally, the agency has not adequately pursued independent sources of information from other federal agencies or private organizations to detect nonresidency of SSI recipients. GAO recognizes that the SSI program is complex to administer, and residency requirements are particularly difficult to enforce because they can necessitate time-consuming, labor-intensive verification checks, such as home visits. However, SSA has not employed a systematic, comprehensive approach to this problem that would allow the agency to use its available systems and procedures more efficiently and reduce the program's exposure to additional violations. [ABSTRACT FROM AUTHOR]

The Cerro Grande Fire Assistance Act mandated that GAO annually audit all claim payments made to compensate the victims of the Cerro Grande Fire in northern New Mexico. For this second report on this topic, GAO determined whether the Federal Emergency Management Agency (FEMA), which is now a part of the Department of Homeland Security, (1) had revised its policies and procedures to address prior GAO recommendations and processed and paid claims consistent with that guidance and (2) properly reported such payments to the Congress. FEMA implemented corrective actions to address the recommendations from GAO's prior report to strengthen its policies and procedures. GAO found that claims were processed, approved, and paid in accordance with FEMA's established applicable guidelines, providing adequate supporting documentation and evidence of supervisory reviews. However, as discussed below, claimed amounts approved for payment but not paid were not properly tracked in the Office of Cerro Grande Fire Claims' (OCGFC) payment approval system. FEMA's report to the Congress included somewhat overstated claim payment information. The report used claimed amounts approved by OCGFC for payment, rather than amounts actually paid by FEMA. This occurred because FEMA had not reconciled the approved amounts from its payment approval system to amounts paid per its accounting system and was not aware of the differences, which amounted to about $12 million, or 3 percent of total reported payments, as of September 7, 2002. FEMA is currently attempting to reconcile the approved amounts with the paid amounts. This difference resulted because approved amounts that were not paid when claims were delayed for appeal or cancelled for other reasons were not removed from or adjusted in the payment approval system. As a result, the claim payment information reported to the Congress does not provide a completely accurate picture of OCGFC claim payments. This information was also used by FEMA to determine its request for additional funding. Since FEMA received less than it requested, this error likely did not result in an appropriation in excess of amounts needed to pay claims. During its review, GAO also noted that FEMA's estimate of its unfunded claims liability increased by $91 million from September 30, 2001, to October 2, 2002. While FEMA's external auditors found that FEMA used a reasonable methodology to calculate the most recent estimate, they were unable to explain the reason for the increase in the estimate. This occurred because FEMA changed the methodology used but did not provide a crosswalk between the two approaches. In April 2003, FEMA officials stated that they planned to contract for an analysis to be performed to determine the effect that the change in methodology and other factors had on the calculation of the estimated liability. [ABSTRACT FROM AUTHOR]

The Department of Defense (DOD) has historically been unable to accurately account for and record its disbursements. In March 2002, the DOD Comptroller cited metrics that showed dramatic reductions in payment recording errors (57 percent between October 2000 and October 2001), backlogs of commercial payments (41 percent between April and October 2001), and travel card payment delinquencies (34 percent for those individually billed and 86 percent for those centrally billed between January and December 2001). As a result, the Congress asked us to determine whether the cited reductions were (1) calculated using consistent definitions and methodologies, (2) properly supported, and (3) effective indicators of short-term financial management progress. The DOD Comptroller's metrics showing significant reductions in payment recording errors and in commercial and travel card payment delinquencies were, in general, based on definitions and methodologies that were either consistent with or better than those used for prior reporting on these issues. Although the methodology used to calculate two of the cited measures resulted in overstating the rates of improvement, our recalculation after correcting for the methodology errors still showed positive--although less dramatic--improvement trends. While we were able to verify the reductions in travel card delinquencies because the underlying data were available from an independent source, we could not verify the accuracy of the specific improvement percentages reported for payment recording errors and commercial payment delinquencies. DOD's archaic and nonintegrated systems either do not contain the transaction-level detail to support the completeness and accuracy of the metrics or they make it extremely onerous and time consuming for the staff to gather and reconcile the needed detail. However, we were able to verify that DOD has made numerous policy, procedure, and systems changes that support an overall trend toward improved performance in these areas. If they could be verified, some of the cited metrics could be effective indicators of short-term financial management progress. However, if considered alone, delinquency rates are not necessarily good indicators for centrally billed travel cards or commercial payments. Placing too much emphasis on paying bills promptly may tempt DOD staff to bypass important internal controls meant to ensure that the goods and services being paid for were properly authorized and actually received. Despite shortcomings, the cited metrics have focused DOD's attention on highly visible financial management problems. As shown below, recent metrics issued by the DOD Comptroller indicate continuing improvements. [ABSTRACT FROM AUTHOR]

As of September 30, 2001, the Navy's operating appropriations had $2.1 billion in unliquidated--or unpaid--funds that were obligated during fiscal years 1997-99. Unliquidated obligations that are no longer needed to pay for goods and services tie up funds that could be used for other permissible purposes. In addition, inaccurate obligation data result in misstatement of budgetary information. Because of the large dollar value, we examined the Navy's management of unliquidated obligations. Specifically, we reviewed a statistically representative sample of the Navy's $1.4 billion in unliquidated operating obligations valued at $50,000 or more for fiscal years 1997-99 to determine whether these obligations were (1) properly accounted for and (2) reviewed in accordance with DOD regulations. We estimated that $929 million of the $1.4 billion in unliquidated operating obligations valued at $50,000 or more for fiscal years 1997-99 was not properly accounted for (see table). Specifically, the Navy failed to deobligate $452 million of unliquidated operating obligations that was no longer needed and potentially available for other permissible purposes, such as contract modifications. In addition, $147 million of unliquidated operating obligations was inaccurately recorded because of problem disbursements--payments not properly matched to the correct obligation. A further $330 million was inaccurately recorded due to unresolved errors, such as bills that were not processed properly. The remaining $489 million in unliquidated operating obligations was properly accounted for and still needed for the original purpose. An estimated two-thirds of the unliquidated operating obligations over $50,000 were not properly accounted for as a result of the Navy's failure to review such obligations three times each year as required by DOD regulations. In addition, the Navy did not fully adhere to the regulation that unliquidated operating obligations of any value be reviewed at least once each year. Consequently, the Navy did not know how much money was tied up in unliquidated operating obligations that could potentially be used for other appropriate needs, and its budgetary reports to Congress and financial statements were inaccurate. Navy fund managers chose to selectively review their operating obligations, citing obstacles such as difficulties in obtaining accurate payment and billing data and the extensive length of time needed to review large numbers of obligations. Further, the Navy did not apply existing internal control activities to ensure that fund managers performed obligation reviews in accordance with DOD regulations, nor did it hold fund managers accountable for the accuracy and completeness of the reviews. [ABSTRACT FROM AUTHOR]

The Small Business Administration's (SBA) loan asset sales are being closely watched because similar sales are projected for other government agencies as a means of reducing loan assets and servicing costs. To assess the progress and effects of SBA's loan sales, GAO undertook this study to (1) describe the process for selling loans, (2) identify how lenders and borrowers have reacted to loan sales, (3) determine whether SBA is properly accounting for its loan sales and their subsequent impact on credit subsidy estimates, and (4) assess whether loan sales generated operational benefits for the agency. GAO did not determine whether SBA maximized proceeds from the loan sales. From August 1999 through January 2002, SBA held five loan asset sales, disposing of a total of $4.4 billion in disaster assistance home and business loans (85 percent) and regular business loans (15 percent). SBA created a sales process that has attracted investors and responded to their concerns. Lenders who participate in the 7(a) business loan guaranty program were also satisfied with the sales as an option for disposing of their defaulted loans. SBA relies on borrower inquiries and complaints to determine whether purchasers of the loans are using prudent loan servicing practices, as required in the loan sale agreements. However, information on borrowers' reactions to loan sales is incomplete, because SBA does not have a comprehensive process to capture the inquiries and complaints it receives. SBA incorrectly calculated the accounting losses on the loan sales and lacked reliable financial data to determine the overall financial impact of the sales. Further, because SBA did not analyze the effect of loan sales on its remaining portfolio, its reestimates of loan program costs for the budget and financial statements may contain significant errors. In addition, SBA could not explain significant declines in its loss allowance account for disaster loans. Until SBA corrects these errors and determines the cause of the precipitous decline in the loss allowance account, SBA's financial statements will likely be misstated, and the audit opinion on past financial statements may be incorrect. Further, the reliability of current and future subsidy cost estimates will remain unknown. These errors and the lack of key analyses also mean that congressional decisionmakers are not receiving accurate financial data to make informed decisions about SBA's budget and the level of appropriations the agency should receive. Our analysis of the operational benefits from loan sales suggests that some benefits that SBA reported either have not yet materialized or were overstated. SBA conducted a limited analysis of the impact of loan sales on its loan servicing centers, showing that loan servicing volume had been reduced. However, loan sales had a much greater impact on disaster loan servicing than on business loan servicing. Therefore, how the sales will help SBA realign its workforce in the small business programs remains unclear. It would be imprudent to continue SBA loan asset sales in the absence of reliable and complete information on the accounting and budgetary effects. A successful loan sales program is not solely about maximizing proceeds and attracting investors: it is also a means of improving an agency's ability to achieve its mission and to best serve the American people. Moreover, as the Office of Management and Budget (OMB) continues to encourage loan asset sales, it is important that agencies embarking on new loan asset sales programs have the capability to properly carry out and account for these activities. [ABSTRACT FROM AUTHOR]

The Supplemental Security Income (SSI) program is the nation's largest cash assistance program for the poor. The program paid $33 billion in benefits to 6.8 million aged, blind, and disabled persons in fiscal year 2001. Benefit eligibility and payment amounts for the SSI population are determined by complex and often difficult to verify financial factors such as an individual's income, resource levels, and living arrangements. Thus, the SSI program tends to be difficult, labor intensive, and time consuming to administer. These factors make the SSI program vulnerable to overpayments. The Social Security Administration (SSA) has demonstrated a stronger commitment to SSI program integrity and taken many actions to better deter and detect overpayments. Specifically, SSA has (1) obtained legislative authority in 1999 to use additional tools to verify recipients' financial eligibility for benefits, including strengthening its ability to access individuals' bank account information; (2) developed additional measures to hold staff accountable for completing assigned SSI workloads and resolving overpayment issues; (3) provided field staff with direct access to state databases to facilitate more timely verification of recipient's wages and unemployment information; and (4) significantly increased, since 1998, the number of eligibility reviews conducted each year to verify recipient's income, resources, and continuing eligibility for benefits. In addition to better detection and deterrence of SSI overpayments, SSA has made recovery of overpaid benefits a high priority. Despite these efforts, further improvements in overpayment recovery are possible. [ABSTRACT FROM AUTHOR]

Since GAO reported on Department of Defense (DOD) contractor overpayments in 1994, additional reports have been issued highlighting billions of dollars of overpayments to Defense contractors. In December 2001, Congress amended Title 31 of the United States Code to require a federal agency with contracts totaling over $500 million in a fiscal year to have a cost-effective program for identifying payment errors and for recovering amounts erroneously paid to contractors. DOD contractors' responses to GAO's survey indicate that they have millions of dollars of overpayments on their records and that they are continuing to refund overpayments-- about $488 million in fiscal year 2001. DOD has taken actions to address problems with contractor overpayments. In addition to its contract audit functions and as part of a broad based program to assist the Defense Contract Management Agency (DCMA) and the Defense Finance and Accounting Service (DFAS), the Defense Contract Audit Agency (DCAA) is auditing at least 190 large DOD contractors to identify overpayments and ensure that contractors have adequate internal controls for prompt identification and reporting of overpayments. Although DOD has several initiatives to reduce overpayments, it still does not yet have basic administrative control over contractor debt and underpayments because its procedures and practices do not fully meet federal accounting standards and federal financial system requirements for the recording of accounts receivable and liabilities. As a result, DOD managers do not have important information for effective financial management, such as ensuring that contractor debt is promptly collected. [ABSTRACT FROM AUTHOR]

This report examines whether the National Aeronautics and Space Administration (NASA) had significant problems with overpayments to its contractors. GAO did not find that NASA had a significant or systemic problem with overpayments or underpayments during fiscal year 2001. The controls that NASA put in place to prevent and detect payment errors appeared to be properly designed. [ABSTRACT FROM AUTHOR]

The Highway Trust Fund "guarantees" specific annual funding levels for most highway programs on the basis of projected receipts to the fund. It also makes annual adjustments to these funding levels on the basis of actual receipts and revised projections of trust fund revenue. These adjustments are called the Revenue Aligned Budget Authority (RABA). GAO concludes that the fiscal year 2003 RABA calculation appears reasonable. Although the RABA adjustment is clearly severe, it reflects the many ways in which an economic downturn affects the calculation. In late January 2002, the administration announced that the fiscal year 2003 RABA adjustment would be a negative $4.965 billion. Within a few days of the announcement, the administration reported that an error had been made and the correct amount was a negative $4.369 billion--a $600 million difference. Treasury is taking steps to improve its internal controls in order to prevent this type of error from reoccurring. The use of ethanol blended fuel instead of gasoline reduces Highway Trust Fund revenue because it is partially exempt from the standard excise tax on gasoline and 2.5 cents of the tax received on each gallon of gasohol sold is transferred to the General Fund. Gasohol use is projected to rise and the impact of these tax provisions will grow as well. The RABA adjustment could be changed in several ways to help reduce fluctuations in highway funding. However, Congress and the administration must weigh the advantages and disadvantages of these and other ways to stabilize highway funding and increase Highway Trust Fund revenues. [ABSTRACT FROM AUTHOR]

In May 2001, GAO issued its opinions on the calendar year 2000 financial statements of the Bank Insurance Fund, Savings Association Insurance Fund, and FSLIC Resolution Fund. GAO also issued its opinion on the effectiveness of the Federal Deposit Insurance Corporation's (FDIC) internal control as of December 31, 2000, and its evaluation of FDIC's compliance with selected provisions of laws and regulations for the three funds for the year ended December 31, 2000. This report reviews the internal control weaknesses identified during GAO's audits of the 2000 financial statements, and recommends improvements to address those weaknesses. GAO found that FDIC has several internal control weaknesses related to financial reporting, including the execution of transactions. The weaknesses concern its asset valuation process and its allocation and recovery expenses. Specifically, GAO found that (1) errors in valuing receivership assets caused both overstatements and understatements in determining the allowance for loss related to receivables; (2) a calculation error in valuing equity partnership assets caused an overstatement in the allowance for loss related to other assets; and (3) incorrect operating expense amounts were allocated and recovered, which resulted in the incorrect distribution of operating expense charges among FDIC's funds. FDIC has instituted new control procedures to address these weaknesses. [ABSTRACT FROM AUTHOR]

In a fiscal year 1999 accountability report to Congress, the Health Care Financing Administration (HCFA) made several clerical errors in the accounting of Medicare trust funds, which caused the Hospital Insurance (HI) Trust Fund to be overinvested by about $14 billion and the Supplementary Medical Insurance (SMI) Trust Fund to be underinvested by about $18 billion. Because of these errors, the HI Trust Fund earned excess interest and the SMI Trust Fund lost interest. GAO found that these errors went undetected for a year because of internal control weaknesses. Inadequate training and supervision and ineffective reconciliations were key factors that allowed the errors to go undetected. HCFA took corrective action, however, as soon as the errors were discovered. [ABSTRACT FROM AUTHOR]

Pursuant to a legislative requirement, GAO provided information on internal control weaknesses identified during GAO's audits of the Federal Deposit Insurance Corporation's (FDIC) 1999 financial statements. GAO noted that there were: (1) losses in the securitization-related escrow account; (2) errors in the allowance calculation for FDIC receivables; and (3) weaknesses with account transaction controls within FDIC's Financial Information Management System. [ABSTRACT FROM AUTHOR]

GAO provided information on the Federal Housing Administration's credit subsidy budget estimates used to formulate the President's fiscal year (FY) 2000 budget to determine whether: (1) these estimates were reasonable; and (2) any changes need to be made to the credit subsidy estimation process to ensure that future budget estimates are reasonable. GAO noted that: (1) the estimates of loan program costs included in the FY 2000 President's budget for the Section 221(d)(4) of the National Housing Act and the Mutual Mortgage Insurance (MMI) Fund loan guarantee programs were reasonable, given the nature of the estimates; (2) however, the process used to calculate these estimates could be improved, which would also have improved the quality of the estimate; (3) for example, the financial statement audit work related to the Section 221(d)(4) program, which was available after the submission of the FY 2000 budget estimate to the Office of Management and Budget, identified better sources of data that would have reduced the estimated program cost by nearly $12 million or 9 percent of the original cost over the life of the loans made during FY 2000 and estimated to be outstanding for up to 40 years; (4) further, the MMI Fund budget estimate was prepared with a cash flow model containing several formula errors; (5) although some of these errors were identified and corrected during the 1998 audit prior to the budget submission, a lack of coordination between the budget and financial statement audit processes and the lack of a detailed supervisory review allowed these errors to remain in the budget model; and (6) if all the identified errors had been corrected in the budget model, the estimated net receipts of MMI Fund would have increased by $96 million, or 4 percent of the original net receipts amount over the life of the loans made during FY 2000 and estimated to be outstanding for up to 30 years. [ABSTRACT FROM AUTHOR]

Pursuant to a congressional request, GAO provided information on the William D. Ford Federal Direct Loan Program's (FDLP) and the Federal Family Education Loan Program's (FFELP) loan consolidation process, focusing on: (1) whether FFELP lenders believe that Electronic Data Systems' (EDS) consolidation processing has improved since the December 1, 1997, reopening of the FDLP consolidation system to new applications; (2) the extent to which problems in the data transmission between EDS and the FDLP servicing system have been resolved; and (3) how quickly EDS has been processing consolidation applications for borrowers who applied after December 1, 1997, and whether the Department of Education believes EDS could promptly process a substantially greater inflow of applications. GAO noted that: (1) the four lenders GAO spoke to said that they believe the consolidation process has improved; (2) they generally reported receiving fewer duplicate requests for information from EDS and fewer incorrect payments for their loans than before the shutdown, and the incorrect payments they did receive were for smaller amounts; (3) they also said that their communications with Education and EDS have improved; (4) Education and EDS have also made progress toward resolving problems in transmitting data to the FDLP servicing system; (5) according to EDS officials, more than 75 percent of transactions that had been rejected during their transmission between the EDS system and the FDLP servicing system as of June 1998-transactions had been successfully transmitted to the FDLP servicing system by September 1998; (6) further, GAO's review of servicing system accounts for the two sets of borrowers it examined showed that many corrections have been made, although not all transactions were being promptly transmitted; (7) for some borrowers in the first set, those included in GAO's April study, some transactions had still not been transmitted successfully to the servicing system; (8) the account of one of these borrowers showed a balance that, according to the servicing system, was $19,000 higher than it should have been, 15 months after EDS recorded the transaction that should have corrected this error; (9) most borrowers in the second set had refunds transmitted to their accounts in 2 to 6 weeks; (10) however, several of these borrowers--who applied for a consolidation loan after the December 1, 1997, reopening--had not had all their transactions successfully transmitted, even though some of these transactions took place more than 5 months ago; (11) Education's data show that the time needed to process consolidation applications has improved since the December 1, 1997, startup; (12) the average processing time fell from about 65 days to about 54 days between December 1997 and June 1998, and the percentage of applications that were pending for 60 or more days decreased from about 6 percent to just over 1 percent between June 1998 and September 1998; and (13) Education officials cited improved processes and increased staff hired by EDS in stating that they are confident that EDS could now handle a greater volume of applications. [ABSTRACT FROM AUTHOR]

A May 1998 report (GAO/RCED-98-164R) found that overhead costs at the Forest Service--called "indirect" costs by the Forest Service--had risen over time. The costs grew from 16 to 27 percent of total expenditures between 1993 and 1997 for the five funds GAO reviewed--the Brush Disposal Fund, the Salvage Sale Fund, the Reforestation Trust Fund, the Cooperative Work/Other Fund, and the Cooperative Work/Knutson-Vandenberg Fund. This report discusses (1) the reasons indirect costs rose, (2) steps taken by the Forest Service and others to control these costs, and (3) other measures that may help the Forest Service to control these costs in the future. [ABSTRACT FROM AUTHOR]

Pursuant to a legislative requirement, GAO provided information on the internal control and accounting policies and procedure weaknesses identified during GAO's audit of the 1997 financial statements of the Federal Deposit Insurance Corporation (FDIC). GAO noted that: (1) to estimate the recovery values for failed institution assets in liquidation, FDIC uses the standard asset valuation estimation methodology; (2) during 1997, GAO found internal control weaknesses in data input and processing in the loss reserve estimation (LOREN) automated database; (3) the data entered from the asset data sheet (ADS) to LOREN for performing loans had not been reviewed; (4) as a result, data entry errors occurred and were not detected by FDIC; (5) data from the ADS represent a significant portion of the data being processed in LOREN for performing loans; (6) regarding the processing of data within LOREN, GAO found that: (a) programming changes made to LOREN were not independently reviewed and tested; and (b) LOREN did not automatically recalculate estimated recoveries when new data were entered or when data were changed; (7) as a result of these control weaknesses, some individual asset recoveries were misstated; (8) for its 1997 financial statements, FDIC planned to incorporate the estimation of its representation and warranty liability into the automated portion of its loan loss reserve (LLR) process; (9) GAO found that FDIC did not recognize the full amount of its estimated liability for representations and warranties in its December 31, 1997, financial statements; (10) during GAO's review of FDIC's contractor oversight program, it found instances in which FDIC procedures were not followed; (11) specifically: (a) some servicer expenses and fees netted from remittances to FDIC were not reviewed for validity and accuracy and the related memos of certification, to document approval of these transactions, were not prepared; and (b) some securitization residual income included in remittances was not reviewed for validity and accuracy; (12) the lack of review and validation of servicer transactions increases the risk that errors and omissions may occur and go undetected and that the related remittance of funds due to FDIC from servicers may not be accurate; (13) the FDIC Field Financial Operations Accounting Manual states that FDIC business centers should not hold checks, but may request that FDIC's Field Finance Center (FFC) hold them; however, GAO found that the Northeast Business Center held some checks rather than forwarding them to FFC to be held; and (14) GAO's 1997 audit of the estimated liabilities for anticipated failures and litigation revealed that FDIC did not have procedures in place to review events occurring subsequent to its December 31, 1997, financial statements but before issuance of the yearend financial statements. [ABSTRACT FROM AUTHOR]

Pursuant to a legislative requirement, GAO provided information on the Congressional Award Foundation's fiscal year (FY) 1997 financial statements and on management's assertions regarding the Foundation's system of internal controls as of September 30, 1997, focusing on: (1) the need to establish and document certain internal control policies and procedures suggested as a result of GAO's FY 1996 audit; and (2) additional matters identified during GAO's FY 1997 audit that relate to those previously identified weaknesses. GAO noted that: (1) in conducting its FY 1997 audit, GAO found that the Foundation had made progress in addressing each of the accounting and internal control weaknesses GAO identified during its FY 1996 audit; (2) the Foundation had assessed the collectibility of its fiscal yearend accounts receivable; (3) however, it had not yet included information such as invoice numbers in its subsidiary accounts receivable records, which would facilitate followup on outstanding receivables; (4) it had not initiated procedures to reconcile receivable subsidiary data to other pertinent information; (5) the lack of subsidiary account data and these internal controls contributed to errors in the Foundation's FY 1997 accounting records; (6) the Foundation improved its tracking of restricted contributions by creating separate funds and related general ledger accounts; (7) however, it did not develop and implement the policies and procedures needed to help ensure that donor-imposed restrictions are identified and properly satisfied; (8) in preparing its FY 1997 financial statements, the Foundation engaged a public accounting firm to compile its financial statements and to develop the supporting documentation for the necessary worksheet adjustments; (9) while hiring a firm to prepare the statements and provide supporting documentation reduces the risk that worksheet adjustments would not be clearly documented, it is not a substitute for formalizing internal control policies and procedures for management's required review and approval of the adjustments; (10) as part of GAO's FY 1997 audit, it noted that the Foundation had taken steps to improve its handling of its in-transit deposits, which resulted in fewer reconciling items at fiscal yearend; (11) however, as of September 30, 1997, the Foundation had not established internal control policies and procedures requiring: (a) a monthly reconciliation of the Foundation's recorded cash balance with the balance reported by the bank; (b) the prompt and effective followup of any reconciling items identified; and (c) appropriate supervisory review; (12) while GAO's FY 1997 audit did not identify any unauthorized or unsupported transactions, the Foundation was sometimes authorizing payments to vendors based on facsimiles of invoices; and (13) because facsimiles do not contain original signatures, it is more difficult to identify duplicates. [ABSTRACT FROM AUTHOR]

Financial management problems have continued to plague the Forest Service--as reflected in the adverse opinion of the Agriculture Department's (USDA) Inspector General (IG) on the Forest Service's fiscal year 1995 financial statement. Because of the severity of these problems, the Forest Service did not prepare financial statements for fiscal year 1996 but chose instead to focus on problem resolution. Financial statements were prepared for fiscal year 1997, and the audit of those statements is near completion; as of July 1, 1998, the USDA IG was finalizing its report. These two testimonies focus primarily on the fiscal year 1995 audit results, which disclosed several serious weaknesses, most of which still exist today. GAO also briefly discusses the Forest Service's plans to address these weaknesses. [ABSTRACT FROM AUTHOR]

This testimony covers expenditure data on five Forest Service funds that provide more than $400 million each year to support various projects, from brush disposal to road and rail reconstruction to the administration of salvage timber sales. GAO's statement, which is drawn from a May 1998 report (GAO/RCED-98-164R), (1) summarizes what the Forest Service's records identify as indirect expenditures charges to each of the funds and (2) discusses GAO's concerns about the reliability of Forest Service data. [ABSTRACT FROM AUTHOR]

Pursuant to a congressional request, GAO provided information on expenditures for indirect support activities by five Forest Service funds between fiscal years (FY) 1993 and 1997. GAO did not analyze the reasons for changes in expenditures over the period. GAO noted that: (1) several limitations with the data affect the extent to which conclusions can be drawn; (2) regions have flexibility in deciding how to include indirect expenditures and how they should be applied; (3) such region-to-region differences affect both the aggregated data and the comparability of data from location to location; (4) GAO's analysis does not capture indirect expenditures that regions may have placed in other accounts; (5) year-to-year comparisons may be affected somewhat because the Forest Service changed the coding requirements for indirect expenditures between FY 1993 and FY 1994; (6) Forest Service officials stated that some of the increases in indirect expenditures probably resulted from changes they made to correct prior inaccuracies, inconsistencies, or inequities that occurred when charging these expenditures to the funds; and (7) GAO continues to have concerns about the reliability of the Forest Service's financial information in general. [ABSTRACT FROM AUTHOR]