[Federal Register Volume 66, Number 138 (Wednesday, July 18, 2001)]
[Rules and Regulations]
[Pages 37405-37406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17933]


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DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1773

RIN 0572-AB66


Policy on Audits of RUS Borrowers; Management Letter

AGENCY: Rural Utilities Service, USDA.

ACTION: Notice of confirmation of direct final rule.

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SUMMARY: The Rural Utilities Service (RUS) hereby gives notice that 
comments were received regarding direct final rule, 7 CFR Part 1773, 
Policy on Audits of RUS Borrowers; Management Letter, and confirms the 
effective date of the direct final rule. This notice also serves to 
address the comments received.

DATES: The direct final rule published in the Federal Register on May 
21, 2001 (66 FR 27829) is effective July 5, 2001.

FOR FURTHER INFORMATION CONTACT: Richard Annan, Chief, Technical 
Accounting and Auditing Staff, Program Accounting Services Division, 
Rural Utilities Service, U.S. Department of Agriculture, 1400 
Independence Ave., SW., STOP 1523, Washington, DC 20250-1523. 
Telephone: 202-720-5227.

Background

    Title 7 part 1773 implements the standard RUS security instrument 
provision requiring RUS electric and telecommunications borrowers to 
prepare and furnish to RUS, at least once during each 12-month period, 
a full and complete report of its financial condition, operations, and 
cash flows, in form and substance satisfactory to RUS; audited and 
certified by an independent Certified Public Accountant (CPA), 
satisfactory to RUS, and accompanied by a report of such audit, in form 
and substance satisfactory to RUS.
    The Rural Utilities Service (RUS) published a direct final rule on 
May 21, 2001, at 66 FR 27829, in the Federal Register revising the 
requirements for the management letter. Section 1773.33(c) is revised 
to address continuing property records (CPRs) rather than the term 
plant records. In addition, the requirement that the CPA state whether 
the CPRs have been established, is expanded wherein the CPA must state 
that the CPRs are established, maintained on a current basis, and are 
reconciled to the general ledger plant accounts. The requirements for 
the CPA to determine that the borrower secured RUS approval for the 
sale of plant in Sec. 1773(c)(5) is expanded to include the sale, 
lease, or transfer of assets secured under the mortgage and to state 
whether the proceeds were handled in conformance with RUS requirements.
    The following requirements under Sec. 1773.33 are eliminated: (1) 
The requirement for the CPA to determine that loan funds were deposited 
in banks designated in the loan documents; (2) a corresponding 
requirement in the telecommunications management letter; (3) the 
requirement for the CPA to determine that the borrower has complied 
with the RUS requirement for approval of any lease of a building or 
land, standard traffic settlement agreement, billing and collecting 
agreements, toll pooling arrangements, directory service agreements, 
and joint-use agreement; and (4) the requirement for the CPA to 
determine borrower compliance with the requirement to maintain a net 
plant to secured debt ratio or a funded reserve for certain loans 
wherein the maturity period exceeds the economic life of the plant 
facilities being financed.
    Section 1773.33, Management Letter, specifies the minimum 
requirements for the CPA's management letter. RUS borrowers have 
increasingly diversified into other utility and nonutility related 
activities through the formation of subsidiary and affiliated 
companies. RUS has need of information on investments in these 
subsidiary and affiliated companies to assist in its efforts to monitor 
loan security issues and respond to claims of cross subsidization. A 
new requirement for the CPA to provide a detailed analysis of 
borrowers' investments is therefore being added to the management 
letter requirements. The CPA is required to disclose certain general 
and financial information regarding each of a borrower's investments in 
subsidiary and affiliated companies accounted for on the cost or equity 
basis. This information should readily available in the borrower's 
investment subsidiary records.
    In previous versions of part 1773 the sample reports, financial 
statements, and management letters were contained in four appendices, 
two for electric borrowers and two for telecommunications borrowers. 
Beginning with this revision of part 1773, the appendices will no 
longer be codified in the Code of Federal Regulations. The appendices 
will be available in new RUS Bulletin 1773-1, which will contain all of 
7 CFR part 1773 and the appendices. Appendix A will contain the sample 
reports, financial statements and management letter for electric 
borrowers while Appendix B will contain similar sample for 
telecommunications borrowers. The exhibits of the management letters, 
which are included in the appendices, are attached to this notice for 
information only. Publishing part 1773 in bulletin form will provide 
the RUS audit policy in a user-friendly format. A single copy of this 
publication will be provided to all RUS borrowers and certified public 
accounts approved to perform audits of RUS borrowers and will be 
available at http://www.usda.gov/rus/ruswide.htm.
    RUS received three comments on this direct final rule from one 
party, Kiesling Associates LLP, Madison Wisconsin, which RUS deemed to 
be not adverse. All of the comments were regarding the requirement to 
include a supplemental schedule of each investment in subsidiary and 
affiliated companies in the management letter as required in 
Sec. 1773.33(i). A summary of their comments and the responses follows:

Comments

    Comment: Keisling stated that the audited financial statements of 
an RUS borrower already include disclosures of equity method 
investments and similar information is reported in Part G of the RUS 
Form 479. In addition, RUS requires the submission of supplemental 
schedules of financial condition and statement of operations for each 
subsidiary for consolidated financial statements. Kiesling also noted 
that Generally Accepted Auditing Standards (GAAP) also requires such 
disclosures.
    Reply: The supplemental schedules containing the statement of 
financial condition and the statement of operations submitted with the 
audited consolidated financial statements contain only the information 
for the current and prior year for each subsidiary or affiliated 
company. However, if the investment is not considered material the 
supplemental statements are not required to be submitted with the 
consolidated financial statements. Only footnote disclosure would be 
required in such instances. The RUS requirement for the supplemental 
information regarding investments included in the management letter 
will provide a summary of the financial condition since inception for 
each individual

[[Page 37406]]

subsidiary or affiliated company. For this reason RUS does not consider 
this information to be duplicative of similar RUS or GAAP reporting 
requirements. The information submitted with the RUS Form 479 is in the 
aggregate for all subsidiary companies.
    Comment: Keisling also commented that similar disclosure 
requirements for investments accounted for on the cost method should 
not be required as such investments are typically not of a material 
nature. And if such investments were material they would be properly 
disclosed in the footnotes to the audited financial statements.
    Reply: While investments accounted for on the cost method may or 
may not be material, RUS' purpose for including similar disclosures for 
investments accounted for cost method is to provide a means for RUS to 
track the RUS borrowers' investments in rural infrastructure. When 
called upon to provide this information from Congressional and 
government oversight agencies, RUS has not been able to readily gather 
and summarize such data. The disclosure of all investments in 
subsidiary and affiliated companies, whether accounted for on the cost 
or equity method, will provide the appropriate information for such 
inquiries.

Confirmation of Effective Date

    This is to confirm the effective date of July 5, 2001, of the 
direct final rule 7 CFR Part 1773, Policy on Audits of RUS Borrowers; 
Management Letter, published in the Federal Register on May 21, 2001, 
at 66 FR 27829.

    Dated: July 12, 2001.
Blaine D. Stockton,
Acting Administrator, Rural Utilities Service.
[FR Doc. 01-17933 Filed 7-17-01; 8:45 am]
BILLING CODE 3410-15-P