Financial Audit: Panama Canal Commission's 1993 and 1992 Financial
Statements (Letter Report, 03/31/94, GAO/AIMD-94-89).

This report presents the results of GAO's audits of the Panama Canal
Commission financial statements for 1993 and 1992. The Commission, a
federal agency, is responsible for running the Panama Canal until it is
turned over to the Panamanian government in 1999. In GAO's opinion, the
Commission's financial statements present fairly, in all material
respects, its financial position for fiscal years 1993 and 1992 and the
results of its operations, changes in capital, and cash flows for those
years. In addition, internal controls reasonably ensured that losses,
noncompliance, or misstatements material to the financial statements
would be prevented or detected. GAO found no material instances of
noncompliance with laws or regulations.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-89
     TITLE:  Financial Audit: Panama Canal Commission's 1993 and 1992 
             Financial Statements
      DATE:  03/31/94
   SUBJECT:  Audit reports
             Audit oversight
             Internal controls
             Compliance
             Financial statement audits
             Financial records
             Auditing standards
             Corporate audits
             Accounting procedures
IDENTIFIER:  Panama Canal
             Panama Canal Treaty of 1977
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Congress

March 1994

FINANCIAL AUDIT - PANAMA CANAL
COMMISSION'S 1993 AND 1992
FINANCIAL STATEMENTS

GAO/AIMD-94-89

Panama Canal Commission


Abbreviations
=============================================================== ABBREV

  FECA - Federal Employees' Compensation Act
  FMFIA - Federal Managers' Financial Integrity Act

Letter
=============================================================== LETTER


B-114839

March 31, 1994

To the President of the Senate and the
Speaker of the House of Representatives

This report presents the results of our audits of the Panama Canal
Commission's financial statements for the years ended September 30,
1993 and 1992, its internal controls, and its compliance with laws
and regulations. 

The Commission is a federal executive agency that was established on
October 1, 1979, to carry out the responsibilities of the United
States with respect to the Panama Canal Treaty of 1977.  The
Commission will operate the Canal until the Treaty terminates on
December 31, 1999, when the Republic of Panama will assume full
responsibility for the Canal. 

We are required by the Panama Canal Act of 1979 to conduct an annual
audit of the Commission's financial statements.  In our opinion, the
Panama Canal Commission's financial statements present fairly, in all
material respects, its financial position as of September 30, 1993
and 1992, and the results of its operations, changes in capital, and
cash flows for the years then ended, in conformity with generally
accepted accounting principles. 

Also, in our opinion, internal controls in effect on September 30,
1993, provided reasonable assurance that losses, noncompliance, or
misstatements material to the financial statements would be prevented
or detected.  Our 1993 tests for compliance with the provisions of
selected laws and regulations disclosed no material instances of
noncompliance, and nothing came to our attention in the course of our
work to indicate that material noncompliance with such provisions
occurred.  Our audit was conducted in accordance with generally
accepted government auditing standards. 

During the course of the audit, we also identified several matters
for improvement in operations which were not material to the
financial statements.  These matters are being communicated to the
Commission in a separate management letter. 


   SCHEDULED TERMINATION OF THE
   COMMISSION
------------------------------------------------------------ Letter :1

As provided by the Panama Canal Treaty of 1977, the Panama Canal
Commission will terminate on December 31, 1999, when the Republic of
Panama will assume full responsibility for the management, operation,
and maintenance of the Panama Canal.  The Treaty provides that the
Canal be turned over in operating condition and free of liens and
debts, except as the two parties may otherwise agree.  As discussed
in note 7 to the financial statements, as of September 30, 1993, the
Commission estimates that the present $175 million in obligations
will be recovered from future operations.  The achievement of this
forecast is dependent upon (1) obtaining the budgeted levels of Canal
operations and (2) future economic events. 

The Commission operates as a rate-regulated utility, and in fiscal
year 1993 approximately 74 percent of its revenues were obtained from
tolls and the remaining 26 percent, from nontoll revenues, such as
navigation services and electric power sales.  Early retirement,
worker injury compensation benefit costs, and postretirement medical
care costs are being funded from Canal revenues on an accelerated
basis in order to be fully funded by 1999.  The President of the
United States serves as the rate regulator for tolls, which are
established at a level to recover the costs of operating and
maintaining the Canal. 


   RESULTS OF OPERATIONS
------------------------------------------------------------ Letter :2

The Commission ended fiscal year 1993 with net operating revenue of
$3.0 million, compared to the net operating loss of $3.6 million for
fiscal year 1992.  When the fiscal year 1993 net operating revenue is
applied to the 1992 outstanding unrecovered costs, a $0.6 million
balance is left to be recovered from subsequent revenues. 

From fiscal years 1989 through 1993, toll and nontoll revenues
increased an average of 4.9 percent annually.  Fiscal year 1993 total
operating revenues increased to $527 million, up 4.2 percent from
fiscal year 1992.  Even though the 1993 Canal traffic was less than
in 1992, the increase occurred because a 9.9 percent toll increase
went into effect on October 1, 1992.  Nontoll revenues, which consist
primarily of navigation services and electric power sales, increased
to $141 million during fiscal year 1993, up 1.4 percent from fiscal
year 1992. 

From fiscal years 1989 through 1993, total operating expenses
increased an average of 4.3 percent annually.  Fiscal year 1993 total
operating expenses increased to $524 million, up 2.9 percent over
fiscal year 1992.  The following were some of the highlights: 

  Tonnage payments to the Republic of Panama increased 1.6 percent in
     fiscal year 1993, due principally to a 1 cent increase (from 35
     cents to
     36 cents) in the amount paid to the Republic of Panama for each
     "Panama Canal net ton" passing through the Canal. 

  The cost of lock operations increased 5.9 percent over fiscal year
     1992 due to an increase in lock maintenance projects. 

  Administrative and general costs increased 13.4 percent in fiscal
     year 1993 due principally to the recognition of the liabilities
     for postretirement medical care costs and post-1999 costs for
     retirement benefits owed to certain former employees.  These
     increases were offset in part by lower costs in other employee
     benefits. 

  Depreciation expense decreased 13.7 percent in fiscal year 1993
     principally because of a one-time $3.4 million increase in
     fiscal year 1992 to depreciation expense.  The increase was
     caused by adjustments to the service lives of certain assets as
     the result of special studies made. 

  Interest on interest-bearing investment decreased 8.8 percent in
     fiscal year 1993 principally because of lower interest rates and
     lower U.S.  interest-bearing investment. 


   ASSETS, LIABILITIES, AND
   CAPITAL
------------------------------------------------------------ Letter :3

During fiscal year 1993, total assets of the Commission increased by
1.8 percent to $839 million, and total liabilities and reserves
increased by
1.8 percent to $293 million.  Capital increased from $537 million to
$546 million.  The most significant changes in individual account
balances for fiscal year 1993 were the following: 

  Property, plant, and equipment (excluding depreciation and
     valuation allowances) increased by a net $30 million to $1,068
     million.  This increase was due primarily to capital
     expenditures of $34.5 million, offset in part by retirements and
     transfers of excess assets to the Republic of Panama and other
     U.S.  government agencies.  Capital additions to plant included
     major items, such as $9.5 million for the replacement and
     improvement of facilities; $8.9 million for the replacement and
     addition of miscellaneous equipment; $6.9 million for
     improvements to electric power, communication, and water
     systems; $4.4 million for the Canal widening/straightening
     program; $3.0 million for the replacement of motor vehicles; and
     $1.0 million for the replacement of launches. 

  Current assets increased by a net $22 million to $188 million due
     principally to an increase in cash.  Cash increased by $22.9
     million mainly because of the $3.0 million of operating income
     during the year and a $20.5 million increase in operating
     liabilities.  This increase was offset in part by the $2.5
     million decrease in storehouse inventories. 

  Deferred charges decreased by a net $12 million to $157 million. 
     This was due principally to a $24.7 million decrease in funding
     for early retirement benefits and compensation benefits for work
     injuries.  The decrease was offset in part by the recognition of
     $17.2 million in postretirement medical care costs. 

  Liabilities and reserves increased by a net $5 million to $293
     million, primarily due to a $5.3 million increase in the
     liability for employees' leave and the recognition of $20.4
     million in postretirement medical care costs.  Offsetting these
     increases, in part, was the amortization of $24.7 million for
     various employee benefits. 

  Capital increased by a net $9 million to $546 million, principally
     because $8.2 million in capital expenditure contributions were
     amortized and $2.0 million of working capital contributions were
     made. 


   TREATY RELATED COSTS
------------------------------------------------------------ Letter :4

The Panama Canal Act of 1979 requires us to include in our annual
audit report to the Congress a statement listing (1) all direct and
indirect costs incurred by the United States in implementing the 1977
Treaty, net of any savings, and (2) the cost of any property
transferred to the Republic of Panama.  The act also provides that
direct appropriated costs of implementation should not exceed $666
million, adjusted for inflation over the life of the Treaty. 

As part of the required annual audit, U.S.  government agencies which
provided services to the former Panama Canal Company and Canal Zone
Government provided the net cost information required under the 1977
Treaty.  This information is presented in unaudited supplementary
schedules to the Commission's financial statements.  From fiscal
years 1980 to 1993, the net reported costs to the U.S.  government
under the Treaty amounted to $704 million, which is less than the
act's inflation-adjusted target of $1,295 million as of September 30,
1993. 

As required by the Panama Canal Act of 1979, we are sending copies of
this report to the President of the United States and the Secretary
of the Treasury.  We are also sending copies to the Director of the
Office of Management and Budget; the Secretaries of State, Defense,
and the Army; the Chairman of the Board of Directors of the Panama
Canal Commission; and the Administrator of the Panama Canal
Commission.






Comptroller General
of the United States


Letter
=============================================================== LETTER


B-114839

To the Board of Directors
Panama Canal Commission

Our audits of the Panama Canal Commission found

  the fiscal years 1993 and 1992 financial statements to be reliable
     in all material respects;

  internal controls on September 30, 1993, to be effective in
     protecting assets, assuring material compliance with budget
     authority and with laws and regulations, and assuring that there
     were no material misstatements in the financial statements; and

  no material noncompliance with laws and regulations we tested for
     the fiscal year ended 1993. 

Each of these conclusions is outlined in more detail below.  This
report also discusses the information presented in the Commission's
unaudited supplemental schedules and the scope of our audit. 


   OPINION ON FINANCIAL STATEMENTS
------------------------------------------------------------ Letter :5

The financial statements and accompanying notes present fairly the
Commission's

  assets, liabilities, and capital;

  operating revenue and expenses;

  changes in capital; and

  cash flows. 


   LIQUIDATION OF LIABILITIES
------------------------------------------------------------ Letter :6

As discussed in note 7 to the financial statements, the Panama Canal
Treaty requires that the Commission transfer the Canal to the
Republic of Panama on December 31, 1999, free of liens and debts,
except as the two parties may otherwise agree.  To comply with this
provision, the Commission is required to identify and fully fund its
liabilities by that date.  The Statement of Viability presented in
this footnote measures the Commission's ability to liquidate all
estimated liabilities by December 31, 1999.  As of September 30,
1993, the Commission had total obligations of $292.8 million and
total resources of $117.7 million.  The net unfunded $175.1 million
in obligations is to be collected from future toll revenues over the
remaining life of the Treaty. 


   OPINION ON INTERNAL CONTROLS
------------------------------------------------------------ Letter :7

The internal controls we evaluated were those designed to

  safeguard assets against loss from unauthorized use or disposition;

  assure the execution of transactions in accordance with budget
     authority and with laws and regulations; and

  properly record, process, and summarize transactions to permit the
     preparation of financial statements and to maintain
     accountability for assets. 

Those controls in effect on September 30, 1993, provided reasonable
assurance that losses, noncompliance, or misstatements material to
the financial statements would be prevented or detected. 


   COMPLIANCE WITH SELECTED LAWS
   AND REGULATIONS
------------------------------------------------------------ Letter :8

Our tests for compliance with the provisions of selected laws and
regulations disclosed no material instances of noncompliance.  Also,
nothing came to our attention in the course of our other work to
indicate that material noncompliance with such provisions occurred. 
Finally, nothing came to our attention to indicate that management's
reports on internal controls prepared under the Federal Managers'
Financial Integrity Act (FMFIA) conflict materially with the results
of our evaluation of internal controls.  The Commission reported no
material weaknesses in its 1993 FMFIA report. 


   UNAUDITED SUPPLEMENTARY
   INFORMATION
------------------------------------------------------------ Letter :9

The Treaty related cost schedules are presented as required by the
Panama Canal Act of 1979, and the schedule of property, plant, and
equipment is presented for additional analysis.  We obtained Treaty
related cost data from other federal agencies and reviewed the data
for unusual fluctuations from amounts previously reported. 
Accordingly, we express no opinion on the schedules of Treaty related
costs.  While we do not express an opinion on the detailed schedule
of property, plant, and equipment, this information is consistent
with the financial statements taken as a whole. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
----------------------------------------------------------- Letter :10

Management has the responsibility for

  preparing financial statements on the basis of accounting
     principles described in note 1 to the financial statements,

  establishing and maintaining internal controls and systems to
     provide reasonable assurance that the broad control objectives
     of FMFIA are met, and

  complying with applicable laws and regulations. 

We have the responsibility to obtain reasonable assurance about
whether the financial statements are reliable (free of material
misstatement and presented fairly in accordance with applicable
accounting principles) and relevant internal controls are in place
and operating effectively.  We also are responsible for testing
compliance with provisions of selected laws and regulations and for
performing limited procedures with respect to unaudited supplementary
information appearing in this report.  Our work was done in
accordance with generally accepted government auditing standards. 

In order to fulfill these responsibilities we

  examined, on a test basis, evidence supporting the amounts and
     disclosures in the financial statements;

  assessed the accounting principles used and significant estimates
     made by management;

  evaluated the overall presentation of the financial statements;

  evaluated and tested relevant internal controls which encompassed
     the following cycles: 

inventory,

fixed assets,

revenue/cash receipts,

expenditures/cash disbursements, and

payroll;

  tested compliance with certain provisions of the following laws and
     regulations: 

Panama Canal Act of 1979,

Antideficiency Act,

Prompt Payment Act, and

Accounting and Auditing Act of 1950; and

  considered compliance with the process required by FMFIA for
     evaluating and reporting on internal control and accounting
     systems. 

We did not evaluate all internal controls relevant to operating
objectives as broadly defined by FMFIA and implementing guidance,
such as those relevant to preparing statistical reports and ensuring
efficient operations.  We limited our work to accounting and other
controls necessary to achieve the objective outlined in our opinion
on internal controls.  Because of inherent limitations in any system
of internal control, losses, noncompliance, or misstatements may
nevertheless occur and not be detected.  We also caution that
projecting our evaluation to future periods is subject to the risk
that controls may become inadequate because of changes in conditions
or that the degree of compliance with controls may deteriorate.






Comptroller General
of the United States

February 11, 1994


FINANCIAL STATEMENTS
=========================================================== Appendix 0

   Statements of Financial
   Position

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

   Statements of Operations

   (See figure in printed
   edition.)

   Statements of Changes in
   Capital

   (See figure in printed
   edition.)

   Statements of Cash Flows

   (See figure in printed
   edition.)

   Notes to Financial Statements

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


SUPPLEMENTARY INFORMATION
(UNAUDITED)
=========================================================== Appendix 1

   Schedules of Treaty Related
   Costs

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

   Schedule of Property, Plant,
   and Equipment

   (See figure in printed
   edition.)