Financial Audit: Panama Canal Commission's 1994 and 1993 Financial
Statements (Letter Report, 03/31/95, GAO/AIMD-95-98).

The Panama Canal Commission is a federal agency that is charged with
operating the canal until the canal is turned over to the Republic of
Panama on December 31, 1999.  In GAO's opinion, the Commission's
financial statements for 1994 and 1993 fairly present its financial
position and the results of its operations, changes in capital, and cash
flows.  Also, GAO believes that management's assertion is fairly stated
that internal controls reasonably ensured that losses, noncompliance, or
misstatements affecting the financial statements would be prevented or
detected on a timely basis.  Also, GAO found no reportable noncompliance
with laws and regulations.  GAO did identify several matters relating to
controls over the Commission's computers that needed improving.

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

 REPORTNUM:  AIMD-95-98
     TITLE:  Financial Audit: Panama Canal Commission's 1994 and 1993 
             Financial Statements
      DATE:  03/31/95
   SUBJECT:  Financial statement audits
             Independent agencies
             Financial management
             Financial records
             Accounting procedures
             Auditing standards
             Accountability
             Internal controls
             Investments abroad
IDENTIFIER:  Panama Canal
             Panama
             
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Cover
================================================================ COVER


Report to the Congress

March 1995

FINANCIAL AUDIT - PANAMA CANAL
COMMISSION'S 1994 AND 1993
FINANCIAL STATEMENTS

GAO/AIMD-95-98

Panama Canal Commission

(917664)


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

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

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


B-114839

March 31, 1995

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,
1994 and 1993, 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, 1994
and 1993, 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, management's assertion is fairly stated that
internal controls in effect on September 30, 1994, provided
reasonable assurance that losses, noncompliance, or misstatements
material to the financial statements would be prevented or detected
on a timely basis.  In addition, our 1994 tests for compliance with
the provisions of selected laws and regulations disclosed no
reportable instances of noncompliance with the provisions we tested. 
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 general controls over some of the Commission's
computerized information systems 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 :0.1

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, 1994, the
Commission estimates that the present $124 million in obligations
will be recovered from tolls over the remaining life of the Treaty. 
The ability to cover these future costs including administrative
costs is dependent upon (1) obtaining the budgeted levels of Canal
operations and (2) future economic events. 

The Commission operates as a rate-regulated utility.  In fiscal year
1994, 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,
compensation benefits for work injuries, retirement benefits for
certain former employees, and post-retirement 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 :0.2

The Commission ended fiscal year 1994 with net operating revenue of
$1.7 million, compared to the net operating revenue of $3.0 million
for fiscal year 1993.  When the fiscal year 1994 net operating
revenue is applied to the $0.6 million outstanding balance of
unrecovered costs from fiscal year 1992 operations, the $1.1 million
balance left is payable to the Republic of Panama as stipulated by
the Treaty. 

From fiscal years 1990 through 1994, toll and nontoll revenues
increased an average of 3.7 percent annually.  Fiscal year 1994 total
operating revenues increased to $548 million, up 4.1 percent from
fiscal year 1993 due mainly to an increase in Canal traffic,
principally larger vessels.  Nontoll revenues, which consist
primarily of navigation services and electric power sales, increased
to $145 million during fiscal year 1994, up 3.2 percent from fiscal
year 1993. 

From fiscal years 1990 through 1994, total operating expenses
increased an average of 4.0 percent annually.  Fiscal year 1994 total
operating expenses increased to $546 million, up 4.3 percent over
fiscal year 1993.  The following were some of the highlights: 

  -- Tonnage payments to the Republic of Panama increased 4.1 percent
     in fiscal year 1994 due to the increase in "Panama Canal net
     tons" passing through the Canal. 

  -- General repair, engineering, and maintenance services increased
     7.2 percent in fiscal year 1994 due mainly to an increase in the
     general level of maintenance and repairs on Canal equipment and
     facilities. 

  -- Utilities costs increased 12.4 percent in fiscal year 1994 due
     principally to increased diesel fuel consumption for power
     generation.  Diesel fuel, rather than cheaper bunker C
     petroleum, was required for turbine power generation to replace
     the capacity lost while the steam power generators were out of
     operation for unscheduled repairs. 

  -- Administrative and general costs increased 8.4 percent in fiscal
     year 1994 due principally to the total recognition of all
     post-1999 retirement medical care costs.  The liability for the
     cost of repatriation of U.S.  citizens was also reevaluated and
     the increase in costs was recognized. 

  -- Depreciation expense increased 8.4 percent in fiscal year 1994
     because of depreciation related to the additions during the year
     and a one-time increase of $0.9 million in depreciation expense
     to recognize new service lives for certain plant items. 

  -- Interest paid during fiscal year 1994 on the interest-bearing
     investment decreased 28.3 percent principally because of lower
     interest rates and lower amount of U.S.  interest-bearing
     investment on which to pay interest. 


      ASSETS, LIABILITIES, AND
      CAPITAL
---------------------------------------------------------- Letter :0.3

By the end of fiscal year 1994, total assets of the Commission
decreased by 1.7 percent to $824 million, and total liabilities and
reserves decreased by 8.6 percent to $267 million.  Capital increased
from $546 million to $557 million.  The most significant changes in
individual account balances by the end of fiscal year 1994 were the
following: 

  -- Property, plant, and equipment (excluding depreciation and
     valuation allowances) increased by a net $35 million to $1,103
     million.  This increase was due primarily to capital
     expenditures of a net $40.1 million, offset in part by
     retirements and transfers of excess assets to other United
     States government agencies.  Capital additions to plant included
     major items, such as $14.6 million for the replacement and
     improvement of facilities; $8.6 million for the Canal
     widening/straightening program; $8.3 million for the replacement
     and addition of miscellaneous equipment; $4.8 million for
     improvements to electric power, communication, and water
     systems; $2.4 million for the replacement of motor vehicles; and
     $1.0 million for the replacement of launches and launch engines. 

  -- Current assets increased by a net $20 million to $208 million
     due principally to an increase in cash.  Cash increased by $23.3
     million as a result of the net cash provided by operating
     activities exceeding the net cash used in investing activities. 

  -- Deferred charges decreased by a net $44 million to $113 million. 
     This was due principally to the amortization of deferred charges
     for early retirement, compensation benefits for work injuries,
     post-retirement medical care costs, and retirement benefits for
     certain former employees. 

  -- Liabilities and reserves decreased by a net $25 million to $267
     million, primarily due to the reduction of $35.0 million for
     certain employee benefits, and the reduction in the reserve for
     floating equipment.  Offsetting these decreases, in part, were
     increases in the liabilities for employees' leave, repatriation,
     post-retirement medical care costs, and marine accident claims. 

  -- Capital increased by a net $11 million to $557 million,
     principally because of a $6.3 million net increase in capital
     contributions for capital expenditures and a $5.0 million
     increase in contributions for working capital. 


      TREATY RELATED COSTS
---------------------------------------------------------- Letter :0.4

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 U.S.  government agencies should not
exceed $666 million, adjusted for inflation over the life of the
Treaty.  As of September 30, 1994, the inflation-adjusted target was
$1,333 million. 

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 1994, the net reported costs to the U.S.  government
under the Treaty amounted to $742 million, which is less than the
act's inflation-adjusted target. 


---------------------------------------------------------- Letter :0.5

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. 

Charles A.  Bowsher
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 1994 and 1993 financial statements to be
     reliable in all material respects;

  -- management fairly stated that internal controls on September 30,
     1994, provided reasonable assurance that losses, noncompliance
     or misstatement material in relationship to the financial
     statements would be prevented or detected on a timely basis; and

  -- no reportable instances of noncompliance with laws and
     regulations we tested for the fiscal year ended 1994. 

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 :1

The financial statements and accompanying notes present fairly, in
all material respects, in accordance with generally accepted
accounting principles, the Commission's

  -- assets, liabilities, and capital;

  -- operating revenue and expenses;

  -- changes in capital; and

  -- cash flows. 


   LIQUIDATION OF LIABILITIES
------------------------------------------------------------ Letter :2

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,
1994, the Commission had total obligations of $266.9 million and
total resources of $143.1 million.  The net unfunded $123.8 million
in obligations is to be collected from future toll revenues over the
remaining life of the Treaty. 


   OPINION ON INTERNAL CONTROLS
------------------------------------------------------------ Letter :3

We evaluated management's assertion about the effectiveness of
internal controls 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 that have a direct and
     material effect on the financial statements; and

  -- properly record, process, and summarize transactions to permit
     the preparation of financial statements in accordance with
     generally accepted accounting principles and to maintain
     accountability for assets. 

Management of the Commission fairly stated that those controls in
effect on September 30, 1994, provided reasonable assurance that
losses, noncompliance, or misstatements material to the financial
statements would be prevented or detected on a timely basis. 
Management made this assertion using the internal control and
reporting criteria set forth in the implementing guidance for the
Federal Managers' Financial Integrity Act (FMFIA) of 1982.  We found
that management's assertion is consistent with the results of our
evaluation of controls. 


   COMPLIANCE WITH SELECTED LAWS
   AND REGULATIONS
------------------------------------------------------------ Letter :4

Our tests for compliance with significant provisions of selected laws
and regulations disclosed no material instances of noncompliance. 


   UNAUDITED SUPPLEMENTARY
   INFORMATION
------------------------------------------------------------ Letter :5

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 purposes of additional analysis.  This
information has not been subjected to the auditing procedures applied
in the audit of the financial statements, and, accordingly, we
express no opinion on these schedules.  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 :6

Management has the responsibility for

  -- preparing financial statements on the basis of generally
     accepted accounting principles;

  -- establishing, maintaining, and evaluating the internal control
     structure to ensure that it provides reasonable assurance that
     the internal control objectives of FMFIA are met; and

  -- complying with applicable laws and regulations. 

We have the responsibility to obtain reasonable assurance about
whether (1) the financial statements are reliable (free of material
misstatement and presented fairly in accordance with generally
accepted accounting principles) and (2) management's assertion about
the effectiveness of internal controls is fairly stated in all
material respects based upon the control criteria in GAO's Standards
for Internal Controls in the Federal Government required by the
FMFIA.  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. 

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,

Anti-Deficiency Act,

Prompt Payment Act,

Civil Service Reform Act of 1978, as amended,

Fair Labor Standards Act, and

Accounting and Auditing Act of 1950;

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

  -- prepared Treaty related costs schedules using unaudited
     information obtained from other federal agencies; and

  -- reviewed the unaudited detailed schedule of property, plant, and
     equipment for consistency with the information presented in the
     financial statements. 

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 internal control testing to
accounting and other controls necessary to achieve the objectives
outlined in our opinion on management's assertion about the
effectiveness of 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. 

Our audit was conducted in accordance with generally accepted
government auditing standards.  We believe our audit provides a
reasonable basis for our opinions. 

Comptroller General
of the United States

January 20, 1995


FINANCIAL STATEMENT
=========================================================== 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.)



   (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.)


*** End of document. ***