Financial Audit: Panama Canal Commission's 1995 and 1994 Financial
Statements (Letter Report, 03/29/96, GAO/AIMD-96-61).

This report presents the results of GAO's audits of the Panama Canal
Commission's financial statements for fiscal years 1995 and 1994. In
GAO's opinion, the Commission's financial statements present fairly, in
all material respects, its financial position for those fiscal years,
and the results of its operations, changes in capital, and cash flows in
conformity with generally accepted accounting principles. GAO believes
that although improvements are needed in internal controls governing the
review of the classification of obligations for consultant services
under congressional spending limitations, internal controls reasonably
ensured that losses, noncompliance, or misstatements material to the
financial statements would be prevented or detected. GAO did find an
Antideficiency Act violation related to noncompliance with a
congressional spending limitation. But the noncompliance was not
material to the financial statements, and management has instituted
internal controls that should prevent future noncompliance.

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

 REPORTNUM:  AIMD-96-61
     TITLE:  Financial Audit: Panama Canal Commission's 1995 and 1994 
             Financial Statements
      DATE:  03/29/96
   SUBJECT:  Financial statement audits
             Internal controls
             Financial management
             Foreign governments
             Independent agencies
             Land transfers
             Accounting procedures
             Information systems
IDENTIFIER:  Panama Canal Commission Fund
             Panama Canal
             
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Cover
================================================================ COVER


Report to the Congress

March 1996

FINANCIAL AUDIT - PANAMA CANAL
COMMISSION'S 1995 AND 1994
FINANCIAL STATEMENTS

GAO/AIMD-96-61

Panama Canal Commission

(917665)


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

  FECA - Federal Employees' Compensation Act
  FMFIA - Federal Managers' Financial Integrity Act of 1982
  OMB - Office of Management and Budget

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


B-262043

March 29, 1996

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 fiscal years ended
September 30, 1995 and 1994, its assertion on internal controls, and
its compliance with laws and regulations. 

On October 1, 1979, the Commission was established as an executive
agency to carry out the responsibilities of the United States with
respect to the Panama Canal Treaty of 1977.\1 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. 

During the period covered by these audits, we were required by the
Panama Canal Act of 1979 to conduct an annual audit of the
Commission's financial statements.\2 Our opinion states that the
Panama Canal Commission's financial statements present fairly, in all
material respects, its financial position as of September 30, 1995
and 1994, 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, our opinion states that management's assertion is fairly stated
that, although improvements are needed in internal controls related
to the review of the classification of obligations for consultant
services under congressional spending limitation, internal controls
in effect on September 30, 1995, provided reasonable assurance that
losses, noncompliance, or misstatements material to the financial
statements would be prevented or detected. 

In conjunction with our 1995 tests for compliance with selected
provisions of certain laws and regulations, management disclosed an
Antideficiency Act [31 U.S.C.  Section 1341 (a)(1)] violation related
to noncompliance with a congressional spending limitation.  The
noncompliance was not material to the financial statements. 
Management has implemented internal controls which, if properly
implemented and adhered to, should prevent future noncompliances.  No
other reportable instances of noncompliance with laws and regulations
were disclosed for the provisions tested.  Our audit was conducted in
accordance with generally accepted government auditing standards. 

During the course of the 1995 audit, we also noted that the
Commission significantly improved general controls over the
computerized information systems.  We had identified matters for
improvement and communicated them to the Commission in a previous
management letter.\3 The Commission has corrected, or is in the
process of correcting, all general control weaknesses identified and
reported in that letter.  We noted no internal control weaknesses
during our audit of their fiscal year 1995 financial statements that
needed to be communicated to the Commission in a separate management
letter. 


--------------------
\1 Subsequent to the period covered by these audits, section 3522 of
the Panama Canal Amendments Act of 1995 (1995 Act), Public Law No. 
104-106, February 10, 1996, amended section 1101 of the Panama Canal
Act of 1979 reconstituting the Commission as a wholly owned
government corporation.  As such, it will now be subject to chapter
91 of title 31, United States Code. 

\2 Section 3526 of the 1995 Act amended section 1313 of the Panama
Canal Act of 1979 to authorize the Board of Directors to direct the
Commission to hire independent auditors to conduct the audit in lieu
of the Comptroller General.  In addition to conducting the audit of
the Commission's financial statements, the auditor is to examine the
Commission's forecast that it will be in a position to meet its
financial liabilities on December 31, 1999. 

\3 Letter to the Chairman, Board of Directors, Panama Canal
Commission (GAO/AIMD-95-104ML, March 31, 1995). 


   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 9 to the financial statements, as of September 30, 1995, the
Commission forecasts that the present $90.7 million in unfunded
liabilities should be covered by tolls over the remaining life of the
Treaty.  We did not examine the Commission's forecast and express no
opinion on it.  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
1995 approximately 74 percent of its operating 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, and post-retirement medical
care costs are being funded from Canal revenues on an accelerated
basis in order to be fully funded by 1999.  During the period of our
audit, the President of the United States served as the rate
regulator for tolls, which are established at a level to recover the
costs of operating and maintaining the Canal.\4


--------------------
\4 Sections 3527 and 3528 of the 1995 Act amended sections 1601 and
1604 of the Panama Canal Act of 1979, respectively, to authorize the
Commission to prescribe the rules for measuring vessels and levying
tolls for the Panama Canal. 


   ANALYSIS OF THE COMMISSION'S
   FINANCIAL STATEMENTS
------------------------------------------------------------ Letter :2

The following is taken from management's analysis of the Commission's
financial statements.  The analysis generally explains the changes in
major financial statement line items from fiscal years 1994 to 1995. 
Our opinions on these financial statements do not extend to the
analysis presented below, and, accordingly, we express no opinion on
this analysis.  While we do not express an opinion on the analysis,
we found no material inconsistencies with the financial statements
taken as a whole. 


      RESULTS OF OPERATIONS
---------------------------------------------------------- Letter :2.1

The Commission's operations ended fiscal year 1995 at breakeven,
compared to the net operating revenue of $1.7 million for fiscal year
1994.  The net operating revenue for 1994 was applied to the $0.6
million outstanding balance of unrecovered costs from fiscal year
1992 operations and the $1.1 million balance left was paid to the
Republic of Panama on March 9, 1995. 

From fiscal years 1991 through 1995, toll and nontoll revenues
increased an average of approximately 3.8 percent annually.  Fiscal
year 1995 total operating revenues increased to $586 million, up 6.9
percent from fiscal year 1994 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 $164 million during fiscal year 1995, up 12.6 percent from fiscal
year 1994. 

The deduction from tolls revenue for working capital was increased
from $5 million in fiscal year 1994 to $10 million in fiscal year
1995 in order to substantially complete the financing of the
Commission's storehouse and fuel inventories. 

The deduction from tolls revenue for contributions for capital
expenditures increased from $11.5 million in fiscal year 1994 to
$30.3 million in fiscal year 1995.  The increase was attributable to
the funding required for the increase in the Commission's capital
program in 1995 for the acquisition of the crane TITAN and to provide
funding for anticipated additional capital expenditures for
replacements and additions to the tug fleet, acceleration of the
Gaillard Cut widening project and the purchase of additional towing
locomotives. 

From fiscal years 1991 through 1995, total operating expenses
increased an average of approximately 4.0 percent annually.  Fiscal
year 1995 total operating expenses increased to $586 million, up 7.3
percent over fiscal year 1994.  The following were some of the
highlights: 

  Tonnage payments to the Republic of Panama increased $9.8 million
     or 13.9 percent in fiscal year 1995.  The additional net tonnage
     transiting the Canal produced $7.6 million of the increase and a
     rate change from 36 cents to 37 cents per ton accounted for $2.2
     million of the change. 

  Navigation service and control costs increased $13.6 million or
     14.8 percent due mainly to the cost of additional resources
     required to service the record traffic levels experienced in
     fiscal year 1995. 

  The increase in locks operation costs of $10.4 million or 18.2
     percent reflected the cost of additional crews required for the
     increased level of traffic, additional locks maintenance and
     repair projects, and increased costs for locks overhaul
     projects. 

  Depreciation expense increased $5.7 million or 22.1 percent in
     fiscal year 1995 principally as the result of (1) an adjustment
     to the service life for certain assets, (2) the change in the
     capitalization limit from $1,500 to $5,000 for minor items
     acquired in fiscal year 1995, and (3) the depreciation for new
     additions to plant during the fiscal year.  Partially offsetting
     these increases was a credit adjustment resulting from the
     amortization of capital contributions of assets acquired prior
     to fiscal year 1992. 

  Interest expense on the interest-bearing investment of the United
     States decreased $3.2 million or 42.2 percent in fiscal year
     1995 because of the larger average cash balances maintained by
     the Commission in its U.S.  Treasury revolving fund account and
     lower interest rates. 

  Other operating expenses increased $5.8 million or 18.8 percent
     primarily because of an increase in the provision for marine
     accident claims during the year related to accidents that
     occurred during fiscal year 1995. 


      ASSETS, LIABILITIES, AND
      CAPITAL
---------------------------------------------------------- Letter :2.2

By the end of fiscal year 1995, total assets of the Commission
increased by 3.3 percent to $851 million, and total liabilities and
reserves decreased by 1.6 percent to $263 million.  Capital increased
by 5.6 percent to $588 million.  The most significant changes in
individual account balances by the end of fiscal year 1995 were the
following: 

  Property, plant, and equipment (excluding depreciation and
     valuation allowances) increased by a net $38 million to $1,141
     million.  This increase was due primarily to net capital
     expenditures of $38.7 million and the acquisition of several
     plant items from other U.S.  government agencies.  Major capital
     additions to plant from capital expenditures included $9.4
     million for the Canal widening/straightening program; $8.0
     million for the replacement and improvement of facilities and
     buildings; $6.6 million for the replacement and addition of
     floating equipment; $5.2 million for the replacement and
     addition of miscellaneous equipment; $4.0 million for
     improvements to electric power, communication, and water
     systems; $2.6 million for the replacement of motor vehicles; and
     $1.6 million for the replacement of launches and launch engines. 

  Current assets increased by a net $54 million to $262 million due
     principally to an increase in cash.  Cash increased by $46.8
     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 $26 million to $87 million. 
     This was due principally to the amortization of deferred charges
     for early retirement, compensation benefits for work injuries,
     and post-retirement medical care costs. 

  Liabilities and reserves decreased by a net $4.2 million to $263
     million.  The major reason for the net decrease included a
     decrease of $26.9 million for certain employee benefits, offset
     in part by increases in the liabilities for severance pay,
     accounts payable, employees' leave, marine accident claims, and
     in the reserve for lock overhauls. 

  Capital increased by a net $31 million to $588 million, principally
     because of a $21.4 million net increase in capital contributions
     for capital expenditures and a $10.0 million increase in
     contributions for working capital. 


   TREATY RELATED COSTS
------------------------------------------------------------ Letter :3

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, 1995, the inflation-adjusted target was
$1,367 million. 

U.S.  Government agencies that provided services to the former Panama
Canal Company and Canal Zone Government provided the direct and
indirect cost information including the cost of property transferred
to the Republic of Panama as required under the 1977 Treaty.  This
information is presented in unaudited supplementary schedules to the
Commission's financial statements, and, accordingly, we express no
opinion on these schedules.  From fiscal years 1980 to 1995, the net
reported costs to the U.S.  Government under the Treaty amounted to
$791 million, which is less than the act's inflation-adjusted target. 

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-262043

To the Board of Directors
Panama Canal Commission

Our audits of the Panama Canal Commission found

  the fiscal years 1995 and 1994 financial statements to be reliable
     in all material respects;

  although certain internal controls to help assure compliance with a
     statutory spending limitation should be improved, management
     fairly stated that internal controls in place on September 30,
     1995, were effective in safeguarding assets from material loss,
     assuring material compliance with laws governing the use of
     budget authority and with other relevant laws and regulations,
     and assuring that there were no material misstatements in the
     financial statements; and

  reportable noncompliance with laws and regulations we tested for
     the fiscal year ended September 30, 1995. 

We discussed a draft of this report with the Commission's Chief
Financial Officer who agreed with our findings and conclusions. 

Described below are significant matters considered in performing our
audit and forming our conclusions. 


   SIGNIFICANT MATTERS
------------------------------------------------------------ Letter :4


      ANTIDEFICIENCY ACT VIOLATION
---------------------------------------------------------- Letter :4.1

The Commission's management identified and reported an instance of
reportable noncompliance with laws and regulations and certain
related controls.  The amount of the violation was not material to
the financial statements. 

In January 1996, the Commission reported to us a violation of the
Antideficiency Act [31 U.S.C.  Section 1341 (a)(1)] for the fiscal
year 1995 Panama Canal Revolving Fund.  The Commission exceeded its
$50,030,000 congressional spending limitation for administrative
expenses, as set forth in the fiscal year 1995 appropriation (Public
Law 103-331) by $160,225.  Management determined that the violation
resulted from a weakness in the Commission's system of internal
controls related to the review of the classification of obligations
for consultant services.  Management has taken steps to improve the
specific control weaknesses related to this incident.  As required in
31 U.S.C.  Section 1351, the Commission has reported all relevant
facts of this Antideficiency Act violation and a statement of actions
taken to the President, the Office of Management and Budget (OMB),
the Speaker of the House of Representatives, and the President of the
Senate. 


      LIQUIDATION OF LIABILITIES
---------------------------------------------------------- Letter :4.2

As discussed in note 9 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.  Note 9 indicates that, as of September 30,
1995, the Commission had total liabilities and reserves of $262.7
million and total resources of $172.0 million.  The Commission
forecasted that the net unfunded $90.7 million in liabilities should
be collected from future toll revenues over the remaining life of the
Treaty.  We did not examine the Commission's forecast and,
accordingly, express no opinion on the forecast. 

The following sections provide our opinions on the Commission's
financial statements and assertion on internal controls, and our
report on the Commission's compliance with laws and regulations we
tested.  This section also discusses the information presented in the
unaudited supplemental schedules and the scope of our audit. 


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

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

  assets, liabilities, and capital;

  operating revenue and expenses;

  changes in capital; and

  cash flows. 


   OPINION ON MANAGEMENT'S
   ASSERTION ABOUT THE
   EFFECTIVENESS OF INTERNAL
   CONTROLS
------------------------------------------------------------ Letter :6

We evaluated management's assertion about the effectiveness of its
internal controls designed to

  safeguard assets against loss from unauthorized acquisition, use,
     or disposition;

  assure the execution of transactions in accordance with laws
     governing the use of budget authority and with other laws and
     regulations that have a direct and material effect on the
     financial statements or that are listed in OMB audit guidance
     and could have a material effect on the financial statements;
     and

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

Management of the Commission fairly stated that those controls in
effect on September 30, 1995, provided reasonable assurance that
losses, noncompliance, or misstatements material to the financial
statements would be prevented or detected on a timely basis. 
Management of the Commission also fairly stated the need to improve
certain internal controls for review of the classification of
obligations for consultant services, as described above.  These
weaknesses in internal controls, although not considered to be
material to the financial statements, represent deficiencies in the
design or operations of internal controls which could adversely
affect the entity's ability to meet the internal control objectives
to assure the execution of transactions in accordance with laws and
regulations or meet OMB criteria for reporting matters under the
Federal Managers' Financial Integrity Act (FMFIA) of 1982. 

Management made this assertion based upon criteria established under
FMFIA and OMB Circular A-123, Internal Control Systems. 


   COMPLIANCE WITH LAWS AND
   REGULATIONS
------------------------------------------------------------ Letter :7

Except as noted above, our tests for compliance with selected
provisions of certain laws and regulations disclosed no other
instances of noncompliance that would be reportable under generally
accepted government auditing standards.  However, the objective of
our audit was not to provide an opinion on overall compliance with
laws and regulations.  Accordingly, we do not express such an
opinion. 


   UNAUDITED SUPPLEMENTARY
   INFORMATION
------------------------------------------------------------ Letter :8

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,
we found no material inconsistencies with the financial statements
taken as a whole. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :9

Management is responsible for

  preparing the annual financial statements in conformity with
     generally accepted accounting principles;

  establishing, maintaining, and assessing the internal control
     structure to provide reasonable assurance that the broad control
     objectives of FMFIA are met; and

  complying with applicable laws and regulations. 

We are responsible for obtaining reasonable assurance about whether
(1) the financial statements are reliable (free of material
misstatement and presented fairly, in all material respects, in
conformity 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 criteria
established under FMFIA and OMB Circular A-123, Internal Control
Systems.  We are also responsible for testing compliance with
selected provisions of certain 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;

  obtained an understanding of the internal control structure related
     to safeguarding of assets, compliance with laws and regulations,
     and financial reporting;

  tested relevant internal controls over safeguarding, compliance,
     and financial reporting and evaluated management's assertion
     about the effectiveness of internal controls;

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

Panama Canal Act of 1979,

Antideficiency 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

  compared 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, such as those controls
relevant to preparing statistical reports and ensuring efficient
operations.  We limited our internal control testing to those
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 internal control
structure, 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. 

We did our work in accordance with generally accepted government
auditing standards. 

Comptroller General
of the United States


January 19, 1996, except for
note 12, as to which the date
is February 10, 1996


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.)



   (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. ***