Financial Audit: Panama Canal Commission's 1996 and 1995 Financial
Statements (Letter Report, 07/10/97, GAO/AIMD-97-92).

Pursuant to a legislative requirement, GAO audited the Panama Canal
Commission's financial statements for the fiscal years (FY) ended
September 30, 1996 and 1995, focusing on its: (1) internal controls; and
(2) compliance with selected applicable laws and regulations. GAO also
presented the results of its examination of the Commission's September
30, 1996 financial forecast that it will be in a position to meet its
financial liabilities on December 31, 1999.

GAO noted that: (1) the Panama Canal Commission's financial statements
present fairly, in all material respects, the Commission's financial
position as of September 30, 1996 and 1995, and the results of its
operations, changes in capital, and cash flows for the years then ended,
in conformity with generally accepted accounting principles; (2) the
underlying assumptions used to prepare the Statement of Financial
Viability as of September 30, 1996 provide a reasonable basis for
management's assertion that the Commission will be in a position to meet
its financial liabilities on December 31, 1999; (3) management's
assertion is fairly stated that internal controls in effect on September
30, 1996, provided reasonable assurance that losses, noncompliance, or
misstatements material to the financial statements would be prevented or
detected; and (4) GAO's tests for compliance with selected provisions of
certain laws and regulations disclosed no reportable instances of
noncompliance with laws and regulations for the provisions tested.

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

 REPORTNUM:  AIMD-97-92
     TITLE:  Financial Audit: Panama Canal Commission's 1996 and 1995 
             Financial Statements
      DATE:  07/10/97
   SUBJECT:  Financial statement audits
             Internal controls
             Financial management
             Foreign governments
             Independent agencies
             Land transfers
             Accounting procedures
             Projections
IDENTIFIER:  Panama Canal
             Panama
             Panama Canal Commission Dissolution Fund
             
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Cover
================================================================ COVER


Report to the Congress

July 1997

FINANCIAL AUDIT - PANAMA CANAL
COMMISSION'S 1996 AND 1995
FINANCIAL STATEMENTS

GAO/AIMD-97-92

Panama Canal Commission

(917666)


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

  FECA - Federal Employees' Compensation Act
  FMFIA - Federal Managers' Financial Integrity Act of 1982
  GAAP - generally accepted accounting principles
  OPM - Office of Personnel Management
  PCA - Panama Canal Authority

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


B-272998

July 10, 1997

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, 1996 and 1995, its assertion on internal controls, and
its compliance with laws and regulations.  The report also presents
the results of our examination of the Commission's September 30,
1996, financial forecast that it will be in a position to meet its
financial liabilities on December 31, 1999. 

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.  In February 1996, the
Panama Canal Amendments Act of 1995 (the 1995 Act)\1 reconstituted
the Commission as a wholly-owned government corporation.  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. 

For fiscal year 1995, we were required by the Panama Canal Act of
1979 to conduct an annual audit of the Commission's financial
statements.  For fiscal year 1996, the Board of Directors requested
that GAO perform the audit.\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, 1996
and 1995, and the results of its operations, changes in capital, and
cash flows for the years then ended, in conformity with generally
accepted accounting principles. 

In addition to auditing the financial statements of the Commission,
we examined the Statement of Financial Viability as of September 30,
1996, in accordance with standards for an examination of a financial
forecast established by the American Institute of Certified Public
Accountants.  Our opinion states that the underlying assumptions
provide a reasonable basis for management's assertion that the
Commission will be in a position to meet its financial liabilities on
December 31, 1999.  However, there is no assurance that the actual
results will occur as forecasted.  The ability to cover all
liabilities existing now and at December 31, 1999, depends on (1)
obtaining the budgeted levels of Canal operations and (2) future
economic events. 

Also, our opinion states that management's assertion is fairly stated
that internal controls in effect on September 30, 1996, provided
reasonable assurance that losses, noncompliance, or misstatements
material to the financial statements would be prevented or detected. 
Our 1996 tests for compliance with selected provisions of certain
laws and regulations disclosed no reportable instances of
noncompliance with laws and regulations for the provisions tested. 
Our audit was conducted in accordance with generally accepted
government auditing standards. 

The Commission operates as a rate-regulated utility.  In fiscal year
1996, approximately 75 percent of its operating revenues were
obtained from tolls and the remaining 25 percent, from nontoll
revenues, such as navigation services and electric power sales. 
Early retirement, compensation benefits for work injuries,
post-retirement medical care costs, and Office of Transition
Administration costs are being funded from Canal revenues on an
accelerated basis in order to be fully funded by 1999.  During the
period of these statements, the Commission was given the authority to
prescribe the rules for measuring vessels and levying toll rates for
the Panama Canal.\3 These rules and rates must establish the tolls at
a level calculated to recover the costs of operating and maintaining
the Canal.  In order to continue to recover all costs and fund a
number of modernization and improvement projects, the Commission's
Board of Directors approved a toll rate increase in November 1996. 
This increase is in two phases--8.2 percent on January 1, 1997, with
an additional increase of 7.5 percent on January 1, 1998.  A tonnage
measurement rate change to cover on-deck container capacity will also
be implemented on July 1, 1997. 

Regarding another transition related matter, the Commission
recognized a $10 million liability for severance pay in fiscal year
1995.  This liability was estimated based on a proposed rule by the
Office of Personnel Management (OPM) that would amend the severance
pay regulations applicable to the Commission.  As discussed in note
10 to the financial statements, management believes the proposed rule
will be issued in final in the near future.  If the regulation is not
issued as drafted, the total severance pay liability could be as much
as $68 million. 


--------------------
\1 Public Law 104-106, sec.  3522, 110 stat.  638 (1996). 

\2 Section 3526 of the 1995 Act amended section 1313 of the Panama
Canal Act of 1979 to authorize the Board of Directors, at its
discretion, 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 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. 


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

As provided by the Panama Canal Treaty of 1977, the Panama Canal
Commission will transfer the Panama Canal to the Republic of Panama
on December 31, 1999.  At that time, the Republic of Panama will
assume full responsibility for the management, operation, and
maintenance of the Canal. 

As discussed in note 14, the Republic of Panama is in the process of
establishing the entity that will assume control of the Canal on
December 31, 1999.  The entity will be known as the Panama Canal
Authority. 

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 disclosed in the Statements of Financial
Viability and in note 12 of the financial statements, as of September
30, 1996, the Commission forecasts that the present $71.5 million in
unfunded liabilities should be recovered by tolls over the remaining
life of the Treaty.  The Commission assumes that all additional
liabilities incurred between September 30, 1996, and December 31,
1999, will be funded from revenues earned during that time. 


   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 1995 through
1996.  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 ended fiscal year 1996 with a net operating loss of
$1.9 million, compared to a breakeven operation for fiscal year 1995. 
The net operating loss for 1996 was deferred as unearned costs to be
recovered from subsequent revenues. 

From fiscal years 1992 through 1996, toll and nontoll revenues
increased an average of approximately 5.5 percent annually.  Toll
revenues increased to $486.7 million, up 5.2 percent from fiscal year
1995, due mainly to an increase in Canal traffic, principally larger
vessels.  Nontoll revenues, which consist primarily of navigation
services and electric power sales, increased slightly to $165 million
during fiscal year 1996, up less than 0.6 percent from fiscal year
1995. 

During fiscal year 1996, no deductions from tolls revenue were made
for working capital requirements because prior years deductions
through fiscal year 1995 had substantially completed the financing of
the Commission's storehouse and fuel inventories.  The remaining
balance to be funded is scheduled for collection before the
termination of the Panama Canal Treaty of 1977. 

The deduction from tolls revenue for contributions for capital
expenditures decreased from $30.3 million in fiscal year 1995 to
$24.0 million in fiscal year 1996.  At fiscal year-end 1995, as
directed by the Board of Directors, the Commission increased its
capital contributions for capital expenditures by $8.3 million.  The
additional funding was necessary in order to provide for an increase
in the Commission's 1995 capital program due to the acquisition of
several unbudgeted major plant items.  Fiscal year 1996 capital fund
requirements did not require this level of funding. 

A total of $2.0 million was deducted from tolls revenue in fiscal
year 1996 to provide funding for the office that will close out the
affairs of the Commission after the termination of the Panama Canal
Treaty of 1977.  No contributions were programmed in fiscal year
1995. 

From fiscal years 1992 through 1996, total operating expenses
increased an average of approximately 5.3 percent annually.  Fiscal
year 1996 total operating expenses increased to $627.2 million, up
7.0 percent over fiscal year 1995.  The following were some of the
highlights. 

  -- Tonnage payments to the Republic of Panama increased $4.4
     million or 5.5 percent in fiscal year 1996 due to an increase in
     the number of Panama Canal Universal Measurement System net tons
     passing through the Canal. 

  -- Navigation service and control costs increased $8.0 million or
     7.6 percent, due mainly to the cost of additional resources
     required to service the record traffic levels experienced in
     fiscal year 1996 as well as increased costs for contract tug
     assistance requirements. 

  -- The increase in locks operation and maintenance costs of $19.4
     million or 28.6 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. 

  -- Administrative and general costs increased 5.1 percent in fiscal
     year 1996.  The increase was attributed principally to an
     increase in costs for advisory and assistance services related
     to treaty transition activities; employee incentive awards; and
     adjustments for minor items of property, originally purchased
     with capital funds but later determined not to meet the
     Commission's capitalization criteria. 

  -- Interest expense on the interest-bearing investment of the
     United States decreased $3.6 million or 83.6 percent in fiscal
     year 1996 primarily because the investment became fully
     amortized during the year.  The larger average cash balances
     maintained by the Commission in its U.  S.  Treasury revolving
     fund account and lower interest rates also contributed to the
     decrease. 


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

By the end of fiscal year 1996, total assets of the Commission
increased by 2.8 percent to $875 million, and total liabilities and
reserves increased by 3.0 percent to $271 million.  Capital increased
by 2.7 percent to $604 million.  The most significant changes in
individual account balances by the end of fiscal year 1996 were the
following. 

  -- Property, plant, and equipment (excluding depreciation and
     valuation allowances) increased by a net $32.2 million to $1,174
     million.  This increase was due primarily to net capital
     expenditures of $50.2 million offset in part by certain
     retirements and the transfer of assets to the Republic of Panama
     and other U.  S.  Government agencies.  Major capital additions
     to plant from capital expenditures included $14.1 million for
     the Gaillard Cut widening and straightening program; $13.1
     million for the replacement and addition of floating equipment;
     $5.3 million for improvements to electric power, communication,
     and water systems; $4.6 million for the replacement and addition
     of miscellaneous equipment; $4.1 million for the replacement of
     motor vehicles; $3.6 million for the replacement and improvement
     of facilities and buildings; $3.0 million for the replacement
     and addition of tugboats; and $1.1 million for the replacement
     of launches and launch engines. 

  -- Current assets increased by a net $35.4 million to $297 million
     due principally to an increase in cash.  Cash increased by $36.9
     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 $21.2 million to $66
     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.  These
     decreases were offset in part by the recognition of the $5.0
     million unfunded portion of the Office of Transition
     Administration costs and the $1.9 million of unrecovered costs
     from fiscal year 1996 operations. 

  -- Liabilities and reserves increased by a net $8.0 million to $271
     million primarily due to increases of $4.2 million in accounts
     payable, $4.2 million in the liability for employee's leave,
     $7.0 million for the recognition of the estimated cost for the
     Office of Transition Administration, $8.8 million in the reserve
     for lock overhauls, and $10.0 million for the establishment of a
     reserve for additional 1999 payroll costs.  Offsetting these
     increases, in part, was the amortization of $28.1 million for
     various employee benefits. 

  -- Capital increased by a net $15.7 million to $604 million,
     principally because of a $15.4 million net increase in capital
     contributions for capital expenditures being amortized. 


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

The Panama Canal Act of 1979 requires that we 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, 1996, the inflation-adjusted target was
$1,408 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 through 1996, the
net reported costs to the U.S.  Government under the Treaty amounted
to $865 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. 

James F.  Hinchman
Acting Comptroller General
of the United States


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


B-272998

To the Board of Directors
Panama Canal Commission

In our audits of the Panama Canal Commission, we found

  -- the fiscal years 1996 and 1995 financial statements were
     reliable in all material respects;

  -- the underlying assumptions used to prepare the Statement of
     Financial Viability as of September 30, 1996, provide a
     reasonable basis for management's assertion that the Commission
     will be in a position to meet its financial liabilities on
     December 31, 1999;

  -- management fairly stated that internal controls in place on
     September 30, 1996, were effective in safeguarding assets from
     material loss, assuring material compliance with laws governing
     the use of budget authority and with selected provisions of
     other relevant laws and regulations, and assuring that there
     were no material misstatements in the financial statements; and

  -- there was no reportable noncompliance with the selected
     provisions of laws and regulations we tested for the fiscal year
     ended September 30, 1996. 

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


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


      ESTIMATED SEVERANCE PAY
      LIABILITY
---------------------------------------------------------- Letter :4.1

The Commission recognized a $10 million liability for estimated
severance pay in fiscal year 1995.  This liability was calculated
based on a proposed amendment to the severance pay regulation issued
by OPM and was unchanged as of September 30, 1996.  As described in
note 10 to the financial statements, OPM has not yet issued the
amendment as a final regulation.  Management believes the amendment
will be issued in the near future.  The total liability could be as
much as $68 million if the severance pay regulation applicable to the
Commission is not amended.  This additional liability would require
the Commission to reprogram its budgetary resources. 


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

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 Financial
Viability and accompanying note 12 are presented in accordance with
the American Institute of Certified Public Accountants standards for
a partial presentation of a financial forecast, and are intended to
demonstrate the Commission's status in funding its liabilities.  As
of September 30, 1996, the Commission had total liabilities and
reserves of $271 million and total resources of $199 million.  The
Commission forecasted that the net difference of $72 million will be
collected from future toll revenues over the remaining life of the
Treaty.  The Commission assumes that any additional liabilities
incurred between September 30, 1996, and December 31, 1999, will be
funded from revenues earned during that time. 


      DISSOLUTION COSTS OF THE
      COMMISSION
---------------------------------------------------------- Letter :4.3

During fiscal year 1996, the Commission completed a study to
determine the costs associated with the dissolution of the Commission
and, as a result, established the Panama Canal Commission Dissolution
Fund as required by the Act.  The Commission will establish the
Office of Transition Administration, which will be responsible for
managing the dissolution costs and liabilities.  As discussed in note
8, the Commission estimated the liability for the costs of
dissolution at $7 million and has deposited $2 million into the fund
as of September 30, 1996.  The Commission programmed the remaining $5
million to be collected from toll revenues before 1999.  The
Commission's estimate for the dissolution fund is based on the
accomplishment of certain critical actions.  These actions include
(1) statutory and regulatory changes to limit the time frames for
some activities that are necessary to close out the affairs of the
Commission, (2) the use of successor agency personnel, and (3)
outsourcing to other U.S.  Government agencies.  Management believes
these actions will be accomplished.  However, if these planned
actions do not occur, management does not believe any additional
costs will be significant.  In addition to the Dissolution Fund, the
Commission has begun funding both current and future liabilities as
allowed by accounting principles for regulated industries. 

In addition to the severance pay liability discussed above, in fiscal
year 1996, the Commission funded the first $10 million of a total
expected $30 million reserve for additional payroll costs anticipated
in 1999.  As discussed in note 11, Commission management believes
that many employees will not take their normal leave during 1999 due
to the anticipated lump sum payout of annual leave balances early in
the year 2000.  If employees do not use their accrued leave,
additional payroll expense will be incurred.  In order to normalize
expenses, the Commission will fund the remaining $20 million reserve
for this 1999 expense over a 2-year period and has programmed this
reserve into its budgets. 

The following sections provide our opinions on the Commission's
financial statements, Statement of Financial Viability, 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 Commission's 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 STATEMENT OF
   FINANCIAL VIABILITY
------------------------------------------------------------ Letter :6

We have examined the accompanying Statement of Financial Viability as
of September 30, 1996 (the forecasted statement).  Our examination
was made in accordance with standards established by the American
Institute of Certified Public Accountants and, accordingly, included
such procedures as we considered necessary to evaluate both the
assumptions used by management and the preparation and presentation
of the forecasted statement. 

To the best of management's knowledge and belief, resources from
future operations will permit the funding of current and future
liabilities by December 31, 1999, as shown on the forecasted
statement.  The forecasted statement is not intended to be a forecast
of financial position, results of operations, or cash flows.  The
accompanying forecasted statement and this report are required by the
Panama Canal Amendments Act of 1995 (Public Law 104-106) for the
purpose of demonstrating that the Commission will be in a position to
meet its financial liabilities on December 31, 1999, and should not
be used for any other purpose. 

In our opinion, the Statement of Financial Viability as of September
30, 1996, is presented in conformity with the guidelines for
presentation of forecasted information established by the American
Institute of Certified Public Accountants, and the underlying
assumptions provide a reasonable basis for management's forecasted
statement.  However, there will usually be differences between
forecasted and actual results because events and circumstances
frequently do not occur as expected, and those differences may be
material.  We have no responsibility to update this report for events
and circumstances occurring after the date of this report. 

The Statement of Financial Viability as of September 30, 1995, is
presented for comparative purposes.  We did not examine this
forecasted statement and, accordingly, express no opinion on the
statement. 


   OPINION ON MANAGEMENT'S
   ASSERTION ABOUT THE
   EFFECTIVENESS OF INTERNAL
   CONTROLS
------------------------------------------------------------ Letter :7

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 selected
     provisions of laws and regulations that have a direct and
     material effect on the financial statements or that are listed
     in the Office of Management and Budget 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
place on September 30, 1996, provided reasonable assurance that
losses, noncompliance, or misstatements material in relation to the
financial statements would be prevented or detected on a timely
basis.  Management made this assertion based on criteria established
under the Federal Managers' Financial Integrity Act of 1982 (FMFIA)
and the Office of Management and Budget Circular A-123, Revised, June
21, 1995, Management Accountability and Control. 


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

Our tests for compliance with selected provisions of certain laws and
regulations disclosed no 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 :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 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 :10

Management is responsible for

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

  -- preparing the Statement of Financial Viability in accordance
     with the American Institute of Certified Public Accountants
     standards for a partial presentation of prospective financial
     information;

  -- 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), (2)
management's assertion that the assumptions underlying the Statement
of Financial Viability provide a reasonable basis for the forecasted
statement, and (3) management's assertion about the effectiveness of
internal controls is fairly stated, in all material respects, based
on criteria established under FMFIA and the Office of Management and
Budget Circular A-123, Revised, June 21, 1995, Management
Accountability and Control.  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 and the Statement of
     Financial Viability;

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

  -- evaluated the overall presentation of the financial statements
     and the Statement of Financial Viability;

  -- examined, on a test basis, evidence supporting the assumptions
     used in the preparation of the Statement of Financial Viability;

  -- 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,

Panama Canal Commission Authorization Act for Fiscal Year 1996,

Panama Canal Amendments Act of 1995,

Antideficiency Act,

Prompt Payment Act,

Civil Service Reform Act of 1978, as amended,

Fair Labor Standards Act, and

Law relating to severance pay and implementing regulations;

  -- 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. 


   COMMISSION COMMENTS
----------------------------------------------------------- Letter :11

In commenting on a draft of this report, Commission management
concurred with the facts and conclusions in our report. 

Robert W.  Gramling
Director, Corporate Audits
 and Standards

January 24, 1997, except for
note 14, as to which the date
is June 11, 1997


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.)

   Statements of Financial
   Viability

   (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. ***