Financial Audit: District of Columbia Highway Trust Fund's 1996 Financial
Statements (Letter Report, 12/15/97, GAO/AIMD-98-30).

Pursuant to legislative requirement, GAO reviewed the: (1) financial
statements of the District of Columbia Highway Trust Fund for the
14-month period which ended September 30, 1996; (2) 5-year forecasted
statements of the Fund expected conditions and operations; and (3)
Fund's internal controls and its compliance with the laws and
regulations during that 14-month period.

GAO noted that: (1) GAO was unable to give an opinion on the financial
statements of the Fund because the lack of adequate documentation
limited the scope of its work; (2) specifically, the District did not
provide evidence for $3.7 million (36 percent of the $10.3 million) in
capital appropriated expenditures and the related liability to the
Capital Operating account, thus the financial statements may be
unreliable; (3) material weaknesses in internal controls resulted in
ineffective controls over: (a) safeguarding assets, specifically revenue
cash receipts and the related accounts receivable, from material loss;
and (b) assuring that there were no material misstatements in amounts
reported in the financial statements, specifically capital appropriated
expenditures, the liability to the Capital Operating account, and
revenue; (4) in addition, GAO identified material weaknesses in the
computer system general controls over physical and logical security,
segregation of duties, and service continuity; (5) GAO was unable to
report on compliance with laws and regulations because the District
lacked adequate documentation; and (6) also because of lack of adequate
documentation, GAO was unable to give an opinion on whether the
underlying assumptions and methodology used to develop the Fund's 5-year
forecasted statements provide a reasonable basis for such statements or
whether the statements are presented in conformity with guidelines
established by the American Institute of Certified Public Accountants.

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

 REPORTNUM:  AIMD-98-30
     TITLE:  Financial Audit: District of Columbia Highway Trust Fund's 
             1996 Financial Statements
      DATE:  12/15/97
   SUBJECT:  Financial statement audits
             Federal aid for highways
             Internal controls
             Fuel taxes
             Municipal governments
             Computer security
             Financial management systems
             Accounting procedures
             Systems conversions
             Auditing standards
IDENTIFIER:  DC Highway Trust Fund
             DC Revolving Fund
             District of Columbia
             
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Cover
================================================================ COVER


Report to Congressional Committees and Subcommittees

December 1997

FINANCIAL AUDIT - DISTRICT OF
COLUMBIA HIGHWAY TRUST FUND'S 1996
FINANCIAL STATEMENTS

GAO/AIMD-98-30

D.C.  Highway Trust Fund

(913796)


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

  AICPA - American Institute of Certified Public Accountants
  CAFR - Comprehensive Annual Financial Report
  CE - construction engineering
  CFO - Chief Financial Officer
  DPW - Department of Public Works
  FABS - Federal Aid Billing System
  FHWA - Federal Highway Administration
  FMS - Financial Management System
  LADS - Labor Acquisition and Distribution System
  LAN - local area network
  OIS - Office of Information Systems
  OTR - Office of Tax and Revenue

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


B-278524

December 15, 1997

Congressional Committees and Subcommittees

This report presents the results of our efforts to audit the
financial statements of the District of Columbia Highway Trust Fund
(the Fund) for the 14-month period ended September 30, 1996, and to
examine the 5-year forecasted statements of the Fund's expected
conditions and operations.  These financial statements and the 5-year
forecasted statements are the responsibility of the District's Chief
Financial Officer, the administrator of the Fund.  This report also
presents the results of our efforts to evaluate the Fund's internal
controls as of September 30, 1996, and its compliance with laws and
regulations during that 14-month period. 

We conducted our work pursuant to the provisions of section 3(e) of
the District of Columbia Emergency Highway Relief Act and in
accordance with generally accepted government auditing standards. 

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Appropriations and its
Subcommittee on the District of Columbia; the House Committee on
Appropriations and its Subcommittee on the District of Columbia; the
Senate Committee on Governmental Affairs and its Subcommittee on
Oversight of Government Management, Restructuring and the District of
Columbia; and the House Committee on Government Reform and Oversight
and its Subcommittee on the District of Columbia.  In addition,
copies will be sent to the District of Columbia's Mayor, Chief
Financial Officer, and Acting Inspector General, as well as the
District of Columbia Auditor and the District of Columbia Financial
Responsibility and Management Assistance Authority. 

If you have any questions regarding this report, please contact me at
(202) 512-4476. 

Gloria L.  Jarmon
Director, Civil Audits

List of Congressional Committees and Subcommittees

The Honorable John H.  Chafee
Chairman
The Honorable Max S.  Baucus
Ranking Minority Member
Committee on Environment and Public Works
United States Senate

The Honorable John W.  Warner
Chairman
Subcommittee on Transportation and Infrastructure
Committee on Environment and Public Works
United States Senate

The Honorable Bud Shuster
Chairman
The Honorable James L.  Oberstar
Ranking Minority Member
Committee on Transportation and Infrastructure
House of Representatives

The Honorable Thomas E.  Petri
Chairman
The Honorable Nick J.  Rahall, II
Ranking Minority Member
Subcommittee on Surface Transportation
Committee on Transportation and Infrastructure
House of Representatives


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


B-278524

To the Mayor of the
District of Columbia

This report presents the results of our efforts to audit the
financial statements of the District of Columbia's Highway Trust Fund
(the Fund) for the initial 14-month period ended September 30, 1996,
and to examine the 5-year forecasted statements of the Fund's
expected conditions and operations, as required by section 3(e) of
the District of Columbia Emergency Highway Relief Act.\1 This report
also presents the results of our efforts to evaluate internal
controls as of September 30, 1996, and compliance with laws and
regulations during the 14-month period. 

In 1995, the U.S.  Department of Transportation's Federal Highway
Administration (FHWA), expressed concerns about the District's
ability to provide matching funds for federal aid highway projects
and maintain its existing highway system.\2

To address these concerns, section 2 of the act\3 temporarily waived
the requirement for the District to provide matching funds for
federal aid highway projects for fiscal years 1995 and 1996.  In
addition, section 3(a) of the act\4

required the District to establish by December 31, 1995, a dedicated
highway trust fund whose revenues are to be used to repay the
temporarily waived amounts and provide matching funds for the
District's federal aid highway projects financed by FHWA.  This
dedicated trust fund is required to include amounts equivalent to
receipts from motor fuel taxes\5 and to be separate from the
District's General Fund.\6

The District reported motor fuel tax revenues of $35 million from
October 1, 1995, to September 30, 1996.  Until May 1996, the taxes
collected were not segregated from the General Fund, as required by
the act.  However, on May 24, 1996, the District established the
Highway Trust Fund account and transferred to it $18.3
million--representing the amount equivalent to motor fuel taxes
collected from October 1, 1995, through April 25, 1996--from the
General Fund.\7

Subsequently, the remaining monthly motor fuel tax collections were
deposited into the General Fund and equivalent amounts were
transferred to the Highway Trust Fund account. 

The act establishes priorities for using the Fund's revenues to pay
the District's portion of federal aid highway project costs.  The
first priority of the Fund is to repay FHWA for the District's share
of federal aid highway project costs temporarily waived during fiscal
years 1995 and 1996.  For fiscal years 1995 and 1996, the District
will have to repay temporarily waived amounts of approximately $2.2
million and $8 million, respectively.\8 The remaining priorities of
the Fund are to reimburse the District for local capital appropriated
expenditures, which are (1) the District's share (normally at 20
percent) of federal aid highway project costs, (2) the salaries
(estimated at $6 million per year) of District personnel and excess
overhead costs (construction engineering cost overruns that exceed 15
percent) associated with federal aid projects, and other non-FHWA
participating costs,\9 and (3) the funding for local (100 percent
District) capital and maintenance projects.  All federal and local
capital appropriated expenditures are to be paid out of the District
of Columbia Department of Public Works' (DPW) Capital Operating
account and then reimbursed by either FHWA or the Fund. 

In addition to the Highway Trust Fund required by section 3(a) of the
act, section 4(b)\10 required the District to establish an
independent revolving fund account, separate from its capital
operating account, to make prompt payments to contractors working on
federal aid highway projects.  On May 28, 1996, the District
established the Revolving Fund account by transferring $5 million
from the Capital Operating account.  The transferred amount is part
of the Fund's liability to the District's Capital Operating account
as of September 30, 1996. 

We are required by section 4(e) of the act\11 to (1) review and
report on the District's establishment of the designated Highway
Trust Fund and related independent Revolving Fund account and (2)
audit the Fund and submit a report to the Congress by December 31 of
each year, beginning with the period ended September 30, 1996.  The
audit is on the Fund's financial condition and results of operations
for fiscal years ending September 30 and the Fund's 5-year forecasted
statements.  We previously reported to the Congress in November 1996
and April 1997,\12 that the first audit of the Fund's financial
condition and 5-year forecasted statements could not be completed by
the due date because the District would not have critical financial
data for us to audit until the completion of the fiscal year 1996
District's Comprehensive Annual Financial Report (CAFR), dated
January 20, 1997.  In addition, the remaining requested information
(final compiled financial statements and responses to issues we had
raised) and the 5-year forecasted statements were not received until
July 1997.  The District's Chief Financial Officer has already
informed us that these critical financial data, which include
year-end closing entries\13 and the subsequently prepared financial
statements, will not be available for the 1997 fiscal year audit
until February 1998 at the earliest.  For this reason, we will
continue to be unable to perform the annual audits in time to meet
the future December 31 reporting deadlines required by the act. 

In our attempt to audit the Fund for the 14-month period ended
September 30, 1996, we found the following: 

  -- We are unable to give an opinion on the financial statements of
     the Fund because the lack of adequate documentation limited the
     scope of our work.  Specifically, the District did not provide
     evidence for $3.7 million (36 percent of the $10.3 million) in
     capital appropriated expenditures and the related liability to
     the Capital Operating account.\14 Thus, the financial statements
     may be unreliable. 

  -- Material weaknesses in internal controls resulted in ineffective
     controls over (1) safeguarding assets, specifically revenue cash
     receipts, and/or the related accounts receivable, from material
     loss and (2) assuring that there were no material misstatements
     in amounts reported in the financial statements, specifically
     capital appropriated expenditures, the liability to the Capital
     Operating account, and revenue.  In addition, we identified a
     material weakness in computer system general controls over (1)
     physical and logical security, (2) segregation of duties, and
     (3) service continuity. 

  -- We are unable to report on compliance with laws and regulations
     because the District's lack of adequate documentation, which is
     discussed later in this report, limited the scope of our work. 

  -- Also because of the lack of adequate documentation, we are
     unable to give an opinion on whether the underlying assumptions
     and methodology used to develop the Fund's 5-year forecasted
     statements provide a reasonable basis for such statements or
     whether the statements are presented in conformity with
     guidelines established by the American Institute of Certified
     Public Accountants (AICPA). 

The following sections provide additional detail concerning our
conclusions and the scope of our efforts. 


--------------------
\1 Public Law 104-21, 109 Stat.  257 (1995), D.C.  Code Ann.  section
7-134.2(e) (1997 Supplement). 

\2 Approximately 423 of the 1,020 miles of streets and highways and
most of the bridges under the District's jurisdiction are eligible
for federal aid. 

\3 D.C.  Code Ann.  section 7-134.1 (1997 Supplement). 

\4 D.C.  Code Ann.  section 7-134.2 (1997 Supplement). 

\5 Motor fuel tax is an excise tax imposed at the wholesale level on
motor fuel sales (including gasoline, diesel fuel, kerosene, heating
oil, and all combustible gases and liquids suitable for the
generation of power for motor vehicles) to retailers or directly to
end users--such as construction, bus, and other companies--who
consume that fuel within the District. 

\6 Unless prohibited by law, the District's cash from all funds is
combined into the General Fund's cash management pool, which is used
to make transfers to all the District's checking accounts as needed. 
Any cash not needed for immediate disbursement is invested. 

\7 The District enacted emergency legislation that was effective for
only 90 days on December 8, 1995, to establish the Fund.  The Fund's
existence was continued through a series of emergency acts and a
temporary law until a permanent provision of the law was adopted and
became effective on April 9, 1997--D.C.  Law 11-184, section 102, 43
DCR 4265, 44 DCR 2379, D.C.  Code Ann.  section 7-134.4 (1997
Supplement).  The District has been required since the adoption of
the first piece of emergency legislation to deposit into the Fund, on
a monthly basis, an amount equivalent to all receipts from taxes,
fees, and civil fines and penalties collected by the District after
September 30, 1995, pursuant to the motor vehicle fuel tax law set
forth in D.C.  Code Ann.  sections 47-2301 et seq. 

\8 As required by section 3(c) of the act, D.C.  Code Ann.  section
7-134.2(c) (1997 Supplement), half of the balance of these amounts is
to be repaid in each of the two fiscal years following those in which
the amounts were temporarily waived.  For example, one-half of the
$2.2 million waived in fiscal year 1995 was due and repaid as of
September 30, 1996, and the remaining half was due and repaid at the
end of fiscal year 1997.  Likewise, of the $8 million waived in
fiscal 1996, half was due and repaid at the end of fiscal year 1997
with the remaining half due at the end of fiscal year 1998. 

\9 These include the District's expenditures for costs not eligible
under the federal aid highway program, such as the costs for cleaning
sewers, storm drain improvements, and retaining walls. 

\10 D.C.  Code Ann.  section 7-134.3(b). 

\11 D.C.  Code Ann.  section 7-134.3(e). 

\12 Highway Fund Audit (GAO/AIMD-97-14R, November 4, 1996) and Status
of Information Needed to Complete Financial Audit of the District of
Columbia's Dedicated Highway Fund for Fiscal Year 1996
(GAO/AIMD-97-73R, April 3, 1997). 

\13 In order to perform the year-end closing process, first
expenditures and then revenues must be considered because grant
revenues are dependent on the expenditure levels.  Only after
receiving all pertinent vendor data (invoices and other documentation
that can take as long as 6 weeks after the fiscal year-end to
receive) can District staff complete the process of calculating
earned revenues and the related federal receivables and posting all
adjustments and accruals.  District officials stated that these steps
have taken from 2 to 3-1/2 months after receipt of vendor data. 

\14 Once non-FHWA federal aid or local highway project costs are paid
by the District, the amount to be reimbursed by the Fund is charged
to capital appropriated expenditures and a liability to the
District's Capital Operating account is established. 


   DISCLAIMER OF OPINION ON
   FINANCIAL STATEMENTS
------------------------------------------------------------ Letter :1

We are unable to give an opinion on the financial statements of the
Fund for the 14-month period ended September 30, 1996, because the
District could not provide detailed supporting documentation for $3.7
million (36 percent of the $10.3 million) in capital appropriated
expenditures and 24 percent of the related liability to the Capital
Operating account.  As a result, we are unable to determine if the
financial statements' presentation of the capital appropriated
expenditures and the related liability to the Capital Operating
account is reliable.  A more detailed discussion of the documentation
problem is provided in the next section. 


   STATEMENT ON INTERNAL CONTROLS
------------------------------------------------------------ Letter :2

We gained an understanding of internal controls designed to

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

  -- assure the execution of transactions in accordance with
     management's authority and with selected provisions of those
     laws and regulations that have a direct and material effect on
     the Fund's financial statements; and

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

The purpose of our work was to determine our procedures for auditing
the financial statements, not to express an opinion on internal
controls.  However, internal controls were ineffective as a result of
material weaknesses found over (1) safeguarding assets, specifically
revenue cash receipts and the related accounts receivable, from
material loss and (2) assuring that there were no material
misstatements in amounts reported in the financial statements,
specifically capital appropriated expenditures, the liability to the
Capital Operating account, and revenue.  In addition, we identified a
material weakness in computer system general controls over (1)
physical and logical security, (2) segregation of duties, and (3)
service continuity. 

A material weakness is a condition in which the design or operation
of one or more of the internal control elements does not reduce to a
relatively low level the risk that errors or irregularities in
amounts that would be material to the financial statements may occur
and not be detected promptly by employees in the normal course of
performing their duties.  Our internal control work would not
necessarily disclose all material weaknesses.  The following
deficiencies identified in internal controls may adversely affect the
quality of data on which management decisions are based.  Unaudited
information reported by the Fund, including the 5-year forecasted
statements, may also contain misstatements resulting from these
deficiencies. 


      CAPITAL APPROPRIATED
      EXPENDITURES
---------------------------------------------------------- Letter :2.1

The District did not provide adequate documentation to support their
$3.4 million year-end closing adjustment\15 and $266,000 for six
intra-District voucher payments\16 charged to capital appropriated
expenditures.  Without detailed supporting documentation, the
validity of $3.7 million (36 percent of the $10.3 million) in capital
appropriated expenditures, as well as the related liability to the
Capital Operating account, could not be determined.  Even though
procedures for maintaining documentation for all payments existed,
DPW officials stated that the support for the six intra-District
voucher payments could not be located. 

The District does not have procedures for maintaining detail-level
support for the year-end closing adjustment and officials stated that
the process for going back to trace these costs back to the detailed
transaction level is cumbersome.  As a result of our attempt to audit
the Fund, DPW acknowledged the need to establish procedures to ensure
that more detailed transaction information is available to support
future audits of the Fund. 

In addition, the District did not seek FHWA reimbursement for
construction engineering (CE) cost overruns\17 of $2.6 million
included in the above mentioned year-end closing adjustment.  CE cost
overruns of up to 15 percent of the annual aggregate federal aid
project construction costs are eligible for FHWA reimbursement.  Any
amounts above the 15 percent reimbursement ceiling would be charged
to the Fund.  However, the District only sought reimbursement for
budgeted costs and did not seek FHWA reimbursement for the CE cost
overruns of up to the above 15 percent.  On July 8, 1997, FHWA
notified the District that it could seek reimbursement of the $2.6
million of CE cost overruns pursuant to section 106 (c) of title 23,
United States Code, and its implementing regulation in 23 C.F.R. 
140.205.  Since no CE cost overruns were submitted for FHWA
reimbursement, the District charged the Fund CE costs that could be
reimbursable by FHWA.  Without adequate documentation as to the
validity of the $2.6 million of the above adjustment, the amounts
eligible for FHWA reimbursement or chargeable to the Fund cannot be
determined.  This occurred because District procedures did not
address CE cost overruns, and District officials were unaware of the
FHWA criteria for the reimbursement of CE cost overruns. 

We also found that the District lacked basic internal control
procedures to ensure the proper segregation of duties related to cash
disbursements.  One DPW person had overall responsibility for
processing and approving costs associated with the Fund.  We found
that 114 of the 142 expenditure journal entry transactions that we
tested were prepared, authorized, and recorded into the District's
Financial Management System (FMS) by the same person without
independent reviews or approvals.  The lack of supervisory review
increases the possibility of unauthorized or ineligible costs and
errors not being corrected for amounts recorded and paid. 

As a result of the lack of documentation and failure to segregate
duties related to cash disbursements, the risk of misappropriation,
errors, and irregularities related to capital appropriated
expenditures is increased. 


--------------------
\15 At year-end, an adjustment was made to match FHWA revenues with
federal aid capital appropriated expenditures.  The net amount of
federal aid capital appropriated expenditures that exceed FHWA
reimbursable amounts is charged to the Fund's capital appropriated
expenditure account.  This is needed since federal capital
appropriated expenditures are limited to amounts billable to FHWA,
and excess amounts are to be reimbursed by the Fund. 

\16 An internal voucher is used to charge a particular District fund,
for the services rendered, that were paid by another fund.  For
example, the General Fund is used to pay all District salaries and an
intra-District voucher is used to charge the Fund for hours that
District employees actually worked on federal-aid projects. 

\17 CE cost overruns are individual project amounts in excess of
budgeted amounts. 


      REVENUE
---------------------------------------------------------- Letter :2.2

Weaknesses in revenue procedures resulted in motor fuel tax payments
that were not recognized in the proper accounting period and
deposited in a timely manner.  We found that revenue was recorded
when received, not when receipts were both measurable and
available,\18 and deposits were made an average of 14 days after
receipt, resulting in over $3.6 million of revenue that was
recognized in the wrong accounting period and approximately $74,500
in potential lost interest income. 

The following revenue recognition problems that we identified for the
14-month period were subsequently corrected by the District: 

  -- Motor fuel tax revenue for September 1996 totaling $2.5 million
     was received in October 1996 and the District incorrectly
     recorded it in fiscal year 1997 instead of fiscal year 1996. 
     Fuel tax receipts received by the due date, the 25th day of the
     following month, and deposited within another 14 days were
     incorrectly recorded as revenue on the deposit date instead of
     the tax due date.  Since the tax receipts were both measurable
     and available as of September 30, 1996, the District should have
     recorded this amount as part of the Fund's fiscal year 1996
     revenue.  The failure to do so reduced assurance that revenue
     was reflected in the proper period and recognized under the
     modified accrual basis.  The District adjusted its records and
     included the $2.5 million as part of the fiscal year 1996
     revenue. 

  -- The District deposited and recorded $1.1 million of July 1996
     motor fuel tax revenue from a wholesaler as a fiscal year 1997
     transaction in February 1997.  This wholesaler typically
     delivered checks to a mailing service for forwarding to the
     cognizant taxing authority.  The wholesaler had confirmation of
     receipt dated August 26, 1996, by the mailing service, but there
     was no evidence that the District had received that check.  The
     wholesaler stopped payment on the original check on January 17,
     1997, and reissued a replacement check on January 31, 1997.  To
     reflect the proper recognition of this missing check, the
     District adjusted its records and included the $1.1 million as a
     fiscal year 1996 revenue transaction. 

The delays caused by untimely revenue processing and depositing
resulted in the loss of interest income.  These delays also increased
the risk that cash and revenue were exposed to loss from
misappropriation, error, and irregularities.  We found that the
District did not have procedures for depositing receipts.  It took
the District an average of 14 days from the time monthly fuel tax
payments were received with tax returns until they were logged,
endorsed, and deposited into the bank.  One payment was not deposited
for 5 months.  Sound cash management practices require cash receipts
to be deposited daily, which is consistent with U.S.  Treasury
requirements for all federal agencies.  According to our analysis,
revenue processing delays (1) resulted in approximately $74,500 in
potential lost interest income (calculated using an average rate of 5
percent for short-term Treasury bills in which the District invests
any excess cash) for the audit period and (2) could have contributed
to the missing wholesaler check for July 1996 that was not received
until February 1997. 

As the District considers options to upgrade its internal receipt
processing to establish adequate controls and prudent cash management
practices, a lockbox system\19 is an alternative for reducing
processing delays and untimely deposits.  The District currently uses
a lockbox for the prompt deposit of tax collections for the Sports
Arena to reduce the risk of lost funds, increase interest income, and
improve the timeliness of deposits.  Under a lockbox system, customer
payments to the post office box are accessible only to the bank, and
cash flow is improved.  District employees have no contact with cash
remittances deposited directly into a lockbox, and the risk of
mishandling or misappropriation is significantly reduced.  Even
though the banks charge a monthly fee for such services, those costs
could be more than offset by the additional interest earned on
investments promptly deposited. 

In addition to these revenue recognition problems, the following
issues significantly reduced the effectiveness of controls over
revenue and cash receipts, and further increased the risk of cash
manipulation: 

  -- The District does not know whether all motor fuel taxes are
     collected since it relies on an honor (self-assessment) system. 
     According to the District's Office of Tax and Revenue (OTR)
     officials, the last verification of motor fuel taxes occurred
     approximately 7 years ago and revealed that construction
     companies underreported the number of gallons consumed within
     the District.  As a result of following the honor system (given
     the problems identified from the last verification, as well as
     the absence of procedures to verify fuel used and the related
     taxes), the District cannot determine whether wholesalers and
     construction, bus, and other companies have reflected the total
     actual quantity of fuel sold to retailers and consumed,
     respectively.  Accordingly, the possibility exists that some
     wholesalers and/or construction, bus, or other companies do not
     pay either motor fuel taxes or all amounts due to the District. 

  -- The District does not have procedures to ensure the segregation
     of duties related to recordkeeping and the physical handling of
     cash receipts.  One OTR employee was the sole person responsible
     for processing tax returns and the related remittances.  The
     person received and reviewed the tax returns, recorded all
     deposits on a spreadsheet (log), endorsed checks, and prepared
     standard deposit tickets and Revenue Cash Receipt forms.  The
     person also hand delivered the checks to the District's cashier
     for deposit.  There was no evidence of supervisory review of the
     cash receipt process, and no other staff person was assigned or
     trained to prevent further delays or processing errors when this
     person was absent or ill. 


--------------------
\18 The District uses the modified accrual basis of accounting for
the Fund.  Under this basis, the District recognizes revenues when
they become both measurable and available--the District considers
revenue receipts available if they are collected within 60 days from
the tax due date.  For example, an amount reported as due to the Fund
as of September 30, 1996, should be treated as fiscal year 1996
revenue if the amount was actually collected by November 29, 1996. 

\19 A lockbox system is a banking service under which the bank
assumes responsibility for receiving, examining, and processing
incoming receipts from a customer. 


      COMPUTER SYSTEM GENERAL
      CONTROLS
---------------------------------------------------------- Letter :2.3

DPW relies on computerized information systems to process and account
for the Fund's financial activities.  General controls over the
systems are intended to prevent or detect unauthorized access and
intentional or inadvertent unauthorized modifications to the data and
related computer programs.  Our audit revealed that general controls
over the systems were ineffective. 

DPW's Office of Information Systems (OIS) operates a local area
network (LAN) with 70 servers\20 located at two data centers.  Four
servers on the LAN are used to process the five financial
applications that relate to federal aid and local capital projects,
including the Fund.  The applications that involve the Fund include
the (1) Overhead Distribution System, (2) Federal Aid Billing Systems
(FABS), (3) Labor Acquisition and Distribution System (LADS), and (4)
Vehicle Usage System.  For the most part, these applications obtain
data from FMS (the central system and the original point of entry for
capital project transactions) or distribute job cost data to the
capital projects in FMS.  For example, FABS is a reporting system
that obtains information from FMS and organizes the data in a
different format for billing to FHWA.  In addition, LADS and the
Vehicle Usage System distribute payroll and vehicle usage costs,
respectively, to the appropriate capital project in FMS.  The various
users and multiple application systems are part of a decentralized
computer environment where strong controls are vital. 

The OIS computer environment lacked basic system controls to prevent
or detect unauthorized access and intentional or inadvertent
unauthorized modifications to the data and related computer programs. 
We identified the following significant weaknesses in the controls
over (1) physical and logical security (access to facilities,
systems, and data), (2) segregation of duties, and (3) service
continuity: 

  -- Security over the system and its data was not adequate to
     protect against unauthorized access to sensitive systems for
     personal gain or destructive purposes.  Physical access to both
     data centers was not controlled.  For example, the door remained
     unlocked at one data center, and backup files were not protected
     at the other data center.  In addition, logical access to
     computer and application systems was not monitored.  For
     example, current security risks were not analyzed, access to
     security functions was not restricted, security access files
     were not maintained, and LAN modifications were not adequately
     controlled, resulting in updates that were not uniform across
     the four servers.  Further, written security policies and
     procedures had not been formalized and distributed.  Without
     assurance that security procedures are adequate, the integrity
     and reliability of financial data face a greater risk of being
     compromised. 

  -- DPW did not adequately practice segregation of duties.  Seven
     employees with supervisory access had control over the entire
     computer environment (including data files, production software
     programs, systems software, and utilities).  Generally, no one
     person should have complete access to the entire computer
     environment without supervisory review by another person.  In
     addition, another employee performed all phases of application
     modifications.  The lack of segregation of duties provides the
     opportunity for controls to be circumvented, which can result in
     unauthorized access and changes to systems and software
     applications. 

  -- Service continuity is at risk since there was no current written
     and tested disaster recovery plan.  Contingency disaster plans
     are needed to ensure that financial and other management
     information can be maintained if data processing operations are
     unexpectedly interrupted due to a disruption of electrical power
     or other events that might cause operations to halt.  An
     interruption of computer services can significantly reduce the
     District's ability to meet users' needs for products and
     services and maintain control over District operations. 

In addition, a Year 2000 program\21 evaluation and conversion plan
had not been established.  District systems are time dependent with
databases and programs created to store and process the year as a
2-digit field (for example, 1997 as "97").  Without promptly
assessing concerns and strategies for addressing this issue, the
advent of the year 2000 will pose significant problems, and
processing codes, interfaces, and multiple processing environments
may not operate. 


--------------------
\20 A file (or network) server is a high-speed computer in a network
that stores program and data files shared by users on a network. 

\21 A Year 2000 program addresses the problem caused by the way dates
are recorded and used in many computer systems.  Many systems use two
digits to represent the year.  As a result of this ambiguity, system
or application programs that use dates to perform calculations,
comparisons, or sorting may generate incorrect results when working
with the years after 1999.  Systems that are Year 2000 compliant do
not have this date problem. 


   COMPLIANCE WITH LAWS AND
   REGULATIONS
------------------------------------------------------------ Letter :3

We were unable to test the laws and regulations we considered
necessary; accordingly, we are unable to report on the Fund's
compliance with laws and regulations.  The lack of adequate
documentation limited the scope of our work for 36 percent of the
capital appropriated expenditures.  For example, as discussed
earlier, the District could not provide detailed support for the
year-end closing adjustment for $3.4 million in federal aid project
costs that were charged to the Fund.  Thus, we could not examine
supporting documentation to determine whether the transactions
recorded in the Fund's accounting records complied with laws and
regulations deemed significant to the financial statements. 


   DISCLAIMER ON 5-YEAR FORECASTED
   STATEMENTS
------------------------------------------------------------ Letter :4

The act requires the District to prepare 5-year forecasted statements
of the Fund's expected conditions and operations.  These forecasts
are required to determine the District's ability to meet future local
matching requirements under the federal highway program for capital
improvements to the District's transportation system.  In June 1997,
the District prepared the Transportation Program's Capital
Improvement Plan for fiscal years 1998 through 2003 (the 5-year
forecasts) and submitted it to the Congress for review and approval. 

We attempted to examine the Fund's 5-year forecasted statements that
the District prepared and submitted to the Congress.  We could not
complete our examination because the District did not have adequate
documentation related to the preparation and presentation of the
forecasted statements.  For example, the District lacked adequate
documentation to support the underlying assumptions and the
methodology used to develop the forecasts.  As a result, we are
unable to and do not give an opinion on whether the underlying
assumptions and methodology used to develop the forecasts provide a
reasonable basis for the Fund's 5-year forecasted statements or
whether such statements are presented in conformity with guidelines
for presentation of a forecast established by the AICPA.  And since
significant differences between the 1996 base year forecasts and the
reported expenditures were not reconciled, we did not include the
5-year forecasted statements in this report. 

The AICPA Forecast/Projection Guide establishes presentation and
disclosure requirements, and accounting and auditing guides published
by the AICPA have been identified as sources for determining
generally accepted accounting principles for prospective financial
statements.  Under the guide, the forecast process should consist of
(1) a formal system for preparing forecasted statements, (2)
performance of a work program that outlines the steps followed in
preparing the statements, or (3) documented procedures, methods, and
practices used in preparing the statements.  It also states that good
faith, appropriate care, accounting principles, best information,
consistency of information, key factors, appropriate assumptions,
assumption sensitivity, documentation, comparison of results, and
review and approval should be incorporated into the forecasted
statement preparation process. 

Even though District officials gave us the Fund's 5-year forecasted
statements, a brief description of the revenue assumptions and
estimates from 1998 through 2001 (provided by transmittal dated
September 3, 1997), and gasoline consumption statistics for each
month from 1981 through 1996, they did not provide adequate
documentation to support the assumptions made and methodology used. 
Our review of the previously mentioned information revealed the
following: 

  -- Gasoline consumption statistics for past periods could not be
     verified since source documentation was not provided.  We also
     noted two instances in which the same amounts were reported in
     the same month for two consecutive years.  Specifically,
     14,229,073 gallons of gas consumption were reported for December
     1995 and 1996, and 13,443,221 for August 1980 and 1981.  In
     addition, the District stated that they assumed a 10 percent
     decline in consumption for the 5-year projection based on a
     comparison of 1993 and 1996 usage.  Our analysis of the actual
     gasoline consumption schedule reflected only a 7.3 percent
     decline between those years.  District officials did not explain
     why 1993 was used as the base year for projected consumption. 

  -- Recalculation of the 1996 tax receipts based on reported
     consumption at $0.20/gallon ($32.56 million as reported for the
     12-month period) did not agree with the amount reported in the
     forecasted Cash Flow Statement ($31.84 million).  In addition,
     interest income of $580,000 for fiscal year 1996 was not
     considered in the forecasts. 

  -- The line item "local share of uses" in the Cash Flow Statement
     ($22.4 million), used as the 1996 base year for the forecasts,
     had not been reconciled to the 1996 reported expenditures ($19
     million).  We found that the net $3 million difference is from
     (1) a $9 million overstatement of reported expenditures for
     temporarily waived amounts that had not yet been paid to FHWA
     and (2) an unexplained $12 million of other forecasted cash uses
     which resulted in understated reported expenditures by that
     amount. 

  -- The projected repayment of the waived local match for fiscal
     year 1997 ($4.5 million) did not agree with the actual amount
     due for the 1996 temporarily waived amount ($3.95 million, 50
     percent of $7.99 million, see footnote 8).  Local and
     federal-use forecasts for project management, nonparticipating
     costs, and design, site, construction, and equipment costs were
     not supported and no explanations were provided.  In addition,
     local street costs that should have been projected were not and
     no explanation was provided. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :5

Management is responsible for

  -- preparing the Fund's financial statements in conformance with
     generally accepted accounting principles;

  -- establishing, maintaining, and assessing the Fund's internal
     controls to provide reasonable assurance that the internal
     control objectives are met;

  -- complying with applicable laws and regulations; and

  -- preparing 5-year forecasted statements of the Fund's expected
     conditions and operations in accordance with standards
     established by the AICPA. 

We are responsible for obtaining a sufficient understanding of
internal controls to plan the audit and for performing limited
procedures with respect to certain other information appearing in
these financial statements.  In order to fulfill our
responsibilities, we

  -- assessed the design of controls and whether they had been placed
     in operation and

  -- tested relevant internal controls over safeguarding, compliance,
     and financial reporting. 

We limited our internal control testing to those controls necessary
to achieve the objectives outlined in our statement on internal
controls.  Because of inherent limitations in any system of internal
control, losses, noncompliance, or misstatements may nevertheless
occur and not be detected. 

Except for the limitations on the scope of our work on the financial
statements and compliance with laws and regulations described above,
we did our work in accordance with generally accepted government
auditing standards.  We completed our fieldwork on September 4, 1997. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

To address weaknesses in capital appropriated expenditures identified
in this report, we recommend that the Director of the Department of
Public Works take the following actions: 

  -- Enforce procedures that call for maintaining documentation for
     all voucher and intra-District payments made on federal aid and
     local highway projects. 

  -- Revise procedures to require maintaining detailed support for
     all adjustments to capital appropriated expenditures.  This
     should include detailed records to support (1) year-end closing
     adjustments and (2) any necessary schedules and reconciliations
     needed to provide an adequate audit trail from the financial
     management systems. 

  -- Establish procedures to (1) obtain detailed documentation for
     construction engineering cost overruns, (2) bill FHWA for those
     overruns up to 15 percent of aggregate annual construction
     costs, and (3) charge the remaining overruns to the District of
     Columbia Highway Trust Fund's capital appropriated expenditures. 

  -- Obtain the detailed documentation to determine the validity of
     the $3.4 million year-end closing adjustment.  If any portion of
     the $2.6 million of construction engineering cost overruns is
     valid, seek reimbursement from FHWA for amounts that do not
     exceed 15 percent of annual aggregate construction costs and
     reduce these amounts from those originally charged to the
     capital appropriated expenditures.  If any portion of the $3.4
     million is not valid, reduce the amounts charged to the capital
     appropriated expenditures. 

  -- Ensure the segregation of duties in the preparation, processing,
     and approval of journal entries and disbursements. 

  -- Perform supervisory reviews of journal entries and disbursements
     related to capital projects. 

To address weaknesses in revenue identified in this report, we
recommend that the Director of the Office of Tax and Revenue take the
following actions: 

  -- Enforce procedures to ensure the recognition of revenue in the
     month the tax is due if the revenue is measurable and available
     (that is, the amount of revenue can be determined and is
     collected within 60 days of the month-end due dates). 

  -- Revise procedures to require daily logging, endorsing, and
     depositing of fuel tax receipts received by the District or
     establish a lockbox system for the processing and depositing of
     such receipts to improve cash management and enhance the control
     environment. 

  -- Establish procedures to verify the completeness of motor fuel
     tax receipts from wholesaler fuel sales to retailers or for fuel
     consumed by construction, bus, and other companies who buy at
     the wholesale level and consume that fuel within the District. 
     On-site inspections and reviews of wholesaler shipping documents
     and confirmation with retailers and construction and bus
     companies annually or on a scheduled but random-sample basis are
     examples of such procedures. 

  -- Segregate incompatible duties, if the District elects to
     administer collections in-house, by assigning separate
     individuals to deposit motor fuel tax receipts and perform
     recordkeeping functions. 

To address weaknesses we identified in computer system general
controls, we recommend that the Director of the Office of Information
Systems take the following actions: 

  -- Strengthen physical security over the facilities, system, and
     data by controlling all physical access to local area network
     (LAN) centers and protecting all backup files. 

  -- Strengthen logical security and better control the access to
     data and systems by conducting a security risk analysis,
     restricting access to security functions, maintaining security
     access files, and applying LAN modification updates uniformly. 

  -- Segregate incompatible duties and provide the appropriate
     supervisory review and, if it is deemed necessary that any one
     person maintain complete access, establish controls to ensure
     that such activities are monitored. 

  -- Ensure service continuity by completing disaster recovery plans
     and testing at both LAN centers. 

  -- Assess the Year 2000 vulnerabilities and develop an evaluation
     and conversion plan. 


   DISTRICT COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

We requested comments on a draft of this letter from the Mayor of the
District of Columbia.  The District's Chief Financial Officer (CFO)
provided us with written comments that are reprinted in appendix I. 

The CFO generally agreed with our findings regarding material
weaknesses in internal controls for capital appropriated
expenditures, revenue, and computer system general controls.  He
explained a number of measures that they intended to take in order to
improve their operating control environment and automated systems. 

Regarding the capital appropriated expenditures, the CFO's comments
focused on general reasons for the year-end closing cost
reclassification adjustment and the subsequent collection of $1.7
million of construction engineering cost overruns from FHWA and
stated that the District had provided all but 6 of the 500 requested
documents. 

However, the material weakness we reported relates to the District's
inability to provide adequate support and specific reasons for the
$3.4 million year-end closing adjustment and the six missing
disbursement transactions, which represented 36 percent of the $10.3
million in capital appropriated expenditures.  The District agreed
that it would modify procedures for year-end closing adjustments,
stating that future adjustments will be generated by journal vouchers
and appropriate supporting documentation.  In our opinion, had the
appropriate documentation been available, some of the uncertainty
regarding billing FHWA for the CE cost overruns and the associated
problems in accounting for those costs could have been avoided.  In
his comments, the CFO stated the District had asked for FHWA approval
to recover the $2.6 million in CE cost overruns.  FHWA responded in
July 1997 that the District can seek reimbursement based on federal
regulations in existence since 1991.  The District's Chief Financial
Officer stated that $1.7 million has been subsequently collected from
FHWA, and DPW stated that the remaining $900,000 will be submitted
for reimbursement during fiscal year 1998.  Notwithstanding the
reimbursement from FHWA, which was based on summary-level reports,
the amount charged to the Fund for the $3.4 million year-end closing
adjustment and for the 6 intra-District voucher payments cannot be
validated without appropriate supporting documentation.  Until these
accounting practices are modified--as the District states it plans to
do--this will continue to be an audit issue. 

The CFO agreed with the reported revenue findings and stated that the
Office of Tax and Revenue has implemented procedures for processing
motor fuel tax collections as of October 24, 1997.  He also said that
the District will (1) establish procedures to ensure that its
accounting policies for revenue recognition are followed, (2)
institute an audit program for motor fuel wholesalers, and (3)
conduct a comprehensive audit of major wholesalers within 24 months
to verify the quantity of fuel consumed. 

Concerning computer system general controls, the CFO stated that the
District is developing a new or revised Financial Management System,
with the Department of Public Works as one of the selected pilot
agencies.  He also stated that (1) his office will conduct an
independent quality assurance evaluation and test the new software
systems and integrated software/hardware system modifications and (2)
an independent systems administrator will work closely with the
Department of Public Works' Director of the Office of Information
Systems to make recommendations to strengthen security, segregation
of duties, and disaster recovery plans and assess the Year 2000
vulnerabilities and conversion plan. 

Regarding the 5-year forecasted statements of the Fund's expected
conditions and operations, the CFO stated that no model exists for
the revenue forecasts, that gasoline consumption has declined since
1993, and that the District's estimates through 2001 are reasonable. 
However, we are unable to opine on the 5-year forecasted statements
because of a scope limitation.  This limitation resulted from a lack
of documentation to

support the assumptions made and the methodology used by the District
to prepare the forecasted statements of revenue and expenditures. 

Gloria L.  Jarmon
Director, Civil Audits

September 4, 1997


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

   Balance Sheet

   (See figure in printed
   edition.)

   Statement of Revenues,
   Expenditures, and Change in
   Fund Balance

   (See figure in printed
   edition.)

   Notes to the Financial
   Statements

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DISTRICT OF
COLUMBIA
=========================================================== Appendix 0



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the District of Columbia Chief
Financial Officer's letter dated November 20, 1997. 

GAO COMMENTS

1.  The report has been modified to include the $1.7 million of
construction engineering cost overruns that the District stated it
received from FHWA during fiscal year 1997.  The report was also
modified to reflect the District's statement that the remaining
$900,000 will be submitted for reimbursement from FHWA in fiscal year
1998. 

2.  The report has been modified to clarify that the certified
receipt for the $1.1 million was from the wholesaler's mailing
service and not from the District. 


*** End of document. ***