Financial Management: Federal Aviation Administration Lacked
Accountability for Major Assets (Letter Report, 02/18/98,
GAO/AIMD-98-62).

This report analyzes the Department of Transportation's Inspector
General's audit report on the Federal Aviation Administration's (FAA)
statement of financial position, which discusses FAA's assets and
liabilities. Because financial statements provide accountability for the
expenditure of appropriated funds, this analysis is important to
understanding the reliability of reported financial information and the
possible consequences of unreliable information. GAO considers the
possible program and budgetary implications of questions raised about
financial statement data deficiencies cited in the audit report.

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

 REPORTNUM:  AIMD-98-62
     TITLE:  Financial Management: Federal Aviation Administration 
             Lacked Accountability for Major Assets
      DATE:  02/18/98
   SUBJECT:  Accountability
             Financial statements
             Air traffic control systems
             Cost accounting
             Federal agency accounting systems
             Inventory control systems
             Internal controls
             Federal property management
             Future budget projections
             Audit oversight
IDENTIFIER:  FAA Air Traffic Control Modernization Program
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on the Budget, House of
Representatives

February 1998

FINANCIAL MANAGEMENT - FEDERAL
AVIATION ADMINISTRATION LACKED
ACCOUNTABILITY FOR MAJOR ASSETS

GAO/AIMD-98-62

FAA Asset Accountability

(913817)


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

  ATC - air traffic control
  DOT - Department of Transportation
  FAA - Federal Aviation Administration
  IG - inspector general

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


B-279015

February 18, 1998

The Honorable John R.  Kasich
Chairman, Committee on the Budget
House of Representatives

Dear Mr.  Chairman: 

This letter responds to your request that we analyze the Department
of Transportation (DOT) Inspector General's (IG) audit report on the
Federal Aviation Administration's (FAA) fiscal year 1996 Statement of
Financial Position, which reports FAA's assets and liabilities.  As
financial statements provide accountability for the expenditure of
appropriated funds, this analysis is important to understanding the
reliability of reported financial information and the possible
consequences of unreliable information.  Specifically, you asked us
to consider the possible program and budgetary implications of the
questions raised about financial statement data deficiencies
identified in the audit report. 


   BACKGROUND
------------------------------------------------------------ Letter :1

FAA's primary mission is to ensure safe, orderly, and efficient air
travel throughout the United States.  FAA's ability to fulfill this
mission depends on the adequacy and reliability of the nation's air
traffic control (ATC) system, a vast network of computer hardware,
software, and communications equipment.  Sustained growth in air
traffic and aging equipment has strained the current system, limiting
the efficiency of ATC operations.  To combat these trends, in 1981
FAA embarked on a multibillion dollar, mission-critical capital
investment program aimed at modernizing its aging ATC infrastructure. 

This modernization program includes over 200 separate projects
estimated to cost over $34 billion through the year 2003.  It
includes the acquisition of new radars and automated data processing,
navigation, and communications equipment as well as new facilities
and support equipment.  As these items are placed in service, FAA is
required to report them as property and equipment assets in its
financial statements.  In addition, related spare parts necessary to
support the operation and maintenance of this equipment are reported
as operating materials and supplies inventory.  In its fiscal year
1996 financial statements, FAA reported assets of $18.2 billion,
including approximately $9.2 billion of operating materials and
supplies (such as mission-critical spare parts), property and
equipment (such as land, buildings, and air traffic control
equipment), and work-in-process (which consists of facilities and
equipment acquired but not yet put in service).  It also reported
expenses of $10.1 billion. 

Problems in the reporting of operating materials and supplies and
property and equipment (including work-in-process) were cited by the
DOT IG in its audit report on FAA's fiscal year 1996 financial
statement.  The IG is responsible for auditing FAA's financial
statements under the Chief Financial Officers Act of 1990, as
expanded by the Government Management Reform Act of 1994, to
determine whether those financial statements are reliable.  The IG
audited FAA's fiscal year 1996 Statement of Financial Position, which
reports the agency's assets and liabilities, but disclaimed (did not
express) an opinion primarily because of internal control weaknesses
that precluded the IG from determining if FAA's operating materials
and supplies and property and equipment were fairly presented.  This
is significant since at September 30, 1996, operating materials and
supplies and property and equipment represented approximately 51
percent of FAA's total reported assets.  Similar conditions resulted
in the IG issuing disclaimers of opinion on FAA's fiscal years 1993
through 1995 financial statements. 

Among the more serious deficiencies cited in the IG's report on FAA's
fiscal year 1996 financial statement were the following: 

  -- The reported $432 million for operating materials and supplies
     could not be verified because physical inventory counts were not
     adequately performed, documentation to verify operating
     materials and supplies valuation was not available, and certain
     spare parts were not included in the reported total.  For
     example, FAA did not include one category of spare parts, which
     includes disk drives, modems, and card assemblies, estimated at
     $245 million in the financial statement because the field spare
     parts inventory records were unreliable. 

  -- The reported $5.5 billion for property and equipment was
     unreliable because FAA records for such assets contained
     significant errors and omissions and did not accurately reflect
     property and equipment owned by FAA.  For example, $198 million
     of property that no longer existed, such as fuel storage tanks
     and buildings, was included in the financial statement as
     assets. 

  -- The reported $3.3 billion of work-in-process could not be
     verified because FAA did not maintain sufficient details to
     support what was in the account, and the total was not
     completely reconciled to other FAA records. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The deficiencies concerning operating materials and supplies and
property and equipment cited by the IG impair FAA's ability to
efficiently and effectively manage programs that use these assets and
expose the agency to waste, fraud, and abuse.  Four examples follow. 

  -- Lack of physical controls over inventory and equipment could
     result in the costly, unnecessary acquisition of additional
     assets already on hand, shortages of critical parts, delays in
     ordering needed assets erroneously shown to be on hand, or
     misuse of assets.  In addition, unnecessary costs could be
     incurred to manage and maintain excess assets. 

  -- Spare parts, such as disk drives, modems, and circuit card
     assemblies, may not be adequately safeguarded.  Since many of
     these items are portable, inaccurate inventory records may
     increase the risk of undetected theft or loss due to
     unauthorized acquisition and use or disposition. 

  -- Mission-critical equipment, such as radars and other air traffic
     control equipment, may be difficult to locate when needed, which
     could exacerbate an emergency situation. 

  -- Problems in accounting for significant investments in property
     may affect FAA's ability to properly maintain these assets,
     including estimating future maintenance funding needs. 

In addition, while not a specific focus of the IG report, GAO and
others have identified the lack of a reliable cost accounting system
as a weakness that prevents FAA from reliably determining costs.  The
lack of cost accounting information impairs FAA's ability to make
effective decisions about resource needs, to adequately control major
projects such as the ATC modernization program, and to identify and
avoid waste.  For example, without good cost information FAA cannot
reliably measure the ATC modernization program's actual cost
performance against established baselines, and cannot reliably use
information relating to actual cost experiences to improve future
cost estimating efforts.  The lack of cost accounting information
also limits the ability of FAA management and other decisionmakers to
develop a system of user fees based on the cost of services provided. 
Finally, the lack of reliable cost information also limits FAA's
ability to meaningfully evaluate performance measures in terms of
efficiency and cost-effectiveness. 

Overall, the lack of accountability over physical assets means that
FAA and the Congress may not have accurate financial management
information to help make informed decisions about future funding. 
The lack of accountability is of particular concern in situations
such as FAA's where billions of dollars of assets are being acquired
in connection with the ATC modernization program. 

FAA advised us that since the IG report was issued on March 27, 1997,
it has made significant progress and expended significant resources
toward correcting the problems reported by the IG.  According to FAA,
it has taken or plans corrective actions in three principal areas: 
(1) operating materials and supplies, (2) property and equipment, and
(3) cost systems.  FAA informed us that it has counted a major
portion of operating materials and supplies and property, identified
excess items, adjusted its records, and created a Cost Accounting
Division. 

We have not assessed the current status or sufficiency of these
actions.  The audit of FAA's fiscal year 1997 financial statement is
currently nearing completion, and we will report the results of our
assessment of that audit and the effectiveness of FAA's remedial
actions at a later date. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objectives were to analyze the IG audit report on FAA's fiscal
year 1996 Statement of Financial Position and to consider the
possible program and budgetary effects of reported financial
statement data deficiencies.  To fulfill our objectives, we analyzed
the IG's report on the audit of the FAA fiscal year 1996 Statement of
Financial Position and reviewed selected IG workpapers related to the
audit.  We focused on the areas of operating materials and supplies
and property and equipment because these were the areas cited in the
IG's report as causing the disclaimer of opinion.  We also
interviewed IG personnel to obtain more details about the issues
raised in the report and to gain an understanding of the work
performed and its results.  In addition, we accessed historical IG
program reports for the last 10 years and reviewed financial
statement audits of FAA for the fiscal years 1993 through 1995
statements.  We also obtained and reviewed information from the FAA
Chief Financial Officer and other FAA personnel about the current
status of corrective actions on the reported issues. 

In addition, because many of the problems identified by the IG were
the result of the lack of a reliable system to accumulate costs, we
reviewed several reports concerning FAA's financial and cost
accounting systems.  These included the Department of
Transportation's Federal Managers' Financial Integrity Act reports
for fiscal years 1993 through 1996, an April 1996 consultant report
by Arthur Andersen on FAA's cost accounting system problems and
needs,\1 and a December 1997 report issued by the National Civil
Aviation Review Commission that provides insights into and recommends
improvements to FAA's cost accounting system.\2 We performed our
review from October 1997 through January 1998 in accordance with
generally accepted government auditing standards. 

We requested oral comments on a draft of this report from the
Secretary of Transportation or his designee.  On February 3, 1998,
the FAA Associate Administrator for Administration and his staff
provided us with oral comments. 


--------------------
\1 Cost Accounting System Recommendations and Proposal Project Plan
and Cost Estimate, April 1996.  Arthur Andersen, Washington, D.C. 

\2 Avoiding Aviation Gridlock & Reducing the Accident Rate, A
Consensus for Change, December 1997.  National Civil Aviation Review
Commission, Washington, D.C. 


   OPERATING MATERIALS AND
   SUPPLIES WERE NOT ACCURATELY
   TRACKED
------------------------------------------------------------ Letter :4

The IG was unable to determine whether operating materials and
supplies with a reported value of $432 million were fairly stated
because adequate inventory counts were not performed to determine
actual items on hand,\3 excess inventory was not identified,
documentation was not available to verify the correct cost of items,
and accurate detailed records were not maintained for spare parts
kept in the field (field spares). 

Operating materials and supplies consist of spare parts located at
the Logistics Center and in the field for ATC and other equipment,
FAA facilities, and aircraft.  The Logistics Center is the central
warehouse for operating materials and supplies and uses an automated
inventory system, which is continually updated (perpetual inventory)
to account for inventory.  Field spares are parts that to meet
operational needs, are maintained at locations near the facility that
they support.  FAA facilities responsible for field spares generally
maintain their own manual or automated inventory lists.  The IG was
unable to verify the reported balance of operating materials and
supplies stocked at the Logistics Center because of numerous errors
and omissions.  Further, because FAA concluded that its records for
field spares were not reliable and field spares were expensed when
issued, no amount for field spares was included in the reported
operating materials and supplies asset total.  Available FAA records
showed a balance of $245 million for field spares. 


Some of the IG's specific findings were that

  -- 20 percent of the Logistics Center inventory counts did not
     agree with the amounts on perpetual inventory system listings,

  -- 27 percent of the field spare line items that were test counted
     did not match lists of stocked items,

  -- 48 percent of the Logistics Center parts did not have invoices
     or other documentation to verify the unit price of items, and

  -- 106 disk drives recorded at $3.6 million were kept in stock
     related to a system that was being decommissioned, some of which
     potentially could be identified as excess inventory. 

The lack of accurate inventory information may result in program
officials' inability to make prudent business decisions and to
safeguard assets adequately, as shown in the following examples. 

  -- Because of inaccurate inventory information, funding requests
     may not be based on actual needs, unnecessary purchases may be
     made, and inventory may be overstocked or hoarded due to
     availability concerns.  In turn, this resulting excess, as well
     as spare parts for equipment no longer in service, would require
     storage, inventory control, and other activities that consume
     operating resources. 

  -- Spare parts, such as disk drives, modems, and circuit card
     assemblies, may not be adequately safeguarded.  Since many of
     these items are portable, inaccurate inventory records may
     increase the risk of undetected theft or loss due to
     unauthorized acquisition and use or disposition. 

The lack of accurate inventory information may also impair
operational effectiveness, as shown in the following examples. 

  -- Inaccurate inventory information may result in a shortage of or
     the inability to locate essential parts necessary to repair
     mission-critical systems.  This could result in repair delays
     due to unscheduled outages and failures of FAA equipment. 

  -- Inaccurate information about the location and quantities of
     spare parts may cause a failure to make necessary modifications
     or updates to these items.  Complex systems may require
     modifications to reflect functional design changes and to
     eliminate failure-prone parts.  Since these parts could be used
     to repair operational systems, it is important that these parts,
     especially circuit card assemblies, subassemblies, and similar
     items, receive required modifications to ensure system design
     integrity. 

Finally, the lack of accurate inventory information affects the
reliability of financial management information.  Operating materials
and supplies inventory is recorded as an asset until it is issued or
consumed in operations when the cost is charged to operating
expenses.  Therefore, if inventory assets are understated, operating
expenses would be overstated.  The misstatement of operating expenses
distorts historical maintenance cost amounts that may be used to
project and budget for future costs. 


--------------------
\3 For fiscal years 1994 through 1996, FAA inventoried less than 8
percent of the Logistics Center inventory for each year and, in 1996,
inventoried only 26 percent of field spares. 


      AGENCY ACTIONS RELATED TO
      OPERATING MATERIALS AND
      SUPPLIES
---------------------------------------------------------- Letter :4.1

FAA advised us that it has

  -- performed a wall-to-wall inventory of operating materials and
     supplies at the central warehouse, identified excess items, and
     adjusted records accordingly;

  -- revised policies and procedures to include an inventory count of
     operating materials and supplies every 3 years;

  -- counted 48 percent (dollar value) of field spares and plans to
     complete the field spares inventory by the end of fiscal year
     1998;

  -- initiated a new project to provide physical and fiscal
     management of FAA assets both centralized at the Logistics
     Center and in field facilities;

  -- begun recording field spares as assets rather than expensing
     them as was the previous practice;

  -- revised methods to ensure timely review of excess operating
     materials and supplies stored at the Logistics Center; and

  -- made plans to implement bar coding for the asset tracking
     process in July 1998. 


   PROPERTY AND EQUIPMENT ON HAND
   COULD NOT BE RELIABLY
   DETERMINED
------------------------------------------------------------ Letter :5

The IG was unable to determine whether $5.5 billion of property and
equipment was correct because records for these assets contained
significant errors and omissions, supporting documentation was often
unavailable, and inventory counts had not been performed to determine
actual items on hand.  The $5.5 billion includes reported amounts of
almost $2 billion in property (real estate assets), and $3.5 billion
in equipment (also referred to as personal property).  Issues
identified by the IG related to each of these categories of assets
are discussed in the following sections. 


      PROPERTY
---------------------------------------------------------- Letter :5.1

FAA's system for keeping track of property, such as land, facilities,
and lease improvements, had significant errors and omissions and
could not be relied on to determine the actual amount of property
owned.  The IG found the following. 

  -- Property estimated at $198 million, which had been disposed of,
     destroyed, or physically removed was still included in the
     property system.  For example,

at the Air Route Traffic Control Center in Miami, a large fuel
storage tank that had been removed years ago was still on the
property list and

at another control center, several buildings on the property list had
been demolished. 

  -- Limited tests of real property identified about $12 million in
     assets held by FAA that could not be located in the property
     system.  For example,

at the Cleveland Air Route Traffic Control Center, a medical trailer
facility was not recorded and

at another control center, FAA failed to record a day care center
completed in 1994. 

  -- The IG could not determine if 22 of 65 leases tested should have
     been recorded as long-term capital leases\4 because
     documentation available was not sufficient to properly classify
     the leases.  If these leases, with about $4 million in annual
     payments, were improperly classified as short-term instead of
     long-term, assets and liabilities would have been understated. 

These types of errors and omissions affect FAA's ability to manage
its real estate assets and make decisions about future needs.  For
example, long-range planning needs for future facilities are impaired
by the lack of accurate information on the cost and useful lives of
existing facilities.  Further, lack of records on revenue-producing
properties results in the inability to analyze the adequacy of fees
charged to recover costs. 


--------------------
\4 Statement of Federal Financial Accounting Standards No.  5,
Accounting for Liabilities of the Federal Government provides
criteria for a capital lease.  If a lease meets the criteria, it is
reported as an asset with a corresponding liability for payments to
be made over the life of the lease. 


      EQUIPMENT
---------------------------------------------------------- Letter :5.2

As with real property, FAA's system for tracking equipment, such as
ATC equipment and aircraft, could not be relied on because of a lack
of supporting documentation and numerous errors.  The IG found that: 

  -- At various regions, equipment records did not separately
     identify individual assets.  For example, at one region, three
     computer workstations valued at $162,000 were lumped together
     and could not be individually identified or located.  FAA
     officials subsequently determined that the workstations were
     replaced in 1994. 

  -- Documentation did not always exist to support reported equipment
     costs.  For example, at one location, documentation to support
     the cost of mission-critical equipment, such as the Backup
     Emergency Communications system and the Voice Switching Control
     system, could not be located. 

  -- Equipment costs totaling $325 million (out of $473 million
     tested by the IG) were improperly reported as operating expenses
     instead of assets.  Based on the results of this sample test,
     the IG indicated that for fiscal years 1995 and 1996, an
     undetermined portion of the estimated $4.5 billion in major
     system equipment acquisitions using facilities and equipment
     funding was inappropriately charged as operating expenses rather
     than recorded as assets. 

The unreliability of the equipment information system affects FAA's
ability to properly manage these assets, thus giving rise to
potential operational inefficiencies.  For example, mission-critical
equipment, such as radars and other air traffic control equipment,
may be difficult to locate when needed, which could exacerbate an
emergency situation.  Also, as with inventory, asset theft could go
undetected, and funds could be spent unnecessarily to acquire
equipment that is already on hand. 

Problems in accounting for both property and equipment also affect
FAA's ability to properly maintain these assets, including estimating
future maintenance and deferred maintenance funding needs.  Effective
in fiscal year 1998, FAA will be required under federal accounting
standards to estimate deferred maintenance costs.\5 Such estimates
will provide information to FAA and the Congress that will be useful
in making decisions about maintenance priorities and future funding. 
However, without accurate property records, FAA and the Congress may
not have sufficient information to make reliable estimates of
maintenance and deferred maintenance needs. 


--------------------
\5 Statement of Federal Financial Accounting Standards No.  6,
Accounting for Property, Plant, and Equipment, defines maintenance as
the act of keeping fixed assets in an acceptable condition.  The
deferred maintenance estimate is the amount of future funding
required to bring property and equipment to its acceptable operating
condition. 


      AGENCY ACTIONS RELATED TO
      PROPERTY AND EQUIPMENT
---------------------------------------------------------- Letter :5.3

FAA advised us that for property it

  -- has counted 70 percent (dollar value) of real property and plans
     to count the remaining property by July 31, 1998;

  -- has made adjustments to detailed property and financial records
     based on property validations (computer match of database)
     taken;

  -- plans to develop procedures by June 30, 1998, to (1) ensure
     detailed property records are adjusted when property is
     acquired, disposed of, or destroyed and (2) reconciled property
     records to the general ledger; and

  -- has published guidelines for identifying capital leases and has
     directed a complete evaluation of leases. 

FAA advised us that for equipment it

  -- has validated (computer match of database) 100 percent of
     equipment records greater than $25,000;

  -- has developed a system modification to record equipment
     acquisitions as individual items rather than as an aggregate
     amount and has issued written guidance about managing equipment
     effectively;

  -- is revising procedures and plans to train personnel in 1998 to
     properly identify equipment purchase costs that should be
     recorded as assets; and

  -- has worked with the IG to develop an approach for determining
     the value of fiscal years 1996 and 1997 transactions (individual
     items) that should be recognized as assets. 


   FAA LACKED A RELIABLE SYSTEM TO
   ACCOUNT FOR PROJECT COSTS
------------------------------------------------------------ Letter :6

Many of the problems the IG identified in operating materials and
supplies and property and equipment result from the lack of a
reliable system for accumulating project cost accounting information. 
When FAA acquires facilities and equipment, some project costs are
accumulated in an account called work-in-process.  The
work-in-process account is a key component of FAA's system used to
account for project costs.  When the acquired items are placed in
service, the accumulated costs are to be removed from work-in-process
and recorded in appropriate asset or expense accounts.  However, the
IG was unable to determine whether the $3.3 billion reported as
work-in-process was correct because FAA did not maintain sufficient
details to support what was in the account, and the total was not
completely reconciled to other FAA records.  Without a reliable
system to accumulate project costs, and to transfer out the
appropriate amount when assets are placed in service, the asset and
expense accounts relating to operating materials and supplies and
property and equipment will continue to be misstated. 

The inadequacy of FAA's cost accounting system has been identified by
GAO and others as a weakness that prevents FAA from reliably
determining project and other costs.  For example, with regard to the
ATC modernization program, we previously reported that FAA does not
have a cost accounting system capable of reliably accumulating full
project cost information.\6 Our report concluded that without a
system to capture and report the full cost of ATC projects, FAA
cannot reliably measure the ATC projects' actual cost performance
against established baselines, and cannot reliably use information
relating to actual cost experiences to improve future cost estimating
efforts.  Further, we reported that the Congress does not have
reliable cost information to use in making funding decisions about
FAA. 

In April 1996, an FAA consultant reported on FAA's cost accounting
needs and options.  Among other conclusions, the consultant stated
that "none of the (existing FAA) systems evaluated can provide cost
data to support management needs.  .  .  ." Others have discussed
some of these needs.  For example, in December 1997, the National
Civil Aviation Review Commission reported that "only with this
effective management tool (cost accounting system) can a substantial
improvement in cost accuracy and service be obtained by FAA." Among
the Commission findings was that "[m]odern business tools, such as a
cost accounting system, that tie specific costs to services, and
measurement tools that assess how well services are provided are not
yet available." Among the recommendations made by the Commission were
that FAA's revenue must be based on the cost of services provided. 
"Using such a (cost-based) system, in and of itself, will bring about
a very significant management improvement.  The questions that could
be answered in a cost-based environment cannot be answered today."

The lack of reliable information about the costs of program
activities limits the ability of FAA management and other
decisionmakers to estimate future costs in preparing and reviewing
budgets, to control and reduce costs, and to identify and avoid
waste.  For example, without reliable cost information, FAA and other
decisionmakers may not be able to effectively

  -- compare, during the budgeting process, expected costs with
     expected benefits, identify activities that add value, and make
     informed decisions about whether to expend resources for
     activities that are not cost-effective;

  -- compare and identify the causes of cost changes over time;

  -- identify and reduce excess capacity costs (the cost to maintain
     a level of service that may not be needed), if any;

  -- choose among alternative actions such as whether to perform a
     project in-house or contract it out, to accept or reject a
     proposal, or to continue or eliminate a product or service; and

  -- compare costs of similar activities and find causes for cost
     differences, if any. 

The lack of reliable cost information about program activities also
limits the ability of FAA management and other decisionmakers to
establish
fees for services based on the cost of the services provided.  For
example, the Federal Aviation Reauthorization Act of 1996 (Public Law
104-264) directed FAA to establish user fees not to exceed $100
million for selected services, including aircraft overflights, and to
directly relate these fees to the costs of providing the service
rendered. 

Finally, the lack of reliable cost information limits the ability of
FAA management and other decisionmakers to meaningfully evaluate
performance measures.  Measuring costs is an integral part of
measuring performance in terms of efficiency and cost-effectiveness. 
Efficiency is measured by relating inputs to outputs and is often
expressed by the cost per unit of output.  Effectiveness is measured
by the outcome, or the degree to which a predetermined objective is
met, and is commonly combined with cost information to show
"cost-effectiveness." However, these measures are meaningless if they
are not based on reliable underlying information. 


--------------------
\6 Air Traffic Control:  Improved Cost Information Needed to Make
Billion Dollar Modernization Investment Decisions (GAO/AIMD-97-20,
January 22, 1997). 


      AGENCY ACTIONS RELATED TO
      COST SYSTEMS
---------------------------------------------------------- Letter :6.1

With regard to accounting for costs, FAA advised us that

  -- it created a Cost Accounting Division and, at the end of fiscal
     year 1997, established a baseline cost accounting system for
     selected pilot organizations that it plans to implement
     agencywide by the end of fiscal year 1998;

  -- by February 28, 1998, it plans to have policies and procedures
     developed for classifying amounts and managing the amounts
     recorded as work-in-process;

  -- it plans to complete development of a detailed transaction
     database to support the amounts in the financial records and
     financial statements; and

  -- its new cost accounting system will respond to recommendations
     made by the National Civil Aviation Review Commission. 


   CONCLUSION
------------------------------------------------------------ Letter :7

Accountability over physical assets is a key step in avoiding waste,
fraud, and abuse, and is essential to efficient and effective
budgeting and management of resources.  It is particularly critical
in situations such as FAA's, in which billions of dollars of assets
are being acquired in connection with the ATC modernization program. 
Until FAA implements effective policies and procedures to provide
accountability over operating materials and supplies and property and
equipment, it remains vulnerable to significant mismanagement of
appropriated funds used to acquire these assets. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

FAA officials generally concurred with our findings and conclusions. 
They emphasized, however, that they have taken significant actions to
address the problems identified in the IG's audit report on the
fiscal year 1996 financial statement.  We have added throughout our
report a discussion of actions FAA stated it has taken since the date
the IG audit report was issued.  Because neither we nor the IG has
yet determined the effectiveness of these actions, it is not clear
whether they are sufficient to address FAA's accounting and financial
management deficiencies.  FAA also provided some clarifying comments
that we incorporated into our report where appropriate. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this letter to the Ranking Minority Member
of your Committee, the Secretary of Transportation, the Administrator
of the Federal Aviation Administration, the Acting Chief Financial
Officer of the Federal Aviation Administration, the Director of the
Office of Management and Budget, the Department of Transportation
Inspector General, and other interested parties.  Copies will also be
made available to others upon request. 

If you have any questions about this letter, please call me at (202)
512-8341 or John C.  Fretwell, Assistant Director, at (202) 512-9382. 

Sincerely yours,

Linda M.  Calbom
Director, Resources, Community,
 and Economic Development Accounting
 and Financial Management Issues


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   ACCOUNTING AND INFORMATION
   MANAGEMENT DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

John C.  Fretwell, Assistant Director
Frank S.  Synowiec, Jr., Assistant Director
H.  Donald Campbell, Senior Auditor
Mary B.  Merrill, Senior Auditor
Meg Mills, Communications Analyst


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