Financial Audit: District of Columbia Highway Trust Fund's Fiscal Years
1998 and 1997 Financial Statements (Letter Report, 09/28/1999,
GAO/AIMD-99-263).

Pursuant to a legislative requirement, GAO presented the results of its
audit of the District of Columbia's Highway Trust Fund, focusing on: (1)
GAO's opinion on the effectiveness of the District's internal control
related to the Fund as of September 30, 1998; and (2) the results of
GAO's evaluation of the District's fiscal year 1998 compliance with laws
and regulations as they relate to the Fund.

GAO noted that: (1) the financial statements for 1998 and 1997 were
fairly presented, in all material respects; (2) the District did not
maintain effective internal control related to the Fund as of September
30, 1998; (3) GAO found material weaknesses related to accounting for
revenue, cashier operations, and computer system general controls; (4)
there was a reportable noncompliance with one of the laws GAO tested
relating to the licensing and bonding of motor vehicle fuel
wholesalers/businesses; and (5) the underlying assumptions made and
methodology used to develop the Fund's revised forecasted statements
provided a reasonable basis for such statements, and the statements were
presented in conformity with guidelines established by the American
Institute of Certified Public Accountants.

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

 REPORTNUM:  AIMD-99-263
     TITLE:  Financial Audit: District of Columbia Highway Trust Fund's
	     Fiscal Years 1998 and 1997 Financial Statements
      DATE:  09/28/1999
   SUBJECT:  Accounting procedures
	     Municipal governments
	     Financial management
	     Trust funds
	     Fund audits
	     Financial statement audits
	     Federal aid for highways
	     Internal controls
	     Fuel taxes
	     Auditing standards
IDENTIFIER:  DC Highway Trust Fund

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    United States General Accounting Office GAO                Report
    to Congressional Committees and Subcommittees September 1999
    FINANCIAL AUDIT District of Columbia Highway Trust Fund's Fiscal
    Years 1998 and 1997 Financial Statements GAO/AIMD-99-263 Contents
    Letter
    4 Opinion Letter
    8 Financial Statements    Balance Sheets
    24 Statement of Revenues, Expenditures, and Change in Fund Balance
    25 Notes to the Financial Statements
    26 Supplementary Information
    31 Forecasted Statements
    34 Appendixes              Appendix I    Comments From the
    District of Columbia                     38 Appendix II Status of
    Prior Years' Audit Recommendations                 43 Appendix III
    GAO Contacts and Staff Acknowledgements                     47
    Tables                  Table 1: Status of Our 1997 and 1996
    Recommendations                     44 Page 1
    GAO/AIMD-99-263 D.C. Highway Trust Fund Abbreviations AICPA
    American Institute of Certified Public Accountants CFO       Chief
    Financial Officer CIP       capital improvement plan DPW
    Department of Public Works DCFO      Deputy Chief Financial
    Officer FABS      Federal Aid Billing System FHWA      Federal
    Highway Administration FMFIA     Federal Managers' Financial
    Integrity Act of 1982 FMS       financial management system GASB
    Governmental Accounting Standards Board LADS      Labor
    Acquisition and Distribution System LAN       local area network
    OCFO      Office of the Chief Financial Officer OFT       Office
    of Finance and Treasury OIS       Office of Information Systems
    OMB       Office of Management and Budget OTR       Office of Tax
    and Revenue SOAR      System of Accounting and Reporting Y2K
    Year 2000 Page 2                                  GAO/AIMD-99-263
    D.C. Highway Trust Fund Page 3    GAO/AIMD-99-263 D.C. Highway
    Trust Fund Comptroller General of the United States United States
    General Accounting Office Washington, D.C. 20548 B-281963
    Letter September 28, 1999 Congressional Committees and
    Subcommittees This report presents the results of our audits of
    the financial statements of the District of Columbia Highway Trust
    Fund (Fund) for the fiscal years ended September 30, 1998 and
    1997, and our examination of the forecasted statements of the
    Fund's expected conditions and operations for the next 5 years.
    These financial statements and the forecasted statements are the
    responsibility of the District's Chief Financial Officer. This
    report also presents (1) our opinion on the effectiveness of the
    District's internal control related to the Fund as of September
    30, 1998, and (2) the results of our evaluation of the District's
    fiscal year 1998 compliance with laws and regulations as they
    relate to the Fund. 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 Senator Robert C. Byrd, Senator Richard Durbin, Senator
    Kay Bailey Hutchinson, Senator Joseph I. Lieberman, Senator Ted
    Stevens, and Senator Fred Thompson, and to Representative Dan
    Burton, Representative Tom Davis, Representative Ernest J. Istook,
    Representative James P. Moran, Representative Eleanor Holmes
    Norton, Representative David R. Obey, Representative Henry A.
    Waxman, and Representative C.W. Bill Young in their capacities as
    Chairmen and Ranking Minority Members of Senate and House
    Committees and Subcommittees. In addition, copies will be sent to
    Kenneth R. Wykle, Administrator of the Federal Highway
    Administration; the Honorable Anthony Williams, Mayor of the
    District of Columbia; Valerie Holt, Chief Financial Officer of the
    District of Columbia; Charles Maddox, Inspector General of the
    District of Columbia; Deborah K. Nichols, District of Columbia
    Auditor; and Alice Rivlin, Chairman of the District of Columbia
    Financial Responsibility and Management Assistance Authority. Page
    4                                   GAO/AIMD-99-263 D.C. Highway
    Trust Fund B-281963 If you have any questions regarding this
    report, please contact Gloria L. Jarmon, Director, Health,
    Education, and Human Services, Accounting and Financial Management
    Issues, at (202) 512-4476. Key contacts and contributors to this
    report are listed in appendix III. David M. Walker Comptroller
    General of the United States Page 5
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 Congressional
    Committees and Subcommittees The Honorable John H. Chafee Chairman
    The Honorable Max Baucus Ranking Minority Member Committee on
    Environment and Public Works United States Senate The Honorable
    George V. Voinovich 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 Ground Transportation
    Committee on Transportation and Infrastructure House of
    Representatives Page 6                   GAO/AIMD-99-263 D.C.
    Highway Trust Fund Page 7    GAO/AIMD-99-263 D.C. Highway Trust
    Fund Comptroller General of the United States United States
    General Accounting Office Washington, D.C. 20548 B-281963
    Opinion Letter To the Mayor of the District of Columbia This
    report presents the results of our audits of the financial
    statements of the District of Columbia Highway Trust Fund for the
    fiscal years ended September 30, 1998 and 1997, and our
    examination of the forecasted statements of the Fund's expected
    conditions and operations for the next 5 years, as required by
    section 3(e) of the District of Columbia Emergency Highway Relief
    Act.1 This report also presents (1) our opinion on the
    effectiveness of the District's internal control related to the
    Fund as of September 30, 1998, and (2) the results of our
    evaluation of the District's compliance with laws and regulations
    during fiscal year 1998 as they relate to the Fund. In 1995, the
    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(a)
    of the act3 temporarily waived the requirement that the District
    provide matching funds for federal aid highway projects for fiscal
    years 1995 and 1996. In addition, section 3(a) of the act4
    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 taxes5 and to be separate
    from the District's 1Public Law 104-21, 109 Stat. 257 (1995), D.C.
    Code Ann. section 7-134.2(e) (1999 Supplement). 2Approximately 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.
    3D.C. Code Ann. section 7-134.1(a) (1999 Supplement). 4D.C. Code
    Ann. section 7-134.2(a) (1999 Supplement). 5The District of
    Columbia levies and collects a tax of 20 cents per gallon on motor
    vehicle fuels within the District of Columbia sold or otherwise
    disposed of by an importer or by a user or used for commercial
    purposes (D.C. Code Ann. section 47-2301(1981, 1995 Replacement
    Vol.)). Page 8
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 General Fund.6
    The District established the trust fund as required by the act.7
    Motor fuel tax revenues were reported to be almost $31 million for
    fiscal year 1998. 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 the
    $10.2 million temporarily waived during fiscal years 1995 and
    1996, the act provides a repayment schedule with the final payment
    made at the end of fiscal year 1998.8 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 of District personnel working directly on
    transportation capital projects, overhead costs associated with
    federal aid projects, and other nonparticipating 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. 6Unless prohibited by
    law (as in the case of the Fund under the act), 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. 7D.C. Code Ann. section 7-
    134.4 (1999 Supplement). 8As required by section 3(c) of the act,
    D.C. Code Ann. section 7-134.2(c) (1999 Supplement), half of the
    balance of these amounts is to be repaid in each of the 2 fiscal
    years following those in which the amounts were temporarily
    waived. 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 and
    paid at the end of fiscal year 1998. 9These include the District's
    expenditures for costs not eligible under the federal aid highway
    program, such as the costs for sewer cleaning, storm drain
    improvements, and retaining walls. Page 9
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 In addition to
    establishing the Highway Trust Fund account, as required by
    section 3(a) of the act, the District was required by section
    4(b)10 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. According to District officials, they do not intend to
    reimburse the Capital Operating account until fiscal year 2004 or
    at such time that it is determined that funds in the Highway Trust
    Fund are sufficient to maintain operations. We are required by
    section 3(e) of the act11 to audit the Fund and submit a report to
    the Congress by December 31 of each year, or 3 months after the
    close of the fiscal year, beginning in 1996. The audit is of the
    Fund's Balance Sheet and Statement of Revenues, Expenditures, and
    Change in Fund Balance for the fiscal year ending September 30 and
    an examination of the District's forecasted statements of the
    Fund's expected condition and operations for the next 5 years. We
    issued our initial report on this Fund due December 1996 in
    December 199712 and the second year's report due December 1997 in
    September 1998.13 As we noted in those reports and in an earlier
    letter to congressional Committees dated November 4, 1996, due to
    the timing regarding the District-wide financial statements (due
    February 1, after the September 30 year-end close), the submission
    of the forecasted statements (due June 15, after year-end close),
    and the availability of supporting documentation from the
    District, we will not be able to meet the future December 31
    reporting deadlines required by the act. 10D.C. Code Ann. section
    7-134.3(b) (1999 Supplement). 11D.C. Code Ann. section 7-134.2(e)
    (1999 Supplement). 12Financial Audit: District of Columbia Highway
    Trust Fund's 1996 Financial Statements (GAO/AIMD-98-30, December
    15, 1997). We were unable to give an opinion on the financial
    statements of the Fund because of a lack of evidence supporting
    $3.7 million or 36 percent of capital appropriated expenditures
    that limited the scope of our work. 13Financial Audit: District of
    Columbia Highway Trust Fund's Fiscal Year 1997 Financial
    Statements (GAO/AIMD-98-254, September 30, 1998). Page 10
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 In our audits, we
    found the following. * The financial statements for 1998 and 1997
    were fairly presented, in all material respects. * The District
    did not maintain effective internal control related to the Fund as
    of September 30, 1998. We found material weaknesses related to
    accounting for revenue, cashier operations, and computer system
    general controls. * There was a reportable noncompliance with one
    of the laws we tested relating to the licensing and bonding of
    motor vehicle fuel wholesalers/businesses. * The underlying
    assumptions made and methodology used to develop the Fund's
    revised forecasted statements provided a reasonable basis for such
    statements, and the statements were presented in conformity with
    guidelines established by the American Institute of Certified
    Public Accountants (AICPA). The following sections outline each
    conclusion in more detail and discuss our conclusions and the
    scope of our audit. Opinion on Financial     In our opinion, the
    financial statements present fairly, in all material Statements
    respects, in conformity with generally accepted accounting
    principles, the Fund's assets and liabilities as of September 30,
    1998 and 1997 and its revenues, expenditures, and changes in fund
    balance for years then ended. However, misstatements may
    nevertheless occur in other financial information reported by the
    Fund as a result of the internal control weaknesses described in
    the following section. The Year 2000 Compliance supplementary
    information on page 31 is not a required part of the basic
    financial statements but is supplementary information required by
    the Governmental Accounting Standards Board (GASB).14 We have
    applied certain limited procedures, which consisted principally of
    inquiries of management regarding the methods of measurement and
    presentation of the supplementary information. However, we did not
    audit the information and do not express an opinion 14GASB was
    organized in 1984 to establish standards of financial accounting
    and reporting for state and local governmental entities that will
    result in useful information for users of financial reports and
    guide and educate the public, including issuers, auditors, and
    users of those financial reports. Page 11
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 on it. Further,
    we do not provide assurance that the District is or will be Year
    2000 (Y2K) compliant in whole or in part or that parties with
    which the District does business will be Y2K compliant. Recently
    issued GAO testimonies on the District's Y2K include (1) Year 2000
    Computing Crisis: The District of Columbia Remains Behind Schedule
    (GAO/T-AIMD-99-84, February 19, 1999) and (2) Year 2000 Computing
    Crisis: The District of Columbia Faces Tremendous Challenges in
    Ensuring Vital Services Are Not Disrupted (GAO/T-AIMD-99-4,
    October 4, 1998). Adverse Opinion on     We have examined
    management's assertion that the District maintained Internal
    Control       effective internal control related to the Fund as of
    September 30, 1998. Management based its assertion on criteria
    established under the Federal Managers' Financial Integrity Act of
    1982 (FMFIA)15 and Office of Management and Budget (OMB) Circular
    A-123, Internal Control Systems. Management asserted that its
    internal control was effectively designed to meet the following
    control objectives: * reliability of financial reporting -
    transactions are properly recorded, processed, and summarized to
    permit the preparation of financial statements and stewardship
    information in accordance with generally accepted accounting
    principles and assets are safeguarded against loss from
    unauthorized acquisition, use, or disposition and * compliance
    with applicable laws and regulations - transactions are executed
    in accordance with the laws governing the use of budget authority
    and with other laws and regulations that could have a direct and
    material effect on the Fund's financial statements. In our
    opinion, because of the effect of the material weaknesses found
    relating to controls over the Fund's revenue, cashier procedures,
    and computer systems, the District did not maintain effective
    internal control related to the Fund as of September 30, 1998,
    based on FMFIA and OMB established criteria. A material weakness
    is a condition that precludes the entity's internal control from
    providing reasonable assurance that material misstatements in the
    financial statements will be prevented or detected promptly. Our
    15The FMFIA requires agency managers to evaluate and report
    annually to the President and the Congress on the adequacy of
    their internal control and accounting systems and what is being
    done to correct the problems. Page 12
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 examination
    disclosed material weaknesses in the design and operation of the
    District's internal control components as of September 30, 1998.
    Some of these weaknesses were identified in our prior years'
    audits. These conditions were considered in determining the
    nature, timing, and extent of audit tests applied in our audit of
    the fiscal year 1998 financial statements, and our opinion on the
    District's internal control related to the Fund does not affect
    our opinion on the financial statements dated July 28, 1999.
    Unaudited information of the Fund, as reported by the District,
    may also contain misstatements resulting from these weaknesses.
    Revenue    Weaknesses in revenue procedures resulted in (1) motor
    fuel taxes not being deposited promptly, (2) motor vehicle fuel
    revenue not being transferred to the Fund monthly, (3) the
    District still being unable to determine or verify that all
    revenues have been collected, (4) incomplete motor vehicle fuel
    tax returns still being accepted and processed, and (5) no
    documentation that teller reconciliations were being properly
    reviewed by a supervisor. These weaknesses resulted in the loss of
    interest income and increased the risk that cash receipts and
    revenue were exposed to losses from misappropriation, errors, and
    fraud. In our prior years' audits, we reported that it took the
    District 14 days from the time of receipt to process and deposit
    motor vehicle fuel taxes. We recommended that the District's
    Office of Tax and Revenue (OTR) revise procedures to require daily
    logging, endorsing, and depositing of fuel tax receipts received
    by the District or establish a lockbox system16 for processing and
    depositing such receipts to improve cash management and enhance
    the control environment. OTR revised its procedures on October 24,
    1997, to require prompt processing of motor fuel tax receipts.
    These revised procedures decreased the time it takes OTR to
    deposit receipts; however, improvements are still needed to ensure
    that the revised procedures are followed at all times. Our current
    year audit work revealed that delays in processing and depositing
    revenue decreased from an average of 14 days to 4 days. Our
    analysis of 67 statistically selected tax returns, out of a total
    of 707 submitted during fiscal year 1998, showed that the District
    took an average of 4 days-ranging from 1 day to 26 days-to log,
    endorse, and deposit the 16A lockbox system is a banking service
    under which the bank assumes responsibility for receiving,
    examining, and processing incoming receipts from a customer. Page
    13                                        GAO/AIMD-99-263 D.C.
    Highway Trust Fund B-281963 taxes into the bank.17 Sixty percent
    of the selected tax returns-40 tax returns-took more than 1 day.
    Sound cash management practices typically result in daily deposits
    of cash receipts. While the District has improved its processing
    and depositing of motor fuel revenue, the District is not
    transferring this revenue to the Fund's bank account promptly.
    District policies and procedures require that motor fuel receipts
    be transferred monthly to the Fund's bank account. The delays
    resulted in approximately $224,000 in potential lost interest
    income (calculated using an estimated 4.5 percent annual interest
    rate for short- term Treasury bills in which the District invests
    any excess cash) to the Fund from the time the tax revenues were
    received and deposited into the Fund's bank account. Our audit
    showed that for 9 months during fiscal year 1998, it took the
    District 2 to 4 months to transfer revenue to the Fund. Although
    the District has improved the timeliness of deposits of motor fuel
    revenue into the General Fund, this money has not been transferred
    to the Highway Trust Fund each month. In addition to the revenue
    processing, depositing, and transferring delays, the District is
    still not able to determine whether all motor fuel taxes are
    collected since it relies on an honor (self-assessment) system.
    According to OTR officials, the last verification of motor fuel
    taxes occurred approximately 9 years ago and revealed that
    construction companies underreported the number of gallons of
    motor fuel consumed within the District. Without effective
    monitoring initiatives, the District cannot determine whether
    wholesalers and construction, bus, and other companies have
    reported the total quantity of fuel actually sold to retailers and
    consumed. In our prior years' audits, we recommended that the
    District establish procedures to verify the completeness of motor
    fuel tax receipts. In November 1997, the District responded that
    it would (1) immediately institute an audit program for motor
    vehicle fuel wholesalers, (2) conduct comprehensive tax audits for
    the major wholesalers within the next 24 months, and (3) purchase
    a commercial database in fiscal year 1998 to assist in identifying
    the total population of wholesalers that should be reporting and
    paying taxes on motor fuel consumed within the District. However,
    in April 1999, OTR officials told us that the audit program had
    not 17The proceeds from taxes are required to be deposited into
    the General Fund upon receipt and subsequently transferred on a
    monthly basis to the Highway Trust Fund. Page 14
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 yet been prepared
    and that the comprehensive audits are still in the planning
    stages. In addition, the commercial database had not been
    purchased. Our fiscal year 1998 audit revealed that the District
    continued to lack adequate controls to verify or monitor the
    amount of fuel used by reporting entities. We also reported in our
    prior year audit that the District did not investigate licensed
    wholesalers and/or construction, bus, or other companies that do
    not file motor vehicle fuel tax returns or filers who are not
    licensed or bonded.18 During our fiscal year 1998 audit, OTR
    officials informed us that these investigations took place;
    however, there was no documentation verifying that follow-up was
    performed. Wholesalers are required to file a Motor Vehicle Fuel
    Tax Return for every month for which the motor vehicle fuel
    license is valid19 and pay monthly motor fuel taxes for fuel sold
    or otherwise disposed of or used on or before the 25th day of the
    next succeeding month.20 Our review of the 66 wholesalers in OTR's
    tracking records showed that no follow-up was performed on 1
    wholesaler who did not submit the required returns. We also noted
    that 13 of the wholesalers filed returns but were not licensed to
    conduct business in the District (6 of these wholesalers
    subsequently obtained licenses). According to OTR officials, some
    wholesalers do submit their application for a license prior to
    filing any returns; however, there are delays in processing due to
    incomplete information provided by the wholesaler. In addition, no
    follow- up was performed on another five wholesalers who were
    licensed during our audit period but never filed returns. The
    District lacked controls to alert it when licensed wholesalers did
    not submit returns or unlicensed wholesalers submitted returns. In
    our fiscal year 1997 audit, we recommended that OTR establish
    control procedures to investigate instances in which unlicensed
    wholesalers submit tax returns or licensed wholesalers do not
    submit monthly returns. As noted above, our fiscal year 1998 audit
    found that these instances continued to exist. 18The bond is in
    place to ensure the prompt payment of all motor vehicle fuel taxes
    and penalties levied or imposed by, and the faithful compliance
    with, the terms and conditions of D.C. Code Ann. sections 47-2301
    to 2315 (1981, 1997 Replacement Vol., 1999 Supplement). 19D.C.
    Code Ann. section 47-2304. 20D.C. Code Ann. section 47-2306. Page
    15                                          GAO/AIMD-99-263 D.C.
    Highway Trust Fund B-281963 Furthermore, we continued to find that
    the accuracy of the information reported by the wholesalers could
    not always be verified. Monthly tax returns are required to be
    submitted with various documents and other supporting schedules
    (which outline specific inventories, receipts, and distributions).
    Four of the 67 monthly tax returns that we reviewed lacked the
    required supporting documentation needed to substantiate the tax
    amount. In our fiscal year 1997 audit report, we recommended that
    the District establish control procedures to (1) review each
    monthly tax return for completeness and accuracy, (2) reject
    incomplete and erroneous monthly tax returns, and (3) contact
    wholesalers if returns are rejected and follow up to ensure
    complete, accurate, and adequately documented monthly tax returns.
    On September 2, 1998, the District's Chief Financial Officer (CFO)
    stated that OTR established control procedures to mitigate the
    occurrence of these errors. Our fiscal year 1998 audit revealed
    that these procedures were not finalized as of July 28, 1999. In
    addition, documentation verifying that follow-up was performed was
    often not available. Cashier Operations    The District does not
    have written procedures to ensure adequate and consistent
    application of controls over the receipt and handling of cash
    transactions within the District's Office of Finance and Treasury
    (OFT). We were informed that OFT cashiers handle as much as $5
    million per month and were performing daily tasks based on verbal
    or assumed policies. Once the motor fuel tax returns are received
    and processed in OTR, the revenues are deposited with OFT. To
    ensure that cash is properly managed, tellers are required to
    perform daily reconciliations of their cash receipts. These
    reconciliations are required to be reviewed by a supervisory
    teller (head cashier). Our analysis of the 67 tax returns revealed
* 10 instances in which there was a lack of segregation between
    teller reconciliations and supervisory reviews and * 50 instances
    in which there was no documentation that teller reconciliations
    were being reviewed by a supervisor. According to OFT officials,
    the lack of written procedures and staffing shortages contributed
    to these problems. During our audit period, OTR deposited its
    motor fuel tax revenue in the cashier's office located at One
    Judiciary Square. According to OFT officials, there were many
    times that only one person was working at this site; therefore, a
    second person was unable to review the teller's work. An effective
    internal control over cash Page 16
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 requires
    documented policies and procedures that enforce the segregation of
    duties and supervisory review. Computer System General     DPW
    relies on computerized information systems to process and account
    Controls                    for the Fund's financial activities.
    General computer 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. While we noted minimal improvements, our audit continued
    to reveal that fiscal year 1998 general controls over the
    automated systems remained ineffective. Consistent with prior
    years, during fiscal year 1998, DPW's Office of Information
    Systems (OIS) operated a local area network (LAN) with 70
    servers21 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. The four applications that
    involve the Fund are 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 the data from the financial
    management system (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. In our prior years' audits, we recommended and are
    reaffirming in this report that the District * strengthen physical
    security over the facilities, systems, and data by controlling all
    physical access to LAN centers and protecting all backup files; *
    strengthen logical security (access to facilities, systems, and
    data) and improve controls by conducting a security risk analysis,
    restricting 21A file (or network) server is a high-speed computer
    in a network that stores program and data files shared by users on
    a network. Page 17
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 access to
    security functions, maintaining security access files, and
    applying LAN modification updates uniformly; * segregate
    incompatible duties, 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; and * assess the
    Y2K vulnerabilities and develop an evaluation and conversion plan
    for DPW as it relates to the Fund. We found that some improvements
    were made in strengthening physical security over facilities but
    further improvements are still needed in protecting critical
    executive software and data through off-site storage.
    Specifically, we found that the District consolidated its LAN
    servers in one location and secured the location with password
    lock controls. However, system and application software as well as
    data backup files remain unprotected because they are not stored
    in a separate location. District officials stated that these
    recommendations would be addressed with the implementation of
    their new financial management system-System of Accounting and
    Reporting (SOAR)-during fiscal year 1999. We will evaluate the
    status of these recommendations during our audit of the fiscal
    year 1999 financial statements. In our review of the District's
    readiness to cope with the Y2K conversion effort, we found that
    the Office of the Chief Financial Officer (OCFO) and DPW have been
    identified as agencies that are critical to conducting operations
    of the District. As of July 28, 1999, both OCFO and DPW had
    identified their mission-critical systems, remediation strategies,
    and associated resources and technology. However, as we reported
    in February 1999,22 the District remains behind schedule in
    addressing the Y2K problem and consequently critical processes
    remain at risk. District systems are date dependent with databases
    and programs created to store and process the year as a two-digit
    field (for example, 1998 as "98"). Without promptly assessing
    concerns and strategies for addressing this issue, the advent of
    the year 2000 poses significant risks for the Fund. 22Year 2000
    Computing Crisis: The District of Columbia Remains Behind Schedule
    (GAO/T-AIMD-99-84, February 19, 1999). Page 18
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 Compliance With
    Laws  Except as noted below, our tests for compliance with the
    provisions of and Regulations                  selected laws and
    regulations disclosed no other instances of noncompliance that
    would be reportable under generally accepted government auditing
    standards. However, the objective of our audit was not to provide
    an opinion on overall compliance with laws and regulations.
    Accordingly, we do not express such an opinion. D.C. Code Ann.
    section 47-2303 requires that wholesalers/businesses obtain
    importer licenses to distribute motor vehicle fuel within the
    District. The law requires that an applicant for a license pay an
    annual license fee of $5 and obtain a motor vehicle fuel bond in
    the approximate sum of three times the average monthly motor fuel
    tax due from the applicant during the preceding 12 months or
    estimated for the succeeding 12 months, but in no event less than
    $5,000 or more than $100,000. During our audit, we discovered that
    the District had been issuing bonds to wholesalers for amounts
    less than the amounts required by the law. We found that three
    wholesalers were underbonded in an amount totaling $27,000. OTR
    officials agreed and stated that bond calculations would be
    performed electronically to ensure that bonds are calculated
    properly. Unqualified Opinion on  The act requires that the
    District prepare and that we examine the Forecasted Statements
    forecasted statements of the Fund's expected conditions and
    operations for the next 5 years. 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. On June 1,
    1999, the District prepared the Fiscal Year 2000 to 2005 Highway
    Trust Fund Capital Improvements Plan (CIP) and Fiscal Year 2000
    Capital Budget and submitted it to the Congress for review and
    approval. The budget included a 7-year financial forecast of the
    Fund. Consistent with our prior year's findings, our examination
    of the CIP submitted in June 1999 identified that the District
    needed to revise its forecasts to the Congress to reflect a proper
    presentation of projections in accordance with AICPA guidelines.23
    Our examination of the CIP submitted to the Congress also revealed
    a lack of adequate support for the projections, as required by
    AICPA guidelines, as well as arithmetic errors. 23Statements on
    Standards for Attestation Engagements No. 1 and No. 4, Financial
    Forecasts and Projections (AT section 200). Page 19
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 On July 28, 1999,
    the District revised its fiscal year 2000 financial forecast and
    stated that it would advise the Congress of the changes.
    Specifically, the District revised its financial forecasts to
    reflect changes to (1) the fiscal year 1998 base year amounts so
    that they agreed with the fiscal year 1998 financial statements,
    (2) revenue projections that were overstated by almost $4 million
    per year over the 7-year period, and (3) correct arithmetic
    miscalculations. As a result of the reduction in projected
    revenues and correction of various errors, the District
    reevaluated its projected expenditures and deferred the start-up
    of projects to ensure that a balance was maintained in the Fund.
    The deferral of these projects lowered planned expenditures by $8
    million over the 7-year period. We found that the need for these
    revisions was primarily attributable to the lack of written
    procedures identifying the responsible agencies and their
    functions in preparing the forecasts. In our opinion, the
    accompanying forecasted statements, as revised on July 28, 1999,
    are presented in conformity with guidelines for presentation of
    forecasted information established by the AICPA. The underlying
    assumptions made and methodology used to develop the statements
    provided a reasonable basis for the first 5 years of the 7-year
    forecast. 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.
    Objectives, Scope, and  Management is responsible for Methodology
* preparing the Fund's financial statements in conformity with
    generally accepted accounting principles, * maintaining effective
    internal control, * 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 (1)
    obtaining reasonable assurance about whether the financial
    statements are free of material misstatement and presented fairly
    in all material respects, in conformity with generally accepted
    accounting principles, and (2) expressing an opinion on the
    effectiveness Page 20                                   GAO/AIMD-
    99-263 D.C. Highway Trust Fund B-281963 of the District's internal
    control related to the Fund based on our examination. We are also
    responsible for testing compliance with selected provisions of
    laws and regulations that have a direct and material effect on the
    financial statements. In addition, we are responsible for
    expressing an opinion on whether the forecasted statements are
    presented in conformity with AICPA guidelines and for determining
    whether the assumptions used provide a reasonable basis for the
    preparation of the statements. In order to fulfill these
    responsibilities, we * examined, on a test basis, evidence
    supporting the amounts and disclosures in the financial
    statements; * assessed the accounting principles used and
    significant estimates made by management; * evaluated the overall
    presentation of the financial statements and the 5-year forecasted
    statements; * obtained a sufficient understanding of internal
    control related to financial reporting, including safeguarding
    assets and compliance with laws and regulations; * tested relevant
    internal controls over financial reporting, including safeguarding
    assets and compliance with laws and regulations, and examined
    management's assertion about the effectiveness of internal
    control; * tested compliance with selected provisions of the
    following laws: (1) D.C. Procurement Practices Act of 1985, (2)
    D.C. Quick Payment Act of 1984, (3) D.C. Emergency Highway Relief
    Act, and (4) D.C. Code Ann. section 47-2303; and * examined the
    assumptions made and methodology used for the first 5 years of the
    District's 7-year forecast of the Fund's expected conditions and
    operations and the preparation and presentation of the forecasted
    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 internal control. We did not test compliance with all
    laws and regulations applicable to the Fund. We limited our tests
    of compliance to those that we deemed Page 21
    GAO/AIMD-99-263 D.C. Highway Trust Fund B-281963 applicable to the
    financial statements of the Fund. We caution that noncompliance
    other than that discussed in this report may occur and not be
    detected by these tests and that such testing may not be
    sufficient for other purposes. We conducted our work in accordance
    with generally accepted government auditing standards. We
    requested comments on a draft of this report from the Mayor of the
    District of Columbia or his designee. The District's CFO provided
    us with written comments that are discussed in the "District
    Comments and Our Evaluation" section and are reprinted in appendix
    I. Recommendations    We reaffirm the recommendations outstanding
    from our reports on the audits of the 1996 and fiscal year 1997
    financial statements of the District's Highway Trust Fund.
    Appendix II indicates the current status of those recommendations.
    To address the newly reported revenue-related weaknesses
    identified in this report, we recommend that the Deputy Chief
    Financial Officer (DCFO) for the Office of Tax and Revenue *
    enforce procedures to require monthly transfers of motor fuel
    receipts from the General Fund to the Highway Trust Fund and
    require the District to reimburse the Fund for potential lost
    interest if the receipts are transferred after 30 days and *
    enforce implementation of the licensing requirement (D.C. Code
    Ann. section 47-2303) for a bond in the approximate sum of three
    times the average monthly motor fuel tax due from each wholesaler
    during the preceding 12 months or an estimate of the succeeding 12
    months. To address the weakness in procedures governing cashier
    operations, we recommend that the DCFO for the Office of Finance
    and Treasury establish written procedures to * enforce the
    segregation of duties between the preparer of daily
    reconciliations and the reviewer and * require that a supervisor
    independently review all teller reconciliations. To address the
    weakness identified in the District's preparation and submission
    of its forecasted statements to the Congress, we recommend that
    the Chief Financial Officer establish written procedures governing
    the processes for preparing, coordinating, and approving the
    financial forecasts prior to submission to the Congress. These
    procedures should identify the parties responsible and time frames
    for the Page 22                                  GAO/AIMD-99-263
    D.C. Highway Trust Fund B-281963 * development of the underlying
    assumptions and methodologies for each line item and * overall
    preparation and presentation of the financial forecasts. District
    Comments and  The District's CFO generally agreed with our audit
    findings and Our Evaluation                  recommendations. The
    CFO stated that the computer system general controls
    recommendations should be addressed during fiscal years 1999 and
    2000 and that procedures are now in place to address our
    recommendations regarding the monthly transfers of motor fuel
    receipts from the General Fund to the Highway Trust Fund and
    implementation of the licensing requirement. We will evaluate the
    effectiveness of the actions taken by the District as part of our
    audit of the Fund's fiscal year 1999 financial statements. David
    M. Walker Comptroller General of the United States July 28, 1999
    Page 23                                  GAO/AIMD-99-263 D.C.
    Highway Trust Fund Financial Statements Balance Sheets Page 24
    GAO/AIMD-99-263 D.C. Highway Trust Fund Financial Statements
    Statement of Revenues, Expenditures, and Change in Fund Balance
    Page 25                    GAO/AIMD-99-263 D.C. Highway Trust Fund
    Financial Statements Notes to the Financial Statements Page 26
    GAO/AIMD-99-263 D.C. Highway Trust Fund Financial Statements Page
    27                 GAO/AIMD-99-263 D.C. Highway Trust Fund
    Financial Statements Page 28                 GAO/AIMD-99-263 D.C.
    Highway Trust Fund Financial Statements Page 29
    GAO/AIMD-99-263 D.C. Highway Trust Fund Financial Statements Page
    30                 GAO/AIMD-99-263 D.C. Highway Trust Fund
    Financial Statements Supplementary Information Page 31
    GAO/AIMD-99-263 D.C. Highway Trust Fund Financial Statements Page
    32                 GAO/AIMD-99-263 D.C. Highway Trust Fund
    Financial Statements Page 33                 GAO/AIMD-99-263 D.C.
    Highway Trust Fund Financial Statements Forecasted Statements Page
    34                 GAO/AIMD-99-263 D.C. Highway Trust Fund
    Financial Statements Page 35                 GAO/AIMD-99-263 D.C.
    Highway Trust Fund Financial Statements Page 36
    GAO/AIMD-99-263 D.C. Highway Trust Fund Financial Statements Page
    37                 GAO/AIMD-99-263 D.C. Highway Trust Fund
    Appendix I Comments From the District of Columbia
    Appen Ad pix pe e s ndix I Page 38       GAO/NSIAD-99-263 D.C.
    Highway Trust Fund Appendix I Comments From the District of
    Columbia Page 39                                   GAO/NSIAD-99-
    263 D.C. Highway Trust Fund Appendix I Comments From the District
    of Columbia Page 40                                   GAO/NSIAD-
    99-263 D.C. Highway Trust Fund Appendix I Comments From the
    District of Columbia Page 41
    GAO/NSIAD-99-263 D.C. Highway Trust Fund Appendix I Comments From
    the District of Columbia Page 42
    GAO/NSIAD-99-263 D.C. Highway Trust Fund Appendix II Status of
    Prior Years' Audit RecommendationsAppendix II The results of our
    efforts to audit the Fund's fiscal year 1997 and 1996 Financial
    Statements were presented in our reports entitled Financial Audit:
    District of Columbia Highway Trust Fund's Fiscal Year 1997
    Financial Statements (GAO/AIMD-98-254, September 30, 1998) and
    Financial Audit: District of Columbia Highway Trust Fund's 1996
    Financial Statements (GAO/AIMD-98-30, December 15, 1997). Both
    reports included a total of 18 recommendations addressing internal
    control weaknesses. Five of these recommendations were implemented
    during the fiscal year 1997 audit period. We determined the status
    of the remaining 13 recommendations, which are listed below, based
    on our fiscal year 1998 audit work and discussions with District
    officials. We plan to update our assessment of the District's
    responses as part of our fiscal year 1999 audit. Page 43
    GAO/AIMD-99-263 D.C. Highway Trust Fund Table 1:  Status of Our
    1997 and 1996 Recommendations Year(s)             Recommendation
    Status To the DCFO for the Department of Public Works 1997 and
    1996       Revise procedures to require maintaining detailed  AC
    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. Ensure the segregation of duties in
    the                 AC preparation, approval, and validation of
    journal entries disbursements. Perform supervisory reviews of
    journal entries          AC and disbursements related to capital
    projects. To the DCFO for the Office of Tax and Revenue 1997
    Establish control procedures to investigate             AP
    instances in which unlicensed wholesalers submit tax returns or
    licensed wholesalers do not submit monthly returns. Establish
    control procedures to (1) review each         AP monthly tax
    return for completeness and accuracy, (2) reject incomplete and
    erroneous monthly tax returns, and (3) contact wholesalers if
    returns are rejected and follow up to ensure complete, accurate,
    and adequately documented monthly tax returns. Enforce
    implementation of the D.C. Code Ann.            AC section 47-2303
    requirement of a $5 annual license fee for motor vehicle fuel
    license and implement procedures to repay licensed wholesalers who
    overpaid during the past 3 years. 1996                Revise
    procedures to require daily logging,             AP endorsing, and
    depositing of motor 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. (Continued ) Page 44
    GAO/AIMD-99-263 D.C. Highway Trust Fund Year(s)
    Recommendation                                         Status
    Establish the procedures to verify the                 PL
    completeness of motor fuel tax receipts from wholesaler fuel sales
    to retailers or for fuel consumed by construction, bus, and other
    companies that buy at the wholesale level and consume that fuel
    within the District. Examples of such procedures are 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. To the
    Director of the Office of Information Systems 1997 and 1996
    Strengthen physical security over the facilities,      AP systems,
    and data by controlling all physical access to LAN centers and
    protecting all backup files. Strengthen logical security and
    better control the  PL 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
    PL 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  PL recovery plans and testing
    them at both LAN centers. Assess the Y2K vulnerabilities and
    develop an          PL evaluation and conversion plan. (Continued
    from Previous Page) Legend: AC - action complete AP - action in
    progress PL - action in planning or planning complete NP - no
    specific action planned Page 45
    GAO/AIMD-99-263 D.C. Highway Trust Fund Page 46    GAO/AIMD-99-263
    D.C. Highway Trust Fund Appendix III GAO Contacts and Staff
    Acknowledgements Appendix III GAO Contacts              Steven R.
    Haughton, (202) 512-5999 John D. Sawyer, (202) 512-9566
    Acknowledgements          In addition to those named above,
    Richard Cambosos, Angela Samblanet, Debra S. Rucker, and Chau Dinh
    made key contributions to this report. (916271)        Letter
    Page 47                                GAO/AIMD99-263 D.C. Highway
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