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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