U.S. Postal Service Actions to Improve Its Financial Reporting	 
(13-NOV-02, GAO-03-26R).					 
                                                                 
Over the past 2 years, we have been raising concerns and have	 
made recommendations regarding the lack of sufficient and timely 
periodic information on the U.S. Postal Service's financial	 
condition and outlook available to the public between		 
publications of its audited year-end financial statements. This  
report responds to a request that we provide periodic updates on 
several key areas related to the Service's financial outlook,	 
including improvements in financial and performance reporting.	 
Specifically, this report discusses actions taken by the Service 
to address our past recommendations to provide sufficient, more  
timely, and accessible financial reports as well as our 	 
assessment of the Service's responses.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-26R 					        
    ACCNO:   A05522						        
  TITLE:     U.S. Postal Service Actions to Improve Its Financial     
Reporting							 
     DATE:   11/13/2002 
  SUBJECT:   Financial management				 
	     Financial records					 
	     Financial statements				 
	     Information disclosure				 
	     Postal service					 
	     Reporting requirements				 

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GAO-03-26R

GAO- 03- 26R Postal Financial Reporting

November 13, 2002 The Honorable Daniel K. Akaka Chairman The Honorable
Thad Cochran Ranking Minority Member Subcommittee on International
Security,

Proliferation, and Federal Services Committee on Governmental Affairs
United States Senate

Subject: U. S. Postal Service Actions to Improve Its Financial Reporting

Given the vital role of the nation*s postal system and the importance of
its financial viability, it is imperative that the U. S. Postal Service
(the Service), the Congress, stakeholders, and the public have adequate
information available to them to understand the Service*s financial
situation and assess its progress towards meeting its performance goals
and planning for its future. During the first part of fiscal year 2001,
the Service made numerous revisions to its estimated net income with
little or no public explanation. The Service*s financial outlook changed
from a $480 million deficit in its fiscal year 2001 budget approved in
November of 2000, to a $2 billion to $3 billion deficit projected 3 months
later in February 2001. Likewise, at the beginning of fiscal year 2002,
the Service estimated that it would end the year with a $1.35 billion
deficit and then stated, in May 2002, that its net loss for the year could
have reached $4.5 billion. Despite the fact that the Service publicly
released periodic financial information, these significant changes in
financial outlook were not evident from publicly available information and
came as a surprise to many stakeholders. More recently, the Service
announced the results of a new financial analysis that could significantly
reduce its Civil Service Retirement System (CSRS) pension liability if
Congress takes related legislative action, which would significantly
impact the Service*s financial outlook. 1 It will be important for the
Service to keep stakeholders well informed about this issue.

Over the past 2 years, we have been raising concerns and have made
recommendations regarding the lack of sufficient and timely periodic
information on the Service*s financial condition and outlook available to
the public between publications of its audited yearend financial
statements. This report responds to your July 31, 2002, request that we
provide periodic updates on several key areas related to the Service*s
financial outlook,

1 In May 2002, we asked the Office of Personnel Management (OPM) to, among
other things, estimate how much of the underfunded CSRS pension liability
is attributable to the Service. OPM*s projections indicate that the
Service*s future payments required under current legislation would
overfund the CSRS liability by $71 billion over the remaining benefit
period. Legislation would be required to modify the existing funding
method so as to prevent overfunding of benefits in the future.

United States General Accounting Office Washington, DC 20548

2 GAO- 03- 26R Postal Financial Reporting

including improvements in financial and performance reporting.
Specifically, this report discusses the actions taken by the Service to
address our past recommendations to provide sufficient, more timely, and
accessible financial reports as well as our assessment of the Service*s
responses. Our specific recommendations and the Service*s initial
responses were as follows:

* In April 2001, we recommended that the Service provide summary financial
reports to Congress and the public on a quarterly basis. These quarterly
reports were to present sufficiently detailed information for stakeholders
to understand the Service*s current and projected financial condition, how
its outlook may have changed since the previous quarter, and its progress
towards achieving its desired results. 2 In a letter dated June 2001 to
congressional oversight and appropriation committees and subcommittees,
the Service agreed to provide additional transparency related to its
financial condition and said that it would create, and post to its Web
site, financial statements *similar to what publicly traded enterprises
provide* and continue this practice quarterly.

* In February 2002, we recommended that the Service provide its monthly
and quarterly financial reports on its Web site in a user- friendly format
and in a timelier manner. 3 In its February 2002 comments on a draft of
our report, the Service agreed with our recommendation and said it was
providing financial reports on its Web site in a more timely and user-
friendly manner.

* In September 2002, we reported that the Service should carefully
reassess its overall accounting treatment for pension and postretirement
health obligations

and reaffirmed a recommendation that we previously made to the Service to
enhance disclosure of its postretirement health benefit obligations in its
financial statements. In its September 10 letter commenting on the report,
the Service stated that it planned to address its pension and
postretirement health obligations in the Management Discussion and
Analysis (MD& A) section of its annual report. 4

This report on the Service*s financial reporting is based on our previous
work, review of the Service*s monthly and quarterly financial reports from
the third quarter of fiscal year 2001 through the third quarter of fiscal
year 2002, the Service*s written responses to our recommendations, and
discussions with Service officials about their responses to our
recommendations.

We compared the Service*s quarterly financial report for the third quarter
ending in May 2002, with those of a similar period completed by two of its
major publicly traded competitors* FedEx and United Parcel Service (UPS).
Publicly traded companies are

2 U. S. General Accounting Office, U. S. Postal Service: Transformation
Challenges Present Significant Risks, GAO- 01- 598T (Washington, D. C.:
Apr. 4, 2001). 3 U. S. General Accounting Office, U. S. Postal Service:
Deteriorating Financial Outlook Increases Need for

Transformation, GAO- 02- 355 (Washington, D. C.: Feb. 28, 2002). 4 U. S.
General Accounting Office, U. S. Postal Service: Accounting for
Postretirement Benefits, GAO- 02-

916R (Washington, D. C.: Sept. 12, 2002).

3 GAO- 03- 26R Postal Financial Reporting

subject to Securities and Exchange Commission (SEC) quarterly financial
reporting requirements. 5 These quarterly reports include three major
components: (1) financial statements, which consist of an income
statement, balance sheet, cash flow statement, and related footnotes; (2)
management*s discussion and analysis (MD& A) of financial condition and
results of operations; and (3) quantitative and qualitative disclosures
about market risk. 6 The SEC requires that information in quarterly
reports from publicly traded entities provide investors and others with an
accurate understanding of the company*s current and prospective financial
position and operating results. Although the Service is not subject to SEC
reporting requirements, the purpose of these requirements is similar to
the intent of our recommendations for improved transparency to enable
stakeholders to better understand the Service*s financial condition and
outlook.

We conducted our review between July 2002 and September 2002 in accordance
with generally accepted government auditing standards. We requested
comments on a draft of this report from the Postal Service, and its
comments are discussed near the end of this letter and are reproduced in
enclosure IV.

Results In Brief

Transparency is particularly important because the Service is the hub of a
$900 billion mailing industry and is a vital part of the nation*s
communications network. Its recent financial difficulties have accentuated
the need for stakeholders* including the Congress, Postal Rate Commission
(PRC), and mailers* to be well apprised of the Service*s financial
situation and understand how future operating results may be affected by
impending events. Further, we recently reported that the Service*s
financial situation is significantly impacted by its pension and
postretirement health obligations and that the Service should reassess its
accounting treatment and reporting of these obligations. We also
reaffirmed our previous recommendation that the Service disclose the full
amount of the accrued postretirement health benefits earned by its
employees and retirees in notes to its financial statements. The
importance of these obligations was recently highlighted when the Service
announced the results of a new analysis that could significantly reduce
its CSRS pension liabilities if Congress takes related legislative action.
This change would improve its overall financial condition and provide
opportunities to address other key financial issues, such as its
postretirement health benefit obligations and outstanding debt.

Although the Service has traditionally provided a range of detailed
financial and operating data to stakeholders throughout the fiscal year,
its periodic financial reports have not clearly explained changes in its
financial condition, results of operations, and outlook and have not
always been readily available to the public. In response to our
recommendations, the Service committed to provide quarterly financial
statements *similar to what publicly traded enterprises provide.* The
Service also has begun posting its quarterly reports on mail volumes and
revenues, along with its monthly operating statements, to its Web site.
However, we do not believe that the quarterly financial

5 See 17 C. F. R. S:240. 13a- 13. 6 Such risks are typically associated
with derivative instruments utilized to hedge changing market

conditions and may not be applicable to activities of the Service.

4 GAO- 03- 26R Postal Financial Reporting

reports provided to date meet the intent of our recommendations, because
the Service provided only limited analysis and explanations to help
stakeholders understand what had changed, why it had changed, and how
these changes affected the Service*s current financial situation and
expected outlook.

The SEC requires that quarterly reports submitted by publicly traded
companies include a discussion of material changes in a company*s
financial condition and results of operations. 7 This type of discussion
is consistent with the intent of our recommendations. When we compared the
Service*s most recent quarterly report with those of two of its publicly
traded competitors* FedEx and UPS* we found that the Service*s quarterly
report generally provided the same basic financial statements as did its
competitors. However, unlike the Service, FedEx and UPS also provided very
detailed *Management*s Discussion and Analysis* sections in their reports
that discussed events during the period that may have had a significant
impact on the financial condition of the company and the outlook for the
future, and compared the results of operations with the prior year*s
results. FedEx and UPS*s reports also included explanatory footnotes to
the financial statements that provided details about significant changes
that have occurred and material contingencies that were not included in
the Service*s reports. Further, the Service*s quarterly reports were not
consistent in format and content, or as available to the public as the
FedEx and UPS quarterly reports. These changes in subsequent quarterly
reports and their limited availability made it difficult to make
comparisons and analyze trends.

In commenting on our draft report, the Service said that it would provide
additional information in its periodic financial reports to improve
stakeholder understanding of its business and that it would retain the
data placed on its Web site for 3 years. The Service also cautioned that
public discussion of retirement obligations must be undertaken with great
care, and that it would ensure greater public understanding in this area.
Due to the magnitude of these costs, the potential effects on current and
future ratepayers, and the complexity of the issues involved in reporting
retirement- related obligations, we agree that greater public
understanding of these obligations is important and that the Service can
help accomplish this through enhanced disclosure in its financial and
related statements. The Service also said that it makes more financial and
operating information available than we reflected in our report. We
discuss this issue near the end of this letter.

Background

Traditionally, between the annual issuance of its audited year- end
financial statements, the Service has provided several types of periodic
financial reports, including its monthly Financial and Operating
Statements; quarterly Revenue, Piece, and Weight (RPW) Reports; and most
recently, quarterly financial reports. 8 The information provided in its
periodic monthly operating statements and quarterly RPW reports is as
follows:

7 See 17 C. F. R. S:229. 303 (b)( 2002). 8 The Service uses a 52- week
*postal fiscal year* for management purposes that contains 364 days and
thus

starts and ends on a different day each postal fiscal year. The Service
divides each postal fiscal year into 13 accounting periods of 4 weeks
each. The first postal quarter corresponds to the first three accounting
periods, and the last postal quarter includes the last four accounting
periods of the postal fiscal year.

5 GAO- 03- 26R Postal Financial Reporting

* Monthly Financial and Operating Statements: Cover a 4- week period and
include data that provide an overview of financial results for that
period, compare results with the budget, compare results with the same
period in the previous year, and provide year- to- date information. These
statements also include detailed information on revenues, expenses,
volumes, and work hours; a balance sheet; a cash flow statement; and
capital commitments and outlays. Traditionally, these reports were sent to
stakeholders by request or posted on the PRC*s Web site. The Service began
posting the most recently completed financial and operating statement to
its Web site in early 2002.

* Quarterly Revenue, Piece, and Weight Reports: Contain information
relating to the Service*s mail classes and special services. RPW reports
document the total revenue, pieces, and weights for each mail class,
subclass, and service for that quarter; in addition, the reports provide
data on the amount and percentage change from the same period in the
previous year and year- to- date information. Quarterly RPW reports dating
back to fiscal year 1999 are currently available on the Service*s Web
site.

During the fall of 2001, when the Service experienced sharp declines in
its mail volumes and revenues, and it requested additional appropriations
from Congress, readily available and detailed information on the Service*s
changing financial situation was scarce. Our February 2002 report noted
that from October 2001 to mid- January 2002, the Service did not publicly
release its monthly statements for the last accounting period of fiscal
year 2001 and for the first three accounting periods of fiscal year 2002.
9 Although the Service issued its annual report for fiscal year 2001 in
December 2001, it did not publicly release financial results for the
fourth quarter of fiscal year 2001. 10 We reported that more timely
availability of monthly and quarterly reports, even if they contain
preliminary data subject to revision, would be useful to improve
transparency for congressional oversight, the stakeholder community, and
the public. 11

The Service*s Quarterly Financial Reports Lacked Explanatory Information,
Consistency, and Public Availability

Much attention has recently been focused on efforts to improve
accountability and the usefulness of financial information, in both the
public and private sectors. One of the key components of the President*s
Management Agenda is to improve accountability to the American people by
enhancing the timeliness, usefulness, and reliability of financial
information provided by federal agencies. Likewise, recently enacted
legislation* the Sarbanes- Oxley Act of 2002 (Public Law 107- 204, enacted
into law on July 30, 2002)* seeks to protect investors by improving the
accuracy and reliability of corporate

9 GAO- 02- 355. 10 The Service has a long- standing practice of
withholding detailed financial information on the fourth

quarter of a fiscal year and the first accounting periods of the following
fiscal year until its annual financial statements have been audited and
approved by the Board of Governors. The board approved the Service*s
audited financial statements for fiscal year 2001 in December 2001. 11
GAO- 02- 355, pp. 44- 45.

6 GAO- 03- 26R Postal Financial Reporting

disclosures made pursuant to the securities laws. Given the importance of
the Service*s financial condition and outlook, timely, accurate, and
complete financial information is needed for oversight purposes and for
stakeholders to better understand the Service*s changing financial
situation and its potential effect on stakeholders* future plans.

The key limitations of the Service*s quarterly financial reports were that
they have lacked sufficient analysis and explanation of what has changed
and why in its financial condition, operating results, and outlook. This
type of explanatory information is typically provided in quarterly
financial reports of publicly traded companies and is consistent with the
intent of our previous recommendations. Further, the Service*s quarterly
reports have not been consistent in format and content or readily
available to the public. Sufficient, consistent, and accessible financial
information helps provide the necessary transparency and accountability
that are fundamental principles in ensuring public confidence in an
organization and proper oversight.

The Service*s Quarterly Financial Reports Lacked Sufficient Analysis and
Explanations When we compared the most recent quarterly reports of the
Service with those of its publicly traded competitors* FedEx and UPS* we
found that the greatest differences were in the level of analysis and
explanation provided for changes in financial condition, operating
results, and outlook. 12 This information is generally included in the
sections titled MD& A in the publicly traded quarterly reports and in the
notes to the financial statements.

Management*s Discussion and Analysis (MD& A) The SEC requires publicly
traded enterprises to provide a management*s discussion and analysis of
the entities* financial condition and results of operations, both in
quarterly and annual reports. The SEC guidance for interim financial
reports states:

*the MD& A requirements are intended to provide in one section of a
filing, material historical and prospective textual disclosure enabling
investors and other users to assess the financial condition and results of
operations of the registrant, with particular emphasis on the registrant*s
prospects for the future . . .. Disclosure is mandatory where there is a
known trend or uncertainty that is reasonably likely to have a material
effect on the registrant*s financial condition or results of operations.
Accordingly, the development of an MD& A should begin with management*s
identification and evaluation of what information, including the potential
effects of known trends, commitments, events, and uncertainties, is
important to providing investors and others an accurate understanding of
the company*s current and prospective financial position and operating
results.* 13

12 Our comparisons were based on the most recent publicly available
quarterly reports by the Postal Service, FedEx, and UPS, which covered
different periods. The Postal Service*s third quarter report for fiscal
year 2002 covered the period February 23- May 17, 2002, and was made
publicly available in July 2002. FedEx*s third quarter report for fiscal
year 2002 covered the period December 1, 2000* February 28, 2002, and was
filed with the SEC in April 2002. UPS*s first quarter report for fiscal
year 2002 covered the period January 1, 2002* March 31, 2002, and was
filed with the SEC in May 2002. 13 See SEC Rel. Nos. 33- 8056; 34- 45321;
FR- 61 (Jan. 22, 2002).

7 GAO- 03- 26R Postal Financial Reporting

In comparing the most recent quarterly reports of the Service, FedEx, and
UPS, we found that the most notable differences were in the level of
detail provided in the MD& A sections of the reports. 14 For example,
FedEx and UPS provided explanations in their MD& A sections of how they
planned to meet their working capital needs for the future; causes of
changes in revenues and volume, by business line, compared with prior
periods; and their outlook for the future, including the effect of
significant events, such as the terrorist- related events of the fall of
2001. In contrast, the Service provided minimal explanations in these
areas. Given the potential impact of these and other key factors, such as
the timing and amount of proposed rate increases, it would be helpful to
know how these factors affect the Service*s changing year- end outlook.
Specific examples of the differences between the MD& A section of the
Service*s quarterly report and those in FedEx*s and UPS*s quarterly
reports are provided below. The full text of the quarterly reports we
compared can be found in enclosure I for the Service, enclosure II for
FedEx, and enclosure III for UPS.

* Postal Service discussion of outlook: *Volume trends of the past three
quarters are expected to continue through the fiscal year end in
September. Taking the June 30, 2002 rate increase into account, volume
losses in the 3 to 4 percent range are anticipated for the quarter,
compared to the same quarter last year. With expense reductions in excess
of $2. 5 billion and the rate increase on June 30, the estimated net loss
for the year will be in the range $1. 0 billion to $1. 5 billion.*

* FedEx discussion of outlook: *While we believe there is evidence that a
modest economic recovery is underway, a significant portion of our U. S.
domestic express business comes from the manufacturing and wholesale
sectors, especially in the high technology area. Recovery in these sectors
is still lagging the rest of the economy on a year- over- year basis.
Until these key sectors experience sustained growth, volumes at FedEx
Express are expected to remain soft.

*Our fourth quarter volume outlook for FedEx Express is for U. S. domestic
average daily package volume to be approximately 2% below last year*s
fourth quarter and for IP shipments to be down about 1%. In addition, our
dynamic fuel surcharge at FedEx Express effectively has a six- week lag
before the surcharge is adjusted for increased fuel prices. Therefore, our
operating income may be negatively affected should the spot price of jet
fuel increase significantly in the fourth quarter. At FedEx Ground, fourth
quarter volume is expected to grow about 16% year- over- year.

*We believe our diverse portfolio of services is the key factor to our
long- term growth. The expansion of our Home Delivery network and
continued development and cross selling of the diverse FedEx portfolio of
services, particularly to small- and medium- sized businesses, is central
to our strategy. Our website, fedex. com, is heavily utilized and has
helped us reduce costs and improve customer satisfaction. We believe that
our substantially fixed cost express network infrastructure will allow us
to realize incremental profits when the economy recovers.

*Maintenance costs during the fourth quarter of 2002 are expected to be
higher due to scheduled maintenance activities. Also, we accrued increased
variable compensation in the third quarter of 2002 and expect to continue
to do so in the fourth quarter. Our 2002 incentive compensation costs

14 The Service did not have a section titled Management*s Discussion and
Analysis in its quarterly report, but it did have similar sections titled
*Operating Results* and *Message from the Chief Financial Officer.* In our
analysis, we compared these sections with the MD& A sections of FedEx and
UPS quarterly reports.

8 GAO- 03- 26R Postal Financial Reporting

will be sharply reduced for most employees (including senior management).
However, fourth quarter incentive compensation provisions will be higher
year- over- year since the prior year*s fourth quarter included reversals
of incentive compensation that had been previously accrued.

*We expect pension and health care costs to continue to increase over the
near term. Our net pension cost for 2002 will increase by approximately
$90 million due to lower interest rates and a reduction in the value of
plan assets. We expect next year*s pension cost to increase by $90- 100
million based on a continued decline in interest rates and a decrease in
the expected return on pension plan assets. While employee retirement
costs continue to rise, our retirement programs are well funded, with
assets more than sufficient to meet our current obligations.*

* UPS excerpts of significant events and outlook: ** Due to the events of
September 11, 2001, increased security requirements for air carriers may
be forthcoming; however, we do not anticipate that such measures will have
a material adverse effect on our financial condition, results of
operations or liquidity. In addition, our insurance premiums have risen
and we have taken several actions, including self- insuring certain risks,
to mitigate the expense increase.

*As of December 31, 2001, we had approximately 232, 500 employees (64% of
total employees) employed under a national master agreement and various
supplemental agreements with local unions affiliated with the
International Brotherhood of Teamsters (" Teamsters"). These agreements
run through July 31, 2002. The majority of our pilots are employed under a
collective bargaining agreement with the Independent Pilots Association,
which becomes amendable January 1, 2004. Our airline mechanics are covered
by a collective bargaining agreement with Teamsters Local 2727, which
became amendable on August 1, 2001. Members of Teamsters 2727 recently
voted down a proposed new contract, and negotiations resumed in April 2002
with the assistance of the National Mediation Board. In addition, the
majority of our ground mechanics who are not employed under agreements
with the Teamsters are employed under collective bargaining agreements
with the International Association of Machinists and Aerospace Workers.
These agreements have various expiration dates between July 31, 2002 and
May 31, 2003.

*We entered into negotiations with the Teamsters in January 2002 for a new
national master agreement. It is our desire through these discussions to
reach an agreement on a new contract prior to the end of our current five-
year agreement on July 31, 2002. Any strike, work stoppage or slowdown
that results from our failure to reach a timely agreement with the
Teamsters, and any change in shipping behavior by our customers or
potential customers due to perceptions that we will not reach a timely
agreement with the Teamsters, could have a material adverse effect on our
financial condition and results of operations. We do not, however,
anticipate that this will occur.

*We believe that funds from operations and borrowing programs will provide
adequate sources of liquidity and capital resources to meet our expected
long- term needs for the operation of our business, including anticipated
capital expenditures such as commitments for aircraft purchases, through
2009.* * Postal Service discussion of changes in revenue:

*Revenue: Revenue of $15. 3 billion was 4.9 percent ($ 796 million) below
plan and 2. 0 percent ($ 322 million) below Quarter III of last year.
Planned revenue growth for Quarter III was 3.1 percent.

*Volume in Quarter III was 2. 5 percent below last year. We processed and
delivered 47.1 billion pieces as compared to 48. 3 billion pieces last
year. Revenue loss from the volume decline of 1. 2 billion pieces was
offset through expense reductions.*

9 GAO- 03- 26R Postal Financial Reporting

* UPS excerpts of changes in revenue: UPS reports its operations in three
segments: U. S. domestic package operations, international package
operations, and nonpackage operations, as well as on a consolidated basis.
Although the entire revenue discussion is included in enclosure III, for
brevity purposes, only the U. S. domestic package revenue discussion is
presented here, as follows:

*U. S. domestic package revenue decreased 1.2% compared to last year. This
decline was driven by a 1. 5% reduction in average daily package volume
which was primarily a result of the continued weakness in the U. S.
economy. Revenue for our Next Day Air products was also adversely affected
by a decline in revenue per piece. The decline results in part from lower
package weights combined with a mix shift favoring letters to packages.
This reflected what we believe to be continued slowness in the
manufacturing sector. Conversely, revenue for our Ground products
increased slightly due to a 3.5% increase in average revenue per piece.
This improvement resulted in part from having a rate increase that
occurred four weeks earlier than compared to the prior year.

*On January 7, 2002, we increased rates for standard ground shipments an
average of 3.5% for commercial deliveries. The ground residential charge
increased $0. 05 to $1. 10 over the commercial ground rate, and this
charge will also be applied to express deliveries in 2002. The additional
delivery area surcharge, which is added to ground deliveries in certain
less accessible areas, remained at $1. 50. In addition, in 2002, this
charge will also be applied to express deliveries to these addresses.
Rates for UPS Hundredweight increased 5. 9%.

*We also increased rates for UPS Next Day Air, UPS Next Day Air Saver, UPS
2nd Day Air, and 3 Day Select an average of 4.0%. The surcharge for UPS
Next Day Air Early A. M. increased from $27. 50 to $28.50. Rates for
international shipments originating in the United States (Worldwide
Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS
International Standard service) increased an average of 3. 9%. Rate
changes for shipments originating outside the U. S. were made throughout
the past year and varied by geographic market.

*An index- based fuel surcharge, which became effective December 10, 2001,
continued and resets on a monthly basis beginning in February 2002. The
index- based surcharge is based on the National U. S. Average On- Highway
Diesel Fuel Prices as reported by the U. S. Department of Energy.*

* FedEx discussion of changes in revenue: FedEx also reports its
operations on a consolidated basis and for its major business segments:
FedEx Express, FedEx Ground, FedEx Freight, and other Operations. See
enclosure II for the complete tables and discussion in each of these
areas.

As these examples indicate, the level of explanations in the FedEx and UPS
quarterly MD& A sections is significantly greater than that provided by
the Service and helps provide the reader with a better understanding not
only of what has changed, but why. In comparing the quarterly reports, we
developed the following questions that we believe would provide meaningful
information for the Service to include in its quarterly report in order to
make it a more useful document to its stakeholders:

* Information regarding the current reporting period:

10 GAO- 03- 26R Postal Financial Reporting

* What were the major changes in revenue, expense, and volume and the
causes of these changes? How do these results compare with the prior
period*s?

* What major challenges or risks did the Service face during the period,
and what was done to respond to them?

* What were the financial consequences of these occurrences?

* Information regarding the upcoming reporting period:

* What challenges are expected, by business line? How will they be
overcome?

* What are the financial expectations of the Service as a whole and on a
business line basis?

* What impact will competitors have in the upcoming period?

* What significant trends, events, commitments, or uncertainties may
affect the Service*s expectations?

* What are the expected cash requirements and year- end cash position?

* What are the expected capital commitments and outlays?

* What is the expected net income, and what actions may be taken to
address specific situations or conditions? Specifically, focus on the
causes of any losses and specific plans to correct them, if known.

* By major business line, what are the major challenges faced,
accomplishments, and plans to generate revenue, reduce costs, and pay down
the debt with the U. S. Treasury?

* Information regarding long- term outlook

* What are the capital expansion plans, projects, time periods, amounts,
and return on investment? What are current projects, their status, and
planned projects? How will these projects be funded and implemented? How
will changing economic factors affect these plans? What risk analysis and
contingency plans have been developed? What are the changes to the
previously reported plans?

* What are the plans to remain within the present debt limit and plans to
pay off long- term debt?

* How is the Service prepared to meet its long- term obligations, such as
funding postretirement health care costs?

While not all of these issues would necessarily be included in every
report, they do represent items that should be considered for disclosure
each quarter, giving special consideration to changes that have occurred
since the annual report was issued. In addition, some of these disclosures
would most appropriately be made in the footnotes accompanying the
quarterly financial statements, as are discussed in more detail below.

11 GAO- 03- 26R Postal Financial Reporting

Financial Statement Footnotes The Service*s most recent quarterly report
provided financial statements that were generally comparable to those
provided by FedEx and UPS in that they included the basic statements of
income, balance sheet, and cash flow. However, unlike the Service, FedEx
and UPS provided notes to the quarterly financial statements that included
explanations on a variety of issues, including changes in accounting
policies, business segment information, major new commitments and
contingencies, and supplemental cash flow information. The SEC guidance
for the content of interim financial statements states, in part, that

** disclosure shall be provided where events subsequent to the end of the
most recent fiscal year have occurred which have a material impact on the
registrant. Disclosures should encompass, for example, significant changes
since the end of the most recently completed fiscal year in such items as:
accounting principles and practices; estimates inherent in the preparation
of financial statements; status of long- term contracts; capitalization
including significant new borrowings or modification of existing financing
arrangements; and the reporting entity resulting from business
combinations or dispositions. Notwithstanding the above, where material
contingencies exist, disclosure of such matters shall be provided even
though a significant change since year end may not have occurred...* 15

These footnote explanations can greatly enhance the reader*s understanding
of the quarterly financial statements. For example, in their quarterly
reports, FedEx and UPS each discuss in detail contingent losses due to
pending lawsuits, whereas the Service does not present similar information
on contingent losses, even though such contingencies exist. 16

Another area where footnote disclosures would be helpful to the
understanding of the Service*s quarterly reports is a more detailed
breakdown of certain key line items in the financial statements. For
example, the Service includes in its income statement a single line item
for *revenues,* with no further breakdown provided. UPS also reports a
single line item for revenue in its income statement, but then provides
breakdowns of revenue for each of its reporting segments, including
comparative numbers for the prior quarter. Similarly, details of financial
statement line items for *other expenses* and *other assets* are provided
in UPS footnotes, which would also be helpful for the Service. *Other
liabilities* is also a significant line item on the Service*s balance
sheet at $41.8 billion, out of $63 billion in total liabilities. Within
this number is approximately $30 billion related to deferred pension
liabilities that warrant explanation in the footnotes, as well as other
liabilities related to employee benefits that are included in this line
item. Further, we have recommended that the Service disclose the amount of
postretirement health benefits earned by postal employees and retirees in
notes to its financial statements to provide more complete information
about these significant obligations. 17 In our

15 See 17 C. F. R. S:210.10- 01( a)( 5)( 2002). 16 A general discussion in
the footnotes to the U. S. Postal Service Annual Report 2001 discloses
contingent

liabilities. 17 In May 1992, we recommended that the Service provide
additional information on its postretirement

health benefits as part of its annual financial statement (U. S. General
Accounting Office, Financial Reporting: Accounting for the Postal
Service*s Postretirement Health Care Costs, GAO/ AFMD- 92- 32, Washington,
D. C.: May 20, 1992). The Service did not agree with and did not implement
this

12 GAO- 03- 26R Postal Financial Reporting

September 2002 report, we stated that the Service should reassess its
accounting treatment for both its pension and postretirement health
obligations and reiterated our previous recommendation that the Service
should fully disclose its postretirement health obligations because they
represent a very material commitment that affects the future viability of
the Service.

An additional useful footnote disclosure for the recent quarterly report
would have been a discussion of the $675 million in supplemental funds
appropriated to the Service during fiscal year 2002 to deal with expenses
relating to the terrorist attacks of September 11 and subsequent anthrax
attacks. 18 These funds are significant because the Service, as an entity
that is substantially self- financing, generally receives only a small
annual appropriation. For example, in fiscal year 2002, the Service was
appropriated only about $77 million in its general fiscal year
appropriation. 19 Further, disclosure of the approximately $4 billion
projected to be needed over the next 5 years for improving the Service*s
mail processing systems to protect postal employees and the general public
from future attacks through the mail would have informed the reader of the
potentially material effect these expenses may have on the Service*s
financial results in the future. 20

Consideration of the level of detail included in FedEx*s and UPS*s
quarterly reports, as well as that of other organizations* reports, may be
helpful to the Service as it makes enhancements to future quarterly
reports. We recognize that judgments must be made about the level of
detail that should be provided in quarterly financial reports and that not
all quarterly reports will be the same. However, it is clear from recently
publicized problems in financial reporting that more detailed information
and transparency are called for by both Congress and the public. Such
transparency is critical for the Service because of the importance of its
financial situation and the implications for stakeholders in making their
own financial plans. These factors help support stakeholders* need for
timely, accurate, and complete financial information that is provided on a
consistent basis.

The Service*s Quarterly Financial Reports Lacked Consistent Format and
Adequate Availability to the Public

The first quarterly report that the Service posted to its Web site for the
third quarter of fiscal year 2001 was a good starting point for providing
information to Congress and the public. However, changes in subsequent
quarterly reports and their limited availability made it difficult to make
comparisons and analyze trends. Table 1 shows quarterly financial
information provided since our recommendation.

recommendation. We reiterated this recommendation and also discussed the
accounting treatment of these obligations in our recent report, U. S.
General Accounting Office, U. S. Postal Service: Accounting for
Postretirement Benefits, GAO- 02- 916R (Washington, D. C.: Sept. 12,
2002). 18 On November 20, 2001, the President released $175 million to the
Postal Service from the Emergency

Response Fund for expenses relating to the terrorist attacks. In January
2002, the Service was appropriated an additional $500 million for
emergency expenses. 19 Public Law 107- 67.

20 Public Law 107- 117 appropriated $500 million to the Service for
emergency expenses and required the Service to develop an Emergency
Preparedness Plan with its planned expenditures to support this Plan.

13 GAO- 03- 26R Postal Financial Reporting Table 1: The Service*s
Quarterly Financial Reports from Third Quarter Fiscal Year 2001

through Third Quarter Fiscal Year 2002 Fiscal quarter The Service*s
actions

Third quarter, FY 2001 Posted quarterly report to its Web site Fourth
quarter, FY 2001 Annual report, no quarterly report available First
quarter, FY 2002 Posted slide presentation to its Web site Second quarter,
FY 2002 Posted slide presentation to its Web site Third quarter, FY 2002
Posted quarterly report to its Web site Source: U. S. Postal Service.

The Service stated that its audited fiscal year 2001 annual report would
serve as its fourth quarter report, which is a common reporting practice
for publicly traded companies under SEC*s rules. Although neither FedEx
nor UPS are required to submit fourth quarter reports to the SEC, they do
issue press releases on their Web sites that include detailed fourth
quarter financial information, such as income statement and balance sheet
information, and a discussion of quarterly results. The Service
occasionally releases financial information via press releases; however,
no press release was provided that included financial results for the
fourth quarter of fiscal year 2001. Utilizing press releases to discuss
fourth quarter results would compensate for the time lapses between the
release of its third quarter report and its annual report, thus providing
stakeholders with more timely financial information.

Another concern we raised was that the format for quarterly reports was
not consistent, so that it was difficult to compare results and analyze
trends over time. For the first quarter of fiscal year 2002, the Service
changed its reporting format from what was provided in its first publicly
available quarterly report for the third quarter of fiscal year 2001. The
Service used the Chief Financial Officer*s (CFO) first quarter slide
presentation to the Board of Governors as its quarterly financial report
and stated that it was posted on its Web site. In spring of 2001, the
Service stated that for future quarterly reports these slide presentations
would be used. The Service then posted the CFO*s slide presentation for
the second quarter of fiscal year 2002 to its Web site. We testified in
May of 2002 that the CFO*s slide presentations contained less information
than the fiscal year 2001 third quarter report. 21 The slide presentations
included summary information on total revenues, expenses, and work- hour
information, but did not include any discussion of the Service*s current
position and outlook. For the third quarter of fiscal year 2002, the
Service posted to its Web site a quarterly report that was similar to its
third quarter report for fiscal year 2001.

Finally, we raised a concern that the Service*s financial reports were not
readily available to the public. Although the Service has begun to post
both its monthly and quarterly reports to its Web site, it only posted the
two most recent monthly reports and the latest quarterly report. In
comparison, FedEx and UPS make available not only their most recent
report, but also past quarterly reports. For example, FedEx*s quarterly
reports dating back to April 1998 and UPS*s quarterly reports dating back
to May 2000 are currently available on their Web sites. Posting past
monthly and quarterly reports to the Service*s Web site would improve
accessibility to past financial information and would

21 GAO- 02- 694T.

14 GAO- 03- 26R Postal Financial Reporting

assist stakeholders in understanding the Service*s changing financial
condition and allow for trend analysis and comparisons. Agency Comments
and Our Evaluation

The Service provided comments on a draft of this report in a letter from
the Chief Financial Officer dated October 17, 2002. These comments are
summarized below and reproduced in enclosure IV. In commenting on our
draft report, the CFO stated that the Service would provide additional
information in its periodic financial reports to improve stakeholder
understanding of its business and that it would retain the data placed on
its Web site for 3 years. Specifically, the Service agreed to provide
explanations about variances from budgeted amounts, financial
expectations, and the projected financial and operational impact of
material events or transactions.

The CFO pointed out that while the Service received many suggestions for
fine- tuning certain disclosures, the financial community expressed
overall satisfaction with the quantity and quality of data the Service
provides. The CFO commented that the Service publicly discloses
information to the PRC during rate case filings that exceeds the amount of
information required by SEC- regulated companies and most other government
agencies. We acknowledge that the Service provides a significant amount of
information in its rate case filings; however, this information is
provided only for rate- setting purposes, and rate cases are not filed on
a regular cycle. Thus, rate case information does not provide stakeholders
timely information about the Service*s current financial condition and
changes to its expected outlook. As we have reported, stakeholders have
been surprised by the significant changes that have occurred during the
fiscal year to the Service*s net income estimates and financial outlook.

The CFO also stated that our report did not adequately or completely
reflect the Service*s ongoing financial reporting, including its detailed
revenue, volume, and weight information; annual billing determinants data;
and 4- week Financial and Operating Statements. Our report does provide
descriptions of the Service*s periodic financial information, including
its quarterly Revenue, Piece, and Weight reports and its monthly Financial
and Operating Statements. As we noted, however, these periodic financial
reports do not clearly explain changes in its financial condition,
outlook, and results of operations, and have not always been readily
available to the public. The Service also provides annual information,
such as its Annual Auditor*s Report and annual billing determinants data,
but this information is not available throughout the year for use in
periodic analysis. Moreover, the billing determinants data for fiscal year
2001, which ended in September 30, 2001, was not released until October of
2002.

With regard to the CFO*s point about the Service*s retirement obligations,
he cautioned that public discussion of retirement obligations must be
undertaken with great care and that the Service would ensure greater
public understanding in this area. Due to the magnitude of these costs,
the potential effects on current and future ratepayers, and the complexity
of the issues involved in reporting retirement- related obligations, we
agree that greater public understanding of these obligations is important.
The Service*s announcement regarding its CSRS pension liability at its
November 2002 Board of

15 GAO- 03- 26R Postal Financial Reporting

Governors meeting further emphasizes the importance of enhanced disclosure
and discussion of the implications of all of its retirement- related
obligations. Further, the reduction in future pension obligations would
increase the Service*s options for dealing with its postretirement health
obligations and other financial challenges. For these reasons, we believe
that the Service needs to enhance its disclosure of its postretirement
health obligations in its financial reports. Importantly, a number of
major employers have provided disclosures relating to these types of
obligations for several years. In addition, the consolidated financial
statements of the U. S. government include extensive disclosures of these
obligations on a government- wide basis. Without sufficient disclosure of
these obligations in the Service*s financial statements or the related
footnotes, neither Congress nor stakeholders can have adequate information
needed to make appropriate decisions related to these issues. We continue
to believe that, at a minimum, these obligations should be discussed in
the notes to the financial statements.

- - - - We are sending copies of this report to the Chairman and Ranking
Minority Member of the Senate Committee on Governmental Affairs, Chairman
and Ranking Minority Member of the House Committee on Government Reform,
the Service*s Postmaster General/ Chief Executive Officer, the Service*s
Chief Financial Officer, the Chairman of the Postal Rate Commission, and
other interested parties. We will also make copies available to others on
request. In addition, the report will be available at no charge on the GAO
Web site at http:// www. gao. gov.

If you have any questions about this report or the enclosures, please
contact Bernard Ungar at (202) 512- 2834, ungarb@ gao. gov, or Linda
Calbom at (202) 512- 8341, calboml@ gao. gov. Key contributors to this
assignment were Teresa Anderson, Tida Barakat, Joshua Bartzen, Heather
Dunahoo, and Michael Fischetti.

Bernard L. Ungar Director, Physical Infrastructure Issues

Linda Calbom Director, Financial Management and

Assurance

Enclosure I 16 GAO- 03- 26R Postal Financial Reporting

Postal Service Fiscal Year 2002 Third Quarter Financial Report

Enclosure I 17 GAO- 03- 26R Postal Financial Reporting

Enclosure II 18 GAO- 03- 26R Postal Financial Reporting

FedEx Fiscal Year 2002 Third Quarter Financial Report

Enclosure II 19 GAO- 03- 26R Postal Financial Reporting

Enclosure II 20 GAO- 03- 26R Postal Financial Reporting

Enclosure II 21 GAO- 03- 26R Postal Financial Reporting

Enclosure II 22 GAO- 03- 26R Postal Financial Reporting

Enclosure II 23 GAO- 03- 26R Postal Financial Reporting

Enclosure II 24 GAO- 03- 26R Postal Financial Reporting

Enclosure II 25 GAO- 03- 26R Postal Financial Reporting

Enclosure II 26 GAO- 03- 26R Postal Financial Reporting

Enclosure II 27 GAO- 03- 26R Postal Financial Reporting

Enclosure II 28 GAO- 03- 26R Postal Financial Reporting

Enclosure II 29 GAO- 03- 26R Postal Financial Reporting

Enclosure II 30 GAO- 03- 26R Postal Financial Reporting

Enclosure II 31 GAO- 03- 26R Postal Financial Reporting

Enclosure II 32 GAO- 03- 26R Postal Financial Reporting

Enclosure II 33 GAO- 03- 26R Postal Financial Reporting

Enclosure II 34 GAO- 03- 26R Postal Financial Reporting

Enclosure II 35 GAO- 03- 26R Postal Financial Reporting

Enclosure II 36 GAO- 03- 26R Postal Financial Reporting

Enclosure II 37 GAO- 03- 26R Postal Financial Reporting

Enclosure II 38 GAO- 03- 26R Postal Financial Reporting

Enclosure II 39 GAO- 03- 26R Postal Financial Reporting

Enclosure II 40 GAO- 03- 26R Postal Financial Reporting

Enclosure II 41 GAO- 03- 26R Postal Financial Reporting

Enclosure II 42 GAO- 03- 26R Postal Financial Reporting

Enclosure II 43 GAO- 03- 26R Postal Financial Reporting

Enclosure II 44 GAO- 03- 26R Postal Financial Reporting

Enclosure II 45 GAO- 03- 26R Postal Financial Reporting

Enclosure II 46 GAO- 03- 26R Postal Financial Reporting

Enclosure II 47 GAO- 03- 26R Postal Financial Reporting

Enclosure II 48 GAO- 03- 26R Postal Financial Reporting

Enclosure II 49 GAO- 03- 26R Postal Financial Reporting

Enclosure II 50 GAO- 03- 26R Postal Financial Reporting

Enclosure II 51 GAO- 03- 26R Postal Financial Reporting

Enclosure III 52 GAO- 03- 26R Postal Financial Reporting

United Parcel Service Quarterly Report

Enclosure III 53 GAO- 03- 26R Postal Financial Reporting

Enclosure III 54 GAO- 03- 26R Postal Financial Reporting

Enclosure III 55 GAO- 03- 26R Postal Financial Reporting

Enclosure III 56 GAO- 03- 26R Postal Financial Reporting

Enclosure III 57 GAO- 03- 26R Postal Financial Reporting

Enclosure III 58 GAO- 03- 26R Postal Financial Reporting

Enclosure III 59 GAO- 03- 26R Postal Financial Reporting

Enclosure III 60 GAO- 03- 26R Postal Financial Reporting

Enclosure III 61 GAO- 03- 26R Postal Financial Reporting

Enclosure III 62 GAO- 03- 26R Postal Financial Reporting

Enclosure III 63 GAO- 03- 26R Postal Financial Reporting

Enclosure III 64 GAO- 03- 26R Postal Financial Reporting

Enclosure III 65 GAO- 03- 26R Postal Financial Reporting

Enclosure III 66 GAO- 03- 26R Postal Financial Reporting

Enclosure III 67 GAO- 03- 26R Postal Financial Reporting

Enclosure III 68 GAO- 03- 26R Postal Financial Reporting

Enclosure III 69 GAO- 03- 26R Postal Financial Reporting

Enclosure III 70 GAO- 03- 26R Postal Financial Reporting

Enclosure III 71 GAO- 03- 26R Postal Financial Reporting

Enclosure IV 72 GAO- 03- 26R Postal Financial Reporting

Comments from the U. S. Postal Service

Enclosure IV 73 GAO- 03- 26R Postal Financial Reporting

(543036)
*** End of document. ***