Financial Audits: American Battle Monuments Commission's Operations for
Fiscal Year 1997 (Testimony, 04/29/98, GAO/T-AIMD-98-151).

GAO discussed its recent audit work on the American Battle Monuments
Commission's (ABMC) fiscal year (FY) 1997 financial statements, focusing
on: (1) legislative initiatives over the past several years to improve
financial management across the federal government, and how requirements
for ABMC to produce audited financial statements fit into that larger
context; (2) GAO's audit reports on ABMC's financial statements and
suggestions for improving ABMC's operations; and (3) ideas for further
enhancing ABMC's accountability.

GAO noted that: (1) the Chief Financial Officers Act of 1990, as
expanded by the Government Management Reform Act of 1994, requires major
departments and agencies to annually produce agencywide financial
statements, and, beginning with FY 1997, for the Secretary of the
Treasury, in cooperation with the Director of the Office of Management
and Budget (OMB), to annually prepare consolidated financial statements
for the entire government; (2) three principals concerned with overall
financial management in the federal government established the Federal
Accounting Standards Advisory Board (FASAB) in 1990 to develop and
recommend federal financial accounting standards to be used in preparing
federal financial statements; (3) the legislative initiatives were
designed to subject the federal government to the same fiscal discipline
imposed for years on the private sector and state and local governments
and to provide Congress, agency officials, and others with reliable
information through audited financial statements; (4) GAO contracted
with KPMG Peat Marwick LLP, an independent certified public accountant
firm, to perform a financial statement audit in accordance with
generally accepted government auditing standards, OMB requirements, and
GAO's Financial Audit Manual; (5) GAO concurred with KPMG's report,
which indicated that: (a) ABMC's balance sheet was reliable in all
material respects; (b) ABMC's assertions regarding the effectiveness of
its internal controls were fairly stated; and (c) no reportable
instances of noncompliance with laws and regulations were found; (6)
ABMC took significant strides in FY 1997 to strengthen its financial
management and comply with the new financial requirements; (7) also,
ABMC was one of the first agencies in the federal government to comply
early with federal accounting standards recommended by FASAB which were
not effective until FY 1998; (8) the audit of ABMC's financial
statements, however, identified four areas of weaknesses regarding the
effectiveness of ABMC's internal controls over financial reporting; (9)
the weaknesses are primarily systems related and are intended to be
resolved through ABMC's selection and implementation of a new financial
management system; (10) preparing agencywide financial statements and
attaining an unqualified opinion on its balance sheet are significant
milestones for ABMC in institutionalizing sound financial management and
organizational accountability; and (11) in that regard, GAO offered 2
suggestions for using the audited financial statements to further
enhance ABMC's accountability.

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

 REPORTNUM:  T-AIMD-98-151
     TITLE:  Financial Audits: American Battle Monuments Commission's 
             Operations for Fiscal Year 1997
      DATE:  04/29/98
   SUBJECT:  Financial statement audits
             Accounting procedures
             Internal controls
             Auditing procedures
             Accountability
             Financial management systems

             
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Cover
================================================================ COVER


Before the Subcommittee on Benefits, Committee on Veterans' Affairs,
House of Representatives

For Release on Delivery
Expected at
10 a.m.
Wednesday,
April 29, 1998

FINANCIAL AUDITS - AMERICAN BATTLE
MONUMENTS COMMISSION'S OPERATIONS
FOR FISCAL YEAR 1997

Statement of David L.  Clark
Director, Audit Oversight and Liaison
Accounting and Information Management Division

GAO/T-AIMD-98-151

GAO/AIMD-98-151T


(911850)


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

  ABMC -
  CFO -
  FASAB -
  KPMG -
  OMB -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to discuss our recent audit reports on the American
Battle Monuments Commission's (ABMC) fiscal year 1997 financial
statements.\1 Our testimony will cover three areas.  First, we will
describe legislative initiatives over the past several years to
improve financial management across the federal government, and how
requirements for ABMC to produce audited financial statements fit
into that larger context.  Second, we will discuss our audit reports
on ABMC's financial statements and suggestions for improving ABMC's
operations.  Third, we will share our ideas for further enhancing
ABMC's accountability. 


--------------------
\1 Financial Audit:  American Battle Monuments Commission's Financial
Statements for Fiscal Year 1997 (GAO/AIMD-98-81, February 27, 1998);
Management Letter:  American Battle Monuments Commission's Financial
Statement Audit for Fiscal Year 1997 (GAO/AIMD-98-130R, April 28,
1998); and American Battle Monuments Commission:  World War II
Memorial Fund Audit for Fiscal Year 1997 (GAO/AIMD-98-129R, April 28,
1998). 


   LEGISLATIVE INITIATIVES TO
   IMPROVE FINANCIAL MANAGEMENT
---------------------------------------------------------- Chapter 0:1

The Chief Financial Officers (CFO) Act of 1990, as expanded by the
Government Management Reform Act of 1994, requires major departments
and agencies to annually produce agencywide financial statements,
and, beginning with fiscal year 1997, for the Secretary of the
Treasury, in cooperation with the Director of the Office of
Management and Budget (OMB), to annually prepare consolidated
financial statements for the entire government.  Inspectors general
at the major departments and agencies are responsible for annually
auditing their respective departments' and agencies' financial
statements, and we are responsible for auditing the consolidated
financial statements.\2

The three principals concerned with overall financial management in
the federal government (the Secretary of the Treasury, the Director
of OMB, and the Comptroller General) established the Federal
Accounting Standards Advisory Board (FASAB) in 1990 to develop and
recommend federal financial accounting standards to be used in
preparing federal financial statements.  FASAB completed work on the
basic standards in 1996, with some initially going into effect in
fiscal year 1998. 

The legislative initiatives were designed to subject the federal
government to the same fiscal discipline imposed for years on the
private sector and state and local governments and to provide the
Congress, agency officials, and others with reliable information
through audited financial statements.  Financial audits determine the
reliability of the financial information reported, provide
information on the adequacy of systems and controls used to ensure
accurate financial reports and safeguard assets, and report on
agencies' compliance with laws and regulations. 

Section 602 (b) of the Veterans' Benefits Improvements Act of 1996\3
requires that ABMC prepare agencywide financial statements beginning
with those for fiscal year 1997, and that we audit the statements. 
ABMC is required to submit its financial statements to the House and
Senate Committees on Veterans' Affairs by March 1 of each year,
beginning in 1998.  Section 602 (b) provides that ABMC's financial
statements be consistent with the requirements of the expanded CFO
Act, and helps to put ABMC's financial reporting on a par with major
federal departments and agencies.  Accordingly, the requirements are
designed to institutionalize accountability over ABMC's financial
operations, and should also help facilitate the inclusion of ABMC's
financial results in the consolidated financial statements of the
United States government. 


--------------------
\2 The majority of federal departments and agencies were unable to
obtain unqualified opinions on their financial statements in the
first year that they were audited.  Since then, several of the
departments and agencies have made significant progress and have now
obtained unqualified opinions. 

\3 Public Law 104-275. 


   AUDIT OF ABMC'S FINANCIAL
   STATEMENTS
---------------------------------------------------------- Chapter 0:2

To help fulfill our audit responsibilities for fiscal year 1997, we
contracted with KPMG Peat Marwick LLP (KPMG), an independent
certified public accounting firm, to perform a financial statement
audit in accordance with generally accepted government auditing
standards,\4 OMB requirements,\5 and GAO's Financial Audit Manual. 
We evaluated the nature, timing, and extent of the work; monitored
progress throughout the audit; reviewed KPMG's workpapers; met with
KPMG partners and staff members and evaluated their key judgments;
met with officials of ABMC; performed independent tests of the
accounting records; and performed other procedures we deemed
appropriate in the circumstances. 

We concur with KPMG's report, which indicated that (1) ABMC's balance
sheet was reliable in all material respects, (2) ABMC's assertions
regarding the effectiveness of its internal controls were fairly
stated, and (3) no reportable instances of noncompliance with laws
and regulations were found.  The scope of KPMG's work was not
intended to express an opinion on the rest of ABMC's financial
statements (statement of net cost and changes in net position,
statement of budgetary resources, and statement of financing) because
(1) fiscal year 1997 was the first year that ABMC was required to
prepare agencywide statements and have them audited and (2) it was
not feasible to extend audit procedures to audit October 1, 1996,
opening balances, which would have been necessary to express an
opinion on those statements.  We expect the audit of ABMC's 1998
financial statements to include opinions on all of ABMC's statements. 

It is important to note that, pursuant to a separate mandate,\6 we
audited and reported on the revenues and expenditures of ABMC's World
War II memorial fund for fiscal year 1997.  Our audit did not
disclose any reportable conditions regarding ABMC's accounting for
the fund. 


--------------------
\4 The standards pertain to auditors' professional qualifications,
the quality of audit effort, and the characteristics of professional
and meaningful audit reports. 

\5 OMB requirements are contained in OMB Bulletin 93-06, as amended,
Audit Requirements for Federal Financial Assistance. 

\6 Public Law 102-414, the World War II 50th Anniversary
Commemorative Coins Act. 


      SUGGESTIONS FOR IMPROVING
      ABMC'S FINANCIAL OPERATIONS
-------------------------------------------------------- Chapter 0:2.1

ABMC took significant strides in fiscal year 1997 to strengthen its
financial management and comply with the new financial requirements. 
For example, ABMC contracted with the Department of the Treasury's
Financial Management Service to study ABMC's financial management
system.  As a result of that effort, ABMC plans to select a
commercial off-the-shelf system from approved vendors on the General
Services Administration's Financial Management Systems Software
schedule.  The single, integrated financial management system
selected will replace ABMC's current nonintegrated, labor-intensive
systems, and is to conform to all current guidance and be Year 2000
compliant.\7

Also, ABMC was one of the first agencies in the federal government to
comply early with federal accounting standards recommended by FASAB,
which were not effective until fiscal year 1998. 

The audit of ABMC's financial statements, however, identified four
areas of weaknesses regarding the effectiveness of ABMC's internal
controls over financial reporting.  The weaknesses are primarily
systems related and are intended to be resolved through ABMC's
selection and implementation of a new financial management system. 
For example, a new system, if properly selected and implemented,
should allow ABMC to accurately record obligations prior to recording
expenditures and improve general access controls over automated
operations.  In addition, the audit identified the need for ABMC to
ensure that it has a full-time information systems officer and that
it provides adequate training on accounting operations. 

The audit also resulted in a number of suggestions in other less
significant areas that ABMC officials said they would consider.  For
example, ABMC agreed to consider developing a comprehensive, current
set of accounting policies and procedures to standardize their
procedures at all locations and a formal system to account for all
material assets as well as requiring periodic physical inventories
for all ABMC locations. 


--------------------
\7 The Year 2000 problem is rooted in the way dates are recorded and
calculated in many computer systems.  For the past several decades,
systems have typically used two digits to represent the year in order
to conserve on electronic data storage and reduce operating costs. 
With this two-digit format, however, the year 2000 is
indistinguishable from the year 1900.  As a result, system or
application programs that use dates to perform calculations,
comparisons, or sorting may generate incorrect results when working
with years after 1999. 


   OTHER IDEAS TO ENHANCE ABMC'S
   ACCOUNTABILITY
---------------------------------------------------------- Chapter 0:3

Preparing agencywide financial statements and attaining an
unqualified opinion on its balance sheet are significant milestones
for ABMC in institutionalizing sound financial management and
organizational accountability.  In that regard, we offer two
suggestions for using the audited financial statements to further
enhance ABMC's accountability. 

First, we suggest that ABMC include its audited financial statements
in its annual report.  ABMC's 1997 annual report included a brief
section summarizing the results of its 1997 financial statement
audit, but did not include either the statements or the auditor's
report in the annual report, thus causing the public and the Congress
to have to identify and obtain separate documents in order to review
ABMC's financial operations.  In this regard, under authority
provided in the Government Management Reform Act of 1994, OMB
instituted a pilot project whereby, for fiscal year 1997, 12 agencies
produced an accountability report linking together information
previously contained in separate reports.  These accountability
reports, which included the agencies' audited financial statements,
provided consolidated analyses of both financial and performance
management data. 

Second, we suggest that ABMC have a separate column in all its
financial statements for the World War II memorial fund.  ABMC's 1997
financial statements combined that fund with its other trust funds in
all of its financial statements, except for the statement of net cost
and changes in net position, which had a separate column for the
fund.  ABMC's goal is to raise $100 million in donations from
individuals, corporations, and foundations, and the fund's activity
is already larger than the other current trust funds combined.  ABMC
would be in a better position to demonstrate its financial
stewardship over the World War II memorial fund if it separately
accounted for the fund in all of its agencywide financial statements. 


-------------------------------------------------------- Chapter 0:3.1

Mr.  Chairman, this concludes my statement.  I would be happy to
respond to any questions that you or other members of the
Subcommittee may have at this time. 

*** End of document. ***