Forest Service: Financial Management Issues (Testimony, 07/07/98,
GAO/T-AIMD-98-230).

Financial management problems have continued to plague the Forest
Service--as reflected in the adverse opinion of the Agriculture
Department's (USDA) Inspector General (IG) on the Forest Service's
fiscal year 1995 financial statement. Because of the severity of these
problems, the Forest Service did not prepare financial statements for
fiscal year 1996 but chose instead to focus on problem resolution.
Financial statements were prepared for fiscal year 1997, and the audit
of those statements is near completion; as of July 1, 1998, the USDA IG
was finalizing its report. These two testimonies focus primarily on the
fiscal year 1995 audit results, which disclosed several serious
weaknesses, most of which still exist today. GAO also briefly discusses
the Forest Service's plans to address these weaknesses.

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

 REPORTNUM:  T-AIMD-98-230
     TITLE:  Forest Service: Financial Management Issues
      DATE:  07/07/98
   SUBJECT:  Financial management
             Federal agency accounting systems
             Federal property management
             Inventory control
             Internal controls
             Financial statement audits
             Accountability
             Accounting procedures

             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  This text was extracted from a PDF file.        **
** Delineations within the text indicating chapter titles,      **
** headings, and bullets have not been preserved, and in some   **
** cases heading text has been incorrectly merged into          **
** body text in the adjacent column.  Graphic images have       **
** not been reproduced, but figure captions are included.       **
** Tables are included, but column deliniations have not been   **
** preserved.                                                   **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************
FOREST SERVICE: Financial Management Issues GAO/T-AIMD-98-230
United States General Accounting Office

GAO Testimony Before the Subcommittee on Government Management,

Information and Technology, Committee on Government Reform and
Oversight, House of Representatives

For Release on Delivery Expected at 10 a. m. Tuesday, July 7, 1998

FOREST SERVICE Financial Management Issues

Statement of Linda M. Calbom Director, Resources, Community, and
Economic Development Accounting and Financial Management Issues
Accounting and Information Management Division

GAO/T-AIMD-98-230

Mr. Chairman and Members of the Subcommittee: I am pleased to be
here today to discuss the results of our work examining weaknesses
in the Forest Service's financial accounting and reporting systems
reported by the United States Department of Agriculture's (USDA)
Office of Inspector General (IG). The Forest Service has been
plagued by continuing financial management problems as evidenced
by the IG's adverse opinion on the Forest Service's fiscal year
1995 financial statements. Due to the severity of these problems,
the Forest Service did not prepare financial statements for fiscal
year 1996, but chose instead to focus its efforts on problem
resolution. Financial statements were prepared for fiscal year
1997, and the audit of those statements is near completion; as of
July 1, 1998, the USDA IG was finalizing its report. Today, I will
focus primarily on the fiscal year 1995 audit results, which
disclosed a number of serious weaknesses, most of which still
exist today. I will also briefly discuss the Forest Service's
plans to address these weaknesses. While some progress has been
made, many hurdles still exist before the Forest Service will be
able to achieve financial accountability.

History of Financial Shortcomings

In July 1996, the USDA IG issued an adverse audit opinion, thereby
concluding that the Forest Service's financial statements for
fiscal year 1995 were unreliable overall. The IG's findings
represented a continuing pattern of unfavorable conclusions about
the Forest Service's financial statements. For fiscal year 1992,
the IG also issued an adverse opinion due to the overall
unreliability of the statements. For fiscal years 1993 and 1994,
the IG issued qualified audit opinions and reported that the
Forest Service's financial statements were unreliable due to
pervasive errors in the field level data supporting the land,
buildings, equipment, accounts receivable, and accounts payable
accounts. Thus, many of the shortcomings in the Forest Service's
accounting and financial data and information systems that
continue to plague the agency today are largely attributable to
long- standing problems.

Among the more serious shortcomings cited by the IG in its report
on the fiscal year 1995 financial statements were that the Forest
Service

 had significant reporting errors in its financial statements and
the records that support those statements;  could not demonstrate
that its policies and procedures adequately

safeguarded assets against unauthorized acquisition, use, or
disposition; and

GAO/T-AIMD-98-230 Page 1

 lacked financial systems that could accurately track revenues and
costs. These shortcomings are discussed in greater detail below.

Errors in Financial Statements

The IG's report on the fiscal year 1995 financial statements and
the notes to the financial statements identified numerous
financial reporting errors. For example:

 An estimated $45 million due to the Forest Service from other
federal agencies (accounts receivable) for reimbursable services
provided was double counted on the Forest Service's financial
records. This type of error called into question the validity of
receivables and reimbursement activity reported by the Forest
Service and potentially impaired meaningful analysis of such
activity. Additionally, since these data were drawn from the same
database used to produce budgetary information, misstatement of
reimbursable services could have resulted in misstatement of
budgetary resources available to carry out program activities.
The Forest Service did not have a system that allowed it to
accurately

track amounts it owed to others (accounts payable) for contracted
services. While the system could determine the amount the Forest
Service obligated, it could not readily determine the percentage
of work completed or the amount owed to the contractor. As a
result, Forest Service managers had to resort to estimating these
amounts based on statistical sampling and testing of year- end
obligations incurred. Based on this testing, the Forest Service
concluded that accounts payable were understated by approximately
$38 million, and it adjusted its records accordingly. While the
Forest Service's weaknesses in accounting for payables were not
indicative of whether the Forest Service overobligated funds, they
precluded the Forest Service from readily knowing costs it had
incurred and amounts it owed on projects at any given point.

These errors in basic financial records demonstrated that the
Forest Service was not always able to determine the amount of
funds spent, reimbursements it should have received, or the
validity of recorded assets and liabilities. Some of these
financial reporting errors also indicated potential errors in
budgetary data, particularly with regard to improperly reported
reimbursements, which directly affect the amount of budgetary
resources available. These errors also hampered Forest Service
managers' ability to accurately report program performance
measures as well as monitor income and spending levels for various
programs and activities.

GAO/T-AIMD-98-230 Page 2

Lack of Policies and Procedures to Safeguard Assets

The IG report disclosed that the $7.8 billion in property, plant,
and equipment reported by the Forest Service was erroneous because
records for these assets were not consistently prepared, regularly
updated, or supported by adequate documentation. Therefore, the
correct quantities and costs of these assets were not
determinable. Without systems in place to accurately track these
assets, the Congress had no assurance that Forest Service requests
for additional funds to construct new roads and buildings and
acquire new equipment were warranted.

For example, the Forest Service lacked a reliable system for
tracking its reported 378,000 miles of roads, 1 which we
determined exceeds the mileage of the national highway system. The
Forest Service started performing inventory counts in fiscal year
1995 in an effort to capture the amount invested in roads it owns.
These initial counts identified $1.3 billion of roads in one
region alone that had not been previously recorded. At that time,
Forest Service officials estimated that this process would take
several years to complete nationwide.

The IG also reported inadequate safeguarding policies and
procedures for equipment. Equipment is susceptible to theft or
misplacement because generally it can readily be moved from one
location to another. The lack of adequate procedures to account
for equipment substantially increased the risk that items could be
stolen without detection or be misplaced and, consequently, not
available when needed. Also, the Forest Service's inability to
identify and locate certain equipment it owned could have hampered
activities of the Forest Service that utilized that equipment.
This situation could also have resulted in the Forest Service
requesting additional appropriations to replace stolen or
misplaced equipment.

Lack of Systems to Track Revenues and Costs

The IG also concluded that the Forest Service did not have
adequate systems to track revenues and total program and operating
costs agencywide. For example, the IG reported that the Forest
Service could not calculate the costs of large fires without
manually adjusting the accounting systems. Additionally, our prior
work disclosed the Forest Service's inability to capture the
revenues and related costs of various programs and activities. 2
This capability is especially important because the Forest Service
should have accurate historical revenue and cost data that can be
used as the basis for determining the amount of money to request
from the

1 The miles of roads are reported in the Forest Service's 1995
Report of the Forest Service. 2 Letter dated June 19, 1996, from
GAO to the Chairmen of the House Committee on the Budget and the
House Committee on Resources.

GAO/T-AIMD-98-230 Page 3

Congress to fund future projects and operations. The ability to
track costs and revenue is also important for the Forest Service
given its (1) relatively unique role in collecting revenues from
timber sales and fees from activities, such as grazing and
national forest use, and (2) authority and flexibility in using a
portion of those revenues to carry out certain missions.

Corrective Actions Forest Service officials determined that
planned corrective actions could not be completed in time to
improve the Forest Service's fiscal year 1996

financial data. As a result, the agency did not prepare financial
statements for fiscal year 1996. Instead, the Forest Service,
USDA's Office of the Chief Financial Officer, and the IG agreed to
work together to address the problems identified in the fiscal
year 1995 IG audit report.

The Forest Service's goal was to correct some of the deficiencies
during fiscal year 1997 and to achieve financial accountability by
the end of fiscal year 1999. In August 1997, we reported 3 that it
was doubtful that the Forest Service could achieve financial
accountability by the end of fiscal year 1999 if management and
staff commitment wavered, planned tasks were not accomplished, and
sufficient resources were not provided. Our most recent report in
February 1998 4 concluded that while corrective measures were
under way, few of the problems reported by the IG in the fiscal
year 1995 audit report had been fully resolved. Thus, we reported
that it was not yet clear whether the Forest Service would be
successful in its efforts to resolve these problems by the end of
fiscal year 1999.

The IG recently concluded its audit of the Forest Service's fiscal
year 1997 financial statements and was preparing its report as of
July 1, 1998. However, we understand that because of the
continuing financial accounting and reporting shortcomings, the IG
will issue an unfavorable report on the fiscal year 1997
statements.

Mr. Chairman, this concludes my statement. I would be glad to
answer any questions that you or the Members of the Subcommittee
may have.

(913830)

3 Financial Management: Forest Service's Progress Toward Financial
Accountability (GAO/AIMD-97-151R, August 29, 1997). 4 Forest
Service: Status of Progress Toward Financial Accountability
(GAO/AIMD-98-84, February 27, 1998).

GAO/T-AIMD-98-230 Page 4

Ordering Information The first copy of each GAO report and
testimony is free. Additional copies are $2 each. Orders should be
sent to the following address, accompanied by a check or money
order made out to the Superintendent of Documents, when necessary.
VISA and MasterCard credit cards are accepted, also. Orders for
100 or more copies to be mailed to a single address are discounted
25 percent.

Orders by mail: U. S. General Accounting Office P. O. Box 37050
Washington, DC 20013

or visit: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW)
U. S. General Accounting Office Washington, DC

Orders may also be placed by calling (202) 512- 6000 or by using
fax number (202) 512- 6061, or TDD (202) 512- 2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512- 6000 using a
touchtone phone. A recorded menu will provide information on how
to obtain these lists.

For information on how to access GAO reports on the INTERNET, send
an e- mail message with "info" in the body to:

info@ www. gao. gov or visit GAO's World Wide Web Home Page at:
http:// www. gao. gov

PRINTED ON RECYCLED PAPER

United States General Accounting Office Washington, D. C. 20548-
0001

Official Business Penalty for Private Use $300

Address Correction Requested Bulk Rate

Postage & Fees Paid GAO Permit No. G100

*** End of document. ***