Forest Service: Financial Management Issues (Testimony, 07/09/98,
GAO/T-AIMD-98-231).

GAO discussed the weaknesses in the Forest Service's financial
accounting and reporting systems reported by the Department of
Agriculture's (USDA) Office of Inspector General (IG).

GAO noted that: (1) in July 1996, the USDA IG issued an adverse audit
opinion, thereby concluding that the Forest Service's financial
statements for fiscal year (FY) 1995 were unreliable overall; (2) among
the more serious shortcomings cited by the IG in its report on FY 1995
financial statements were that the Forest Service: (a) had significant
reporting errors in its financial statements and the records that
support those statements; (b) could not demonstrate that its policies
and procedures adequately safeguarded assets against unauthorized
acquisition, use, or disposition; and (c) lacked financial systems that
could accurately track revenues and costs; (3) 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; (4) also, the Forest Service's inability to identify
certain equipment it owned and its location could have hampered
activities of the Forest Service that utilized that equipment; (5) IG
concluded that the Forest Service did not have adequate systems to track
revenues and total program and operating costs agencywide; (6)
additionally, GAO's prior work disclosed the Forest Service's inability
to capture the revenues and related costs of various programs and
activities; (7) 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 Congress to fund future projects and operations; (8) Forest
Service officials determined that planned corrective actions could not
be completed in time to improve the Forest Service's FY 1996 financial
data; (9) instead, the Forest Service, USDA's Chief Financial Officer,
and the IG agreed to work together to address the problems identified in
the FY 1995 IG audit report; (10) in August 1997, GAO reported that it
was doubtful that the Forest Service could achieve financial
accountability by the end of FY 1999 if management and staff commitment
wavered, planned tasks were not accomplished, and sufficient resources
were not provided; (11) GAO's most recent report in February 1998
concluded that while corrective measures were under way, few of the
problems reported by the IG in the FY 1995 audit report had been fully
resolved; and (12) thus, it was not yet clear whether the Forest Service
would be successful in its efforts to resolve these problems by the end
of FY 1999.

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

 REPORTNUM:  T-AIMD-98-231
     TITLE:  Forest Service: Financial Management Issues
      DATE:  07/09/98
   SUBJECT:  Financial management systems
             Federal agency accounting systems
             Accountability
             Financial statement audits
             Data integrity
             National forests
             Accounting procedures
             Financial records
             Internal controls
             Accounting errors

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


Before the Subcommittee on Government Management, Information and
Technology, Committee on Government Reform and Oversight, House of
Representatives

For Release on Delivery
Expected at
11 a.m.
Thursday,
July 9, 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-98-231

GAO/AIMD-98-231T


(913830)


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

  IG -
  OCFO -
  USDA -

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

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
---------------------------------------------------------- Chapter 0:1

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

  -- lacked financial systems that could accurately track revenues
     and costs. 

These shortcomings are discussed in greater detail below. 


      ERRORS IN FINANCIAL
      STATEMENTS
-------------------------------------------------------- Chapter 0:1.1

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. 


      LACK OF POLICIES AND
      PROCEDURES TO SAFEGUARD
      ASSETS
-------------------------------------------------------- Chapter 0:1.2

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. 


--------------------
\1 The miles of roads are reported in the Forest Service's 1995
Report of the Forest Service. 


      LACK OF SYSTEMS TO TRACK
      REVENUES AND COSTS
-------------------------------------------------------- Chapter 0:1.3

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
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. 


--------------------
\2 Letter dated June 19, 1996, from GAO to the Chairmen of the House
Committee on the Budget and the House Committee on Resources. 


   CORRECTIVE ACTIONS
---------------------------------------------------------- Chapter 0:2

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. 


--------------------
\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). 


-------------------------------------------------------- Chapter 0:2.1

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

*** End of document. ***