Financial Management: Financial Audit Results at GSA, EPA, and DOT
(Statement/Record, 09/30/1999, GAO/T-AIMD-99-301).
GAO's audit of the 1998 consolidated financial statements of the federal
government found serious shortcomings in systems, recordkeeping,
documentation, financial reports, and controls. As a result, the
financial statements did not provide decisionmakers or the public with
reliable information. GAO has included the most serious deficiencies on
its list of government activities at high risk for waste, fraud, abuse,
and mismanagement. This testimony discusses data quality at the General
Services Administration, the Environmental Protection Agency, and the
Department of Transportation. GAO summarizes the results of its audits
of the financial statements for these three agencies.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-AIMD-99-301
TITLE: Financial Management: Financial Audit Results at GSA, EPA,
and DOT
DATE: 09/30/1999
SUBJECT: Noncompliance
Federal agency accounting systems
Accountability
Financial statement audits
Auditing standards
Reporting requirements
Auditing procedures
Accounting procedures
Internal controls
Financial management systems
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GAO/T-AIMD-99-301
Before the Subcommittee on Oversight and Investigations and Emergency
Management, Committee on Transportation and Infrastructure, House of
Representatives
For Release on Delivery
Expected at
2 p.m.
Thursday,
September 30, 1999
FINANCIAL MANAGEMENT
Financial Audit Results at GSA, EPA, and DOT
Statement for the Record by Linda M. Calbom
Director, Resources, Community, and Economic Development Accounting and
Financial Management Issues
Accounting and Information Management Division
*****************
*****************
GAO/T-AIMD-99-301
Mr. Chairman and Members of the Subcommittee:
We are pleased to provide a statement for the record for this hearing on
financial data quality at the General Services Administration (GSA), the
Environmental Protection Agency (EPA), and the Department of
Transportation (DOT). Our statement today will provide a summary of the
financial statement audit results of these three agencies. These audit
results are key indicators of the quality of agency financial data. As you
know, in March of this year, we reported on the results of our financial
statement audit of the 1998 consolidated financial statements of the
United States government./Footnote1/ We found that because of serious
deficiencies in the government's systems, recordkeeping, documentation,
financial reporting, and controls, amounts reported in the financial
statements do not provide a reliable source of information for decision-
making by the government or the public. We have designated the most
serious examples of these deficiencies as high risk, including financial
management at the Federal Aviation Administration (FAA)-a major component
of DOT. Our statement will also discuss the problems that led to this
designation.
Background
Federal decisionmakers need reliable and timely financial information to
ensure adequate accountability, manage for results, and make timely and
well-informed judgments. However, historically, such information has not
been available across the government. Agencies' independent auditor
reports, Inspector General (IG) reports, as well as our own work, have
identified persistent limitations in the availability of quality financial
data for decision-making. Major reforms, such as the Chief Financial
Officers (CFO) Act, set expectations for agencies to develop and deploy
more modern financial management systems and to routinely produce sound
cost information. Toward that end, the 24 agencies covered by the CFO Act
have been required to annually prepare financial statements and have them
audited since the fiscal year 1996 financial statements. These audits have
shown how far many agencies have to go to generate reliable year-end
information. As of September 27, 1999, of the 24 CFO Act agencies, 9
agencies had received unqualified audit opinions on their fiscal year 1998
financial statements, indicating that their financial statements were
reliable in all material respects; 4 agencies had received qualified
opinions, indicating that at least one significant item on the financial
statements was unreliable; 5 agencies had received disclaimers, meaning
that the auditor was unable to determine on an overall basis if the
financial statements were reliable; 2 agencies had received mixed
opinions/Footnote2/; and 4 agencies had not yet issued their audited
financial statements, which were due by
March 1, 1999.
For some agencies, the preparation of financial statements requires
considerable reliance on ad hoc programming and analysis of data produced
by inadequate financial management systems that are not integrated or
reconciled. These systems problems often require significant adjustments
to the financial statements. While obtaining unqualified "clean" opinions
on federal financial statements is an important objective, it is not an
end in and of itself. The key is to take steps to continuously improve
underlying financial and management information systems and internal
controls as a means to ensure accountability, increase the economy,
improve the efficiency, and enhance the effectiveness of government. These
systems must generate timely, accurate, and useful information on an
ongoing basis, not just as of the end of the fiscal year. The overarching
challenge in generating timely, reliable data throughout the year is
overhauling financial and related management information systems.
More fundamentally, the Federal Financial Management Improvement Act of
1996 (FFMIA) requires that agency financial management systems comply with
(1) financial systems requirements,/Footnote3/ (2) federal accounting
standards, and (3) the U.S. Government Standard General Ledger at the
transaction level. As of September 27, 1999, financial statement audits
for fiscal year 1998 had been completed for 20 of the 24 CFO Act agencies.
Of the 20 agencies whose fiscal 1998 audited financial statements had been
issued as of September 27, 1999, financial management systems for 17
agencies were found by auditors to be in substantial noncompliance with
FFMIA's requirements.
The following discussion focuses on the results of the fiscal years 1998
and/or 1997 audits of GSA,/Footnote4/ EPA,/Footnote5/ and DOT,/Footnote6/
including the results of the auditor's review of FFMIA compliance. These
audits were performed by the Inspector General of the agency or, in the
case of GSA, by an independent public accountant (IPA) contracted for by
the IG.
GSA Audit Results
GSA is the federal government's business manager and is responsible for
space acquisition and management; retail and wholesale supply sales; fleet
management; travel and transportation management; telecommunications and
information management; and governmentwide policy on procurement, travel
and transportation, and electronic commerce. GSA's mission is to work with
industries, businesses, and federal agencies to provide competitively
priced products and services to keep the government running smoothly. Its
expenses for fiscal year 1998 totaled $ 11.7 billion.
GSA received an unqualified audit opinion on its fiscal years 1997 and
1998 financial statements. For fiscal year 1998, GSA's IPA, whose audit
report was timely issued, concluded that internal controls over financial
reporting were effective. However, the IPA identified three reportable
conditions/Footnote7/ and reported noncompliance with FFMIA financial
systems requirements related to weak information technology access
controls and application of security policies and procedures. These issues
are described in the appendix.
EPA Audit Results
EPA was established in 1970 to control pollution and other environmental
risks to public health and the environment. The agency is responsible for
carrying out various statutory authorities directed at controlling
pollution and other human health and environmental risks. The states have
the primary responsibility for day-to-day implementation of most
environmental programs. EPA works with other stakeholders-including other
federal agencies, business and industry, and environmental and public
interest groups-and its activities include providing funds to states to
implement programs to prevent pollution. A major program that EPA manages
is the federal Superfund program to clean up the nation's most hazardous
waste sites. It is primarily financed by the Superfund Trust Fund, which
is funded primarily by taxes on crude oil and chemicals. EPA's expenses
for fiscal year 1997 totaled $6.9 billion.
Although EPA received an unqualified opinion on its timely issued fiscal
year 1997 financial statements, as of September 27, 1999, it had not
released its audited fiscal year 1998 financial statements, which were due
March 1, 1999./Footnote8/ According to agency officials, the delay results
from difficulties in preparing the Statement of Budgetary Resources, which
was required for the first time in fiscal year 1998 and contains certain
budget information required by the Statement of Federal Financial
Accounting Standards No. 7./Footnote9/ This statement, which reports the
sources, availability, and uses of budgetary resources, includes balances
related to unexpended obligations. Historically, EPA has not been prompt
in closing out grants, contracts, and interagency agreements and
deobligating related unexpended funds that are no longer available.
Consequently, a major time-consuming effort was necessary to analyze
agency obligations in order to prepare the fiscal year 1998 Statement of
Budgetary Resources.
Although EPA received an unqualified opinion on its fiscal year 1997
financial statements, the EPA IG reported one material
weakness,/Footnote10/ which related to the difficulties encountered by EPA
in estimating the Superfund Trust Fund's year-end unbilled oversight costs
for monitoring the cleanup of hazardous waste sites. At the request of the
IG, the agency performed additional analyses and recalculated the accounts
receivable balance related to these unbilled oversight costs. The IG was
then able to determine that the September 30, 1997, balance for unbilled
oversight costs was reasonably correct. However, because the agency's
systems do not readily provide the data necessary to properly estimate
these receivables on an ongoing basis, the IG concluded that internal
controls related to tracking Superfund site information need to be
strengthened.
The OIG also cited eight reportable conditions and three areas of
noncompliance with laws and regulations, including FFMIA, which are
described in the appendix. Noncompliance with FFMIA was related to Year
2000 (Y2K) computer requirements, financial systems security, financial
systems inventory data requirements, and updating the CFO-required Five-
Year Plan.
DOT Audit Results
DOT establishes and implements national transportation policy for the
federal government. It is responsible for ensuring the safety of all forms
of transportation, protecting the interests of consumers, establishing
international transportation agreements, conducting transportation
planning and research for the future, and helping cities and states meet
their local transportation needs through financial and technical
assistance. DOT fulfills its mission through 11 operating administrations
including FAA, the U.S. Coast Guard, the Federal Highway Administration,
and the Federal Transit Administration. DOT's reported net costs for
fiscal year 1998 were $41 billion.
The DOT Inspector General was unable to express an opinion (disclaimer of
opinion) on DOT's fiscal years 1998 and 1997 consolidated financial
statements. Both reports were issued about 1 month after they were due.
The reasons cited for the disclaimer for fiscal year 1998, which were also
described as material internal control weaknesses, were as follows.
o Property, plant, and equipment (PP&E) reported at $21 billion could not
be substantiated due to continuing property accounting weaknesses in
FAA and the U.S. Coast Guard.
o Inventory reported at $2.3 billion could not be substantiated primarily
because the U.S. Coast Guard was unable to determine the cost of its
inventory using acceptable inventory valuation methods.
o In the Statement of Net Cost, $41 billion of operating costs for the
Surface Transportation, Air Transportation, and Maritime Transportation
reporting categories was not linked to the related 32 performance
measures that address program results shown in the agency's performance
plan as required. DOT's accounting systems were not able to determine
cost accounting data by program in order to provide information for
this linkage.
o The Statement of Budgetary Resources had six material financial line
items that could not be substantiated, including the beginning
unobligated balance, obligations incurred, and the ending obligated
balance. DOT's accounting systems were unable to provide detailed
supporting records for obligations incurred and obligated balances had
not been properly determined.
o The Statement of Financing identified $11.6 billion of reconciliation
and/or unexplained differences between financial and budgetary data.
DOT accounting practices did not ensure that these data were properly
reconciled.
These deficiencies mean that DOT's financial statements were not reliable
for fiscal year 1998. Similar deficiencies concerning PP&E and inventory,
reported at $28.5 billion as of September 30, 1997, were reported by the
DOT Inspector General for DOT's fiscal year 1997 financial statements.
Serious financial management weaknesses at FAA, whose PP&E and inventory
were reported at $12.4 billion as of September 30, 1997, contributed to
this situation. Consequently, in January 1999, we designated financial
management at FAA as high risk./Footnote11/
In addition, for fiscal year 1998, the DOT IG found that DOT was not in
compliance with FFMIA and two other laws and regulations, which are
described in the appendix. FFMIA noncompliance was due to
(1) inaccurate PP&E and inventory amounts on the Balance Sheet, (2) not
using the general ledger system to prepare financial statements, and
(3) unavailability of cost accounting data to evaluate performance against
performance goals.
FAA Financial Management High-Risk Designation
We designated FAA financial management as a high-risk area in January 1999
because of serious and long-standing accounting and financial reporting
weaknesses, particularly relating to PP&E and inventory. These weaknesses
render FAA vulnerable to waste, fraud, and abuse; undermine its ability to
manage operations; and limit the reliability of financial information
provided to the Congress.
Recently, we performed an analysis of the weaknesses concerning PP&E and
inventory as reported by the DOT Inspector General to determine
(1) the key issues FAA must resolve in order to achieve accountability
over its PP&E and inventory and (2) whether FAA is taking appropriate
actions to resolve these issues promptly. As we reported in July
1999,/Footnote12/ FAA's lack of accountability for PP&E and inventory
generally stems from
o an historical lack of attention to basic recordkeeping,
o the continuing use of outdated systems that were not designed for
financial management, and
o poor systems of internal controls to prevent and detect errors in
accounting for these assets.
We reported that in order to address these issues for PP&E, FAA needs to
determine what assets it has and then reconstruct its records to establish
an historical cost baseline for those assets. Next it needs to establish
adequate systems and controls to account for the assets on an ongoing basis.
During fiscal year 1999, FAA undertook an extensive effort to identify and
record the baseline cost of unrecorded PP&E assets and to adjust its
detailed records. Also, in fiscal year 1999, FAA began to comprehensively
address its systems needs; however, it does not expect full implementation
of these new systems until 2001. Without systems capable of maintaining
PP&E accountability on an ongoing basis, accounting for the acquisition of
these assets will continue to require costly, time-consuming manual
processes. Because these manual processes are inherently prone to error,
strong internal controls are needed to ensure accurate accounting. While
some improvements have been made, FAA has not implemented such a system of
controls.
With regard to inventory, FAA has made improvements in its Logistics
Center (warehouse) inventory accounting, but still needs to strengthen its
procedures and controls. However, it has made less progress with its field
spares (spare parts) inventory located throughout the country that
supports various systems. An accurate baseline of inventory quantities and
costs needs to be established for field spares, and new procedures and
controls need to be implemented in order to maintain accountability on an
ongoing basis.
As a result, we made several recommendations in our July report regarding
FAA's need to
o establish accountability for billions of dollars expended for PP&E in
the past and institute upgraded systems, procedures, and controls to
ensure that accountability is maintained on an ongoing basis and
o complete improvements over its inventory accountability, particularly
those related to field spares.
In order to ensure financial accountability across the federal government,
it is essential that attention to financial management issues be given
high priority. Considerable effort is now being exerted throughout the
government to address these issues, and several agencies have made good
progress toward achieving financial management reform goals. While much
remains to be done, these efforts, if sustained, will continue to move us
step by step towards a more economic, efficient, and effective federal
government.
This completes our statement.
Contact and Acknowledgements
For information about this statement, please contact Linda M. Calbom at
(202) 512-9508. Individuals making key contributions to this statement
included John Fretwell, Don Campbell, and Meg Mills.
--------------------------------------
/Footnote1/-^Financial Audit: 1998 Financial Report of the United States
Government (GAO/AIMD-99-130, March 31, 1999).
/Footnote2/-^One of these agencies received an unqualified opinion on its
balance sheet and a disclaimer on the rest of its statements. The other
agency did not prepare consolidated statements and received unqualified
opinions on three of its components and disclaimers on the remaining two
of its components.
/Footnote3/-^The financial management systems requirements have been
developed by the Joint Financial Management Improvement Program, which
is a joint and cooperative undertaking of the Department of the
Treasury, Office of Management and Budget, GAO, and Office of Personnel
Management.
/Footnote4/-^GSA 1998 Annual Report and U.S. General Services
Administration 1997 Annual Report.
/Footnote5/-^Office of Inspector General Audit Report, Financial
Management, EPA's Fiscal 1997 and 1996 Financial Statements, E1AML7-20-
7008-8100058, March 2, 1998.
/Footnote6/-^Office of Inspector General Audit Report, Fiscal Year 1998
Consolidated Financial Statements, Department of Transportation, Report
Number: FE-1999-081, March 30, 1999, and Office of Inspector General
Audit Report, Fiscal Year 1997 Consolidated Financial Statements,
Department of Transportation, Report Number: FE-1998-105, March 31, 1998.
/Footnote7/-^Reportable conditions are matters coming to the auditor's
attention that, in his or her judgment, should be communicated because
they represent significant deficiencies in the design or operation of
internal controls that could adversely affect the organization's ability
to meet the objectives of reliable financial reporting and compliance
with applicable laws and regulations.
/Footnote8/-^On September 28, 1999, the EPA Office of the IG advised us
that EPA had issued its fiscal year 1998 audited financial statements on
that date. We have not received a copy of those audited financial
statements. Therefore, this statement for the record is based on our
review of the fiscal year 1997 EPA financial statements.
/Footnote9/-^Statement of Federal Financial Accounting Standards No.7,
Accounting for Revenue and Other Financing Sources and Concepts for
Reconciling Budgetary and Financial Accounting, is effective for fiscal
years beginning after September 30, 1997.
/Footnote10/-^A material weakness is a reportable condition that precludes
the entity's internal controls from providing reasonable assurance that
material misstatements in the financial statements or material
noncompliance with applicable laws or regulations will be prevented or
detected promptly.
/Footnote11/-^High-Risk Series: An Update (GAO/HR-99-1, January 1999).
/Footnote12/-^FAA Financial Management: Further Actions Needed to Achieve
Asset Accountability (GAO/AIMD-99-212, July 30, 1999).
INTERNAL CONTROL AND COMPLIANCE AUDIT RESULTS
=============================================
The following summarizes the reportable conditions, including those that
are classified as material weaknesses, and noncompliance with laws and
regulations as reported by the IPA for GSA, and the IGs for EPA and DOT in
their most recent financial statement audit reports discussed in this
statement.
GSA's Fiscal Year 1998 Financial Statement Audit Report
Reportable Conditions Classified as Material Weaknesses
-------------------------------------------------------
None were reported.
Other Reportable Conditions
---------------------------
o With regard to the Federal Buildings Fund, calculating errors, missing
data, inadequate documentation, and failure to update leasing data led
to overpayments to lessors, inaccurate rent bills, a lack of
transaction level history needed for space management, and possible
adverse funding effects for new leases.
o Data access security policies and procedures were incomplete and
outdated and were not consistent with GSA requirements.
o Access controls over mission-critical systems that support GSA's
financial statements were weak.
Noncompliance With Laws and Regulations
---------------------------------------
GSA was not in compliance with FFMIA systems requirements because
(1) logical and physical access controls over its information technology
environment were weak and (2) security policies and procedures were not
uniformly applied across GSA's service lines.
EPA's Fiscal Year 1997 Financial Statement Audit Report
Reportable Condition Classified as a Material Weakness
------------------------------------------------------
Internal controls related to tracking Superfund site information need to
be strengthened to allow the preparation of estimates of unbilled costs.
Other Reportable Conditions
---------------------------
o Accounts receivable were not recorded and billed promptly.
o Personal property that should have been capitalized was not
capitalized, property was undervalued, and unresolved reconciliation
differences existed in the property accounts.
o Financial managers did not have sufficient financial information to
evaluate accounting activity, perform trend analysis, and identify
accounting errors on an ongoing basis. This resulted in EPA officials
being unable to effectively monitor various asset and liability
accounts during the year.
o Although the process used to estimate grantee expenses owed at the end
of the year was sufficient to allow for an unqualified opinion, it did
not permanently resolve estimation process issues, which have been
identified in previous audit reports on EPA's financial statements.
o Invoice approval forms for interagency agreements were not always
promptly approved and returned to the finance office responsible for
their payment.
o Adequate processes to identify, track, and report EPA's environmental
liability were not implemented.
o Regional finance officials did not properly recognize revenues for
Superfund State Contracts. As a result, accounts associated with
Superfund State Contracts were misstated by nearly $29 million.
o Documentation for EPA's Integrated Financial Management System did not
contain the level of detail necessary for a financial statement audit.
Noncompliance With Laws and Regulations
---------------------------------------
EPA was not in compliance with
o FFMIA with regard to the Office of Management and Budget's (OMB) Y2K
requirements for financial systems activities, Y2K maintenance
activities for financial systems, financial systems security, financial
systems inventory data requirements, and the annual update of its CFO
Financial Management Report and Five-Year Plan for 1994-1999;
o the CFO Act, because EPA had not performed required biennial reviews of
fees; and
o Title 31 U.S.C. section 1301, because EPA made disbursements for grants
from the oldest available funding/appropriation first, without
establishing that this was the appropriation that benefited from the
work performed.
DOT's Fiscal Year 1998 Financial Statement Audit Report
Reportable Conditions Classified as Material Weaknesses
-------------------------------------------------------
o Due to continuing property accounting weaknesses, PP&E reported at $21
billion could not be substantiated.
o Due to the inability of the U.S. Coast Guard to determine the cost of
its inventory using acceptable inventory valuation methods, the amount
reported for inventory could not be substantiated.
o DOT accounting systems are not able to determine cost accounting
information by program in order to link program performance information
with the costs incurred.
o DOT accounting systems were unable to provide detailed supporting
records for six material financial statement budgetary line items.
o DOT accounting practices did not ensure that the Statement of Financing
was properly reconciled.
Other Reportable Conditions
---------------------------
None were reported.
Noncompliance With Laws and Regulations
---------------------------------------
DOT was not in compliance with
o FFMIA, because (1) PP&E and inventory amounts presented on the Balance
Sheet were inaccurate and not supported by financial records, (2) the
Departmental Accounting and Financial Information System was not used
for preparation of the financial statements, and (3) the cost
accounting data needed to effectively evaluate performance against
performance goals and outcomes was not available;
o Title 31, United States Code Sections 1108 and 1501, because
unliquidated obligations were not reviewed prior to certification; and
o OMB Bulletin 97-01, because performance measures did not provide
information about cost-effectiveness and fiscal year financial data
were not linked to performance measures.
(913875)
*** End of document. ***