[Independent Auditors Report on Bureau of Indian Affairs Financial Statements for Fiscal Year 1999 ]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 00-I-597

Title: Independent Auditors Report on Bureau of Indian Affairs
       Financial Statements for Fiscal Year 1999 

  Date:  July 28, 2000
  
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  C-IN-BIA-002-99-R
  
  July 28, 2000
  
  
  INDEPENDENT AUDITORS REPORT
  
  Memorandum
  
  To:  Assistant Secretary for Indian Affairs
  
  Subject:  Independent Auditors Report on Bureau of Indian Affairs Financial Statements for
  Fiscal Year 1999  (No. 00-I-597)
  
  SUMMARY
  
  In our audit of the Bureau of Indian Affairs (BIA) financial statements for fiscal year 1999,
  we found the following:
  
  -  The principal financial statements were fairly presented in all material respects.  BIA's
  principal financial statements consist of  the Consolidated  Statement of Financial Position
  as of September 30, 1999; the Consolidated Statement of  Net Cost and Consolidated
  Statement of Change in Financial Position for the fiscal year ended September 30, 1999; and
  the Statements of Budgetary Activity and Financing for the fiscal year ended September 30,
  1999.   
  
  -   Our tests of the internal controls identified weaknesses in the following areas that we
  consider to be material: construction-in-progress; property, plant and equipment; budgetary
  accounts; financial information integrity reviews; and automated information systems.  In
  addition, we believe that the identified weaknesses in accounts and interest receivable and
  related revenue and allowance for doubtful accounts and deferred maintenance are reportable
  conditions.
  
  - Our tests of compliance with laws and regulations identified five noncompliance issues that
  are required to be reported relating to the Chief Financial Officers Act of 1990, the Federal
  Financial Management Improvement Act of 1996, the Debt Collection Improvement Act of
  1996, the Prompt Payment Act, and managerial cost accounting management and reporting
  requirements.
  
  Our conclusions are detailed in the sections that follow.
  
  OPINION ON PRINCIPAL FINANCIAL STATEMENTS
  
  In accordance with the Chief Financial Officers Act of 1990, we audited BIA's principal
  financial statements for the fiscal year ended September 30, 1999 as contained in BIA's
  accompanying Annual Report for fiscal year 1999.  These financial statements are the
  responsibility of BIA, and our responsibility is to express an opinion, based on our audit, on
  these principal financial statements.
  
  Our audit was conducted in accordance with the "Government Auditing Standards," issued
  by the Comptroller General of the United States, and with Office of Management and Budget
  (OMB) Bulletin 98-08, "Audit Requirements for Federal Financial Statements," as amended. 
  These audit standards require that we plan and perform the audit to obtain reasonable
  assurance as to whether the accompanying principal financial statements are free of material
  misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts
  and disclosures contained in the principal financial statements and the accompanying notes. 
  An audit also includes assessing the accounting principles used and  the significant estimates
  made by management.  We believe that our audit work provides a reasonable basis for our
  opinion.
  
  In our opinion, the principal financial statements (pages IV-1 to IV-6) present fairly, in all
  material respects, the financial position of BIA as of September 30, 1999 and its consolidated
  net cost and change in financial position and budgetary activity and financing for the fiscal
  year ended September 30, 1999 in conformity with generally accepted accounting principles. 
  
  Our audit was conducted for the purpose of forming an opinion on the consolidated principal
  financial statements taken as a whole, and our opinion relates only to  the principal financial
  statements.  The supplemental segment information following the notes to the principal
  financial statements in BIA's Annual Report were subjected to auditing procedures that were
  applied to the consolidated principal financial statements and, in our opinion, is fairly stated
  in all material respects in relation to the principal financial statements taken as a whole.
  
  BIA's Annual Report for fiscal year 1999 contains certain information that is not a required
  part of the principal financial statements.  The Management Discussion and Analysis section
  of the report contains selected performance goals and results required by the Government
  Performance and Results Act.  We reviewed the internal controls related to the transactions
  and other data that support the performance measures to determine whether the transactions
  were properly recorded, processed, and summarized in accordance with the criteria stated by
  management.  In addition, the deferred maintenance and supplementary stewardship
  information (pages VI-b-1 to VI-c-4) is not a required part of the principal financial
  statements but is supplementary information required by the Federal Accounting Standards
  Advisory Board.  We applied certain limited procedures, including discussions with
  management, to ensure compliance with OMB guidance and consistency with the financial
  statements.  However, we did not audit the information and therefore do not express an
  opinion on this supplementary information.
  
  REPORT ON INTERNAL CONTROLS
  
  Our audit was conducted in accordance with the "Government Auditing Standards," issued
  by the Comptroller General of the United States, and with Bulletin 98-08, as amended.
  
  Management of BIA is responsible for establishing and maintaining an internal control
  structure which provides reasonable assurance that the following objectives are met:
  
  -  Transactions are properly recorded, processed, and summarized to permit the preparation
  of the principal financial statements and required supplementary stewardship information in
  accordance with Federal accounting standards. 
  
  -  Assets are safeguarded against loss from unauthorized acquisition, use, or disposition.
  
  -  Transactions are executed in accordance with  laws governing the use of budget authority
  and other laws and regulations that could have a direct and material effect on the principal
  financial statements or required supplementary stewardship information and any other laws,
  regulations, and Governmentwide policies identified by OMB.
  
  -  Transactions and other data that support reported performance measures are properly
  recorded, processed, and summarized to permit the preparation of performance information
  in accordance with criteria stated by management.
  
  Because of inherent limitations in any internal control structure, errors or fraud may occur
  and not be detected.  Also, projections of any evaluation of the internal controls over
  financial reporting to future periods are subject to the risk that the internal controls may
  become inadequate because of changes in conditions or that the degree of compliance with
  the policies or procedures may deteriorate.
  
  In planning and performing our audit, we obtained an understanding of the relevant internal
  control policies and procedures, determined whether these internal controls had been placed
  in operation, assessed control risks, and performed tests of controls in order to determine our
  auditing procedures for the purpose of expressing an opinion on the principal financial
  statements and not to provide assurance on the internal controls.  Accordingly, we do not
  provide an opinion on the internal controls.  We also reviewed BIA's most recent report
  required by the Federal Managers' Financial Integrity Act of 1982 and compared it with the
  results of our evaluation of BIA's internal control structure. 
  
  Our consideration of the internal controls over financial reporting would not necessarily
  disclose all matters in the internal control structure over financial reporting that might be
  reportable conditions.  Under standards established by the American Institute of Certified
  Public Accountants and by Bulletin 98-08, as amended, reportable conditions are matters
  coming to our attention relating to significant deficiencies in the design or operation of the
  internal controls that, in our judgment, could adversely affect BIA's ability to record,
  process, summarize, and report financial data consistent with the assertions made by
  management in the financial statements.  Material weaknesses are  reportable conditions in
  which the design or operation of one or more of the internal control components does not
  reduce to a relatively low level the risk that misstatements in amounts that would be material
  in relation to the financial statements being audited may occur and not be detected within a
  timely period by employees in the normal course of performing their assigned functions.  We
  noted certain matters involving the internal controls and their operation that we consider to
  be material or reportable conditions as described by the American Institute of Certified
  Public Accountants and by Bulletin 98-08, as amended. 
  
  Material Weaknesses
  
  We discovered material weaknesses as discussed in the paragraphs that follow.
  
  A.  BIA Needs Improved Controls Over Construction-in-Progress Account
  
  BIA did not have sufficient internal controls to ensure that the construction-in-progress
  general ledger control account, which had a reported balance of $51.4 million as of
  September 30, 1999, was stated in accordance with Federal accounting standards.  Our audit
  tests disclosed aggregate errors (positive and negative) totaling $69.1 million, which required
  a  net adjustment  of $33.6 million  (65 percent  increase)  in the account as of 
  September 30, 1999.  This occurred because BIA had not developed and implemented
  adequate policies and procedures to ensure that all valid projects and related costs were
  included in the account, completed projects were transferred timely to the appropriate fixed
  asset accounts, and invalid projects and project costs were removed from the account.  These
  deficiencies are detailed as follows: 
  
  -  BIA did not identify and record at least 13 valid construction projects totaling $21 million. 
  For example, our analytical reviews of project cost information maintained in BIA's Project
  Cost Accounting System disclosed that  BIA had not identified and recorded project costs
  totaling $10.5 million related to the rehabilitation and renovation of a BIA-owned dam.  We
  also found that two fire station construction projects totaling $485,000 were not recorded. 
  
  
  - BIA did not record project costs of at least $16.3 million related to 15 construction projects. 
  For example, our  reviews of construction project files and site visits disclosed unrecorded
  dam renovation construction costs totaling $14.5 million and September 1999 project
  construction costs totaling $474,000 related to 10 construction projects.
  
  - BIA did not transfer five completed construction projects totaling $2.6 million to the
  appropriate fixed asset accounts.  For example, the construction-in-progress subsidiary ledger
  included two projects at one school location, completed in October 1998, at a cost of
  $1.5 million that  had not been transferred to the buildings account as of September 30, 1999.
  
  - BIA did not timely identify and remove invalid project costs totaling $29.2 million related
  to 15 projects.  For example, the construction-in-progress subsidiary ledger included project
  costs totaling $13.5 million for a non-BIA-owned school (according to Facilities
  Management Construction Center officials) and project costs totaling $918,000 related to the
  duplicate reporting of August 1999 transactions.  
  
  When informed of these deficiencies, BIA management made the necessary adjustments. 
  
  Recommendation
  
  We recommend that the Assistant Secretary for Indian Affairs direct the Chief Financial
  Officer to establish and implement policies and procedures to ensure that all projects and
  related costs are included in the construction-in-progress account, completed projects are
  timely transferred to the appropriate fixed asset accounts, and invalid projects and project
  costs are identified and removed from the construction-in-progress account. 
  
  BIA Response:  The BIA concurs with this finding.  BIA is currently implementing a plan
  to improve controls over Construction-in-Process (CIP) and has issued a revised CIP Manual
  in June 2000.  BIA has issued instructions for another complete inventory to be completed
  by June 30, 2000.  The BIA is in process of correcting the CIP Report 664 that lists all
  transactions for all construction projects. The corrective actions on CIP are expected to be
  completed by August 31, 2000.  
  
  B.  BIA Needs Improved Controls Over Property, Plant and Equipment Accounts 
  
  BIA did not have sufficient internal controls to ensure that the buildings subsidiary ledger,
  other structures and facilities subsidiary ledger, and equipment subsidiary ledger were stated
  in accordance with Federal accounting standards.  Our audit tests showed that as of
  September 30, 1999 BIA's subsidiary ledgers included errors for property, plant and
  equipment acquisition costs totaling $25.3 million; accumulated depreciation costs totaling
  $7.0 million; and depreciation expenses totaling $64.8 million.  These deficiencies occurred
  because BIA had not developed and implemented effective policies and procedures. 
  Examples of deficiencies are detailed as follows: 
  
  - Subsidiary ledger acquisition costs for six buildings did not agree with the amounts shown
  on the supporting documentation, which resulted in gross misstatements of at least
  $1.1 million.
  
  - The building general ledger control account and/or subsidiary ledger did not include costs
  totaling $1.9 million for four buildings (costs not transferred from the
  construction-in-progress account to the buildings account) and $2.2 million for three
  completed buildings that had not previously been recorded in the buildings or
  construction-in-progress general ledger accounts but that were charged directly to expenses.
  
  -  Eleven employee housing quarters (duplex and fourplex buildings) totaling $1.1 million
  had been incorrectly recorded as separate apartment units and, as a result, did not meet the
  $50,000 capitalization threshold for recording building assets.  When we informed BIA
  management of the incorrect recording, they agreed that the buildings should be capitalized
  and included in the buildings general ledger control account.
  
  -  Five buildings and/or building improvements totaling $106,000 were below the $50,000
  capitalization threshold and should not have been recorded in the general ledger control
  account. 
  
  - Improper depreciation expense computations resulted in an $18 million overstatement for
  219 buildings and a $4 million understatement for 22 buildings.
  
  - Six BIA-owned water towers totaling an estimated $300,000 were not recorded in the other
  structures and facilities subsidiary ledger.
  
  - Thirteen other structures and facilities items totaling $209,000 were below the $50,000
  capitalization threshold and should not have been recorded in the general ledger control
  account.
  
  - Improper depreciation expense computations resulted in a $31.5 million understatement
  related to three other structures and facilities items and a $2.6 million overstatement related
  to 34 other structures and facilities items.
  
  - In-service date supporting documentation was inadequate for seven equipment items
  totaling $727,000.
  
  - An improper deletion of 112 equipment items resulted in a $5 million understatement to
  the equipment account.
  
  - Twenty-three equipment items totaling $697,000 were not recorded in the equipment
  subsidiary ledger.
  
  When informed of these deficiencies,  BIA management made the necessary adjustments. 
  
  Recommendation
  
  We recommend that the Assistant Secretary for Indian Affairs direct the Chief Financial
  Officer to establish and implement policies and procedures which ensure that property, plant
  and equipment physical inventories are adequate and complete; acquisitions and disposals
  are recorded timely and accurately; adequate supporting documentation is maintained;
  completed construction projects are transferred timely to the appropriate accounts;
  depreciation expense is timely and accurately recorded; and errors in BIA's Fixed Asset
  Subsystem are timely identified and corrected.
  
  BIA Response:  The BIA concurs with this finding.  The BIA completed a new physical
  inventory as of March 31, 2000 and is currently performing internal reviews of the
  inventories at the large property Regions.  In addition to this inventory, BIA is currently
  photographing all real property; these photographs will be loaded into a database that will
  be linked to the Fixed Asset System.  
  
  C.  BIA Needs Improved Controls Over Budgetary Accounts
  
  BIA did not have sufficient internal controls to ensure that budgetary account transactions
  were timely deobligated (cleared)  when completed or inactive,  accurately recorded, and 
  adequately supported in accordance with Federal accounting regulations.
  
  The deficiencies related to the budgetary accounts occurred because BIA management had
  not developed and implemented adequate policies and procedures to ensure that periodic
  reviews were performed to determine the validity and accuracy of undelivered orders and 
  that completed, closed, or inactive undelivered orders transactions were timely removed 
  from the account.  
  
  Our audit tests of 182 items totaling $82.4 million disclosed that 21 items (12 percent)
  totaling $708,000 (projected over the universe to be a most likely overstatement error of
  $13.9 million) should have been deobligated prior to September 30, 1999.  In addition, we
  found one transaction totaling $24,000 that was recorded with the wrong transaction type,
  which caused the undelivered orders accounts to be understated, and funds totaling $133,000
  that were incorrectly obligated twice by field office personnel, which caused the undelivered
  orders accounts to be overstated.  Also, during our analytical tests, we found 140 undelivered
  orders transactions with unnatural balances totaling $206,000 included in the subsidiary
  ledger at September 30, 1999.  For example, one unnatural balance occurred because a check
  cancellation totaling $144,000 was improperly processed within the accounting system. 
  When informed of the deficiencies,  BIA management made a $13.8 million net adjustment
  to the undelivered orders-unpaid and allotment resources realized accounts.
  
  In addition, BIA improperly posted a subsidy reestimate adjustment totaling $21 million to
  budgetary accounts for an entry that should have been recorded only to proprietary accounts
  prior to receipt of budgetary authority and did not have sufficient internal controls to ensure
  that adequate documentation was available to support an $18 million adjustment to fiscal
  year 1999 beginning budgetary account balances.
  
  Recommendation
  
  We recommend that the Assistant Secretary for Indian Affairs direct the Chief Financial
  Officer to establish and implement policies and procedures which ensure that budgetary
  account transactions are timely deobligated (cleared)  when completed or inactive, accurately
  recorded, and adequately supported in accordance with Federal accounting regulations.
  
  BIA Response:  The BIA concurs with this finding.  BIA issued an Undelivered Orders
  Manual in July 2000 that requires the program managers to reconcile the BIA Report 130s
  (UDOs) each month and take necessary corrective action.  BIA is also sending the report on
  UDOs to the field in a text file that can be dropped into a data base for additional sorts as
  required.  
  
  D.  BIA Needs Improved Controls Over Financial Information Integrity Reviews
  
  BIA did not have sufficient internal control procedures to ensure that errors and invalid
  transactions contained in its general and subsidiary ledgers, listings, and reports were timely
  identified and corrected at September 30, 1999.  In addition, BIA did not consistently have
  adequate internal controls to ensure that adjusting journal/accounting entries were properly
  recorded in the appropriate general ledger control accounts.  These deficiencies occurred
  because BIA had not developed and implemented an effective financial information integrity
  review, reconciliation, and correction process.  The deficiencies are detailed as follows:
  
  - An improper transaction code used to remove non-BIA-owned structures and facilities
  resulted in a $77.3 million misstatement to the loss on disposal and prior period adjustments
  general ledger control accounts.
  
  - The necessary proprietary account adjusting entries were not made to properly record net
  upward and downward reestimates of direct loan subsidy expenses totaling $5.3 million, loan
  guaranty liability decreases totaling $17.5 million, and reestimate interest expenses totaling
  $3.2 million.
  
  - A $4.6 million adjusting entry was improperly recorded to the bad debt expense and
  allowance for doubtful accounts general ledger control accounts (backward debit and credit
  entries).
  
  - A $12.7 million accounts payable adjusting entry was improperly posted to the accrued
  unfunded payroll general ledger control account. 
  
  -  One item totaling $676,000 was recorded in the improvements to land subsidiary ledger,
  but, according to the supporting documentation, the item was not owned by BIA.
  
  - Five athletic fields had not been recorded in the improvements to land subsidiary ledger. 
  
  -  Seven parcels of land (159 acres) with an undetermined cost had not been recorded in the
  subsidiary ledger, but supporting documentation indicated that the acreage was owned by
  BIA.
  
  -  BIA had not performed timely clearing and/or reconciliation of transactions from the
  deposit suspense liability account.  For example, we found stale transactions dating as far
  back as fiscal year 1994 that, according to supporting documentation, should have been
  cleared.  In addition, we identified an unreconciled difference of approximately $168,000
  between three power projects' meter deposit detail listings and the related general ledger
  control account.
  
  When informed of these deficiencies, BIA management made the necessary adjustments.
  
  Recommendation
  
  We recommend that the Assistant Secretary for Indian Affairs direct the Chief Financial
  Officer to establish and implement necessary controls to ensure that adjusting
  journal/accounting entries are properly recorded in the appropriate general ledger control
  accounts; effective financial information integrity reviews, reconciliations, and correction
  processes are performed to ensure that errors and omissions are timely identified and
  corrected; and transactions from the deposit suspense liability account are cleared timely and
  reconciled. 
  
  BIA Response:  The BIA concurs with this finding.  The BIA has implemented a two level
  review process for all journal vouchers that are to be entered into the accounting system. 
  This change, along with management changes currently underway, should result in improved
  controls over financial information.  
  
  E.  BIA Needs Improved General Controls Over Automated Information Systems
  
  BIA did not have adequate controls over its Operations Service Center automated
  information systems in accordance with Bulletin 98-08.  Detailed findings and
  recommendations and  BIA's response and remedial actions taken are discussed in  the April
  1997 audit report "General Controls Over Automated Information Systems, Operations
  Service Center, Bureau of Indian Affairs" (No. 97-I-771).  In addition, our June 1998 audit
  report "Followup of General Controls Over Automated Information Systems, Operations
  Service Center, Bureau of Indian Affairs" (No. 98-I-483) stated that the general control
  weaknesses and risks identified in our April 1997 report still existed.  Our audit work
  performed for fiscal year 1999 determined that the general control weaknesses still existed
  and that recommendations made in the prior years' audit reports were not fully implemented. 
  
  Recommendation
  
  We recommend that the Assistant Secretary for Indian Affairs direct the Chief Financial
  Officer to develop and implement procedures to strengthen the reported internal control
  weaknesses over automated information systems.  
  
  BIA Response:  The BIA concurs with this finding.  BIA is addressing identified inadequate
  controls over automated systems in its new Reston Offices.  
  
  Reportable Conditions
  
  We discovered reportable conditions as discussed in the paragraphs that follow.
  
  F.  BIA Needs Improved Controls Over Accounts and Interest Receivable and Related
  Revenue and Allowance for Doubtful Accounts
  
  BIA did not have sufficient internal control procedures to ensure that accounts and interest
  receivable and related revenue and allowance for doubtful accounts general ledger control
  account balances were stated in accordance with Federal accounting standards.  These
  deficiencies occurred because  BIA had not developed and implemented adequate procedures
  to ensure that adequate documentation was available to support all recorded receivable
  balances; all recorded receivable balances were valid, accurate, and properly classified; all
  receivable and revenue transactions were timely entered into the appropriate general and
  subsidiary ledgers; and accurate receivable aging data were used to compute the allowance
  estimate.  
  
  Our audit tests showed that receivables of $2.1 million were unsupported and receivables 
  of $2.4 million were invalid, inaccurate, or improperly classified.  When informed of these
  deficiencies,  BIA management made adjustments of $1.8 million (out of $4.5 million
  identified) to correct the deficiencies noted in the receivable general ledger control accounts;
  however, BIA financial management did not make an adjustment to correct the remaining
  identified errors of $2.7 million.  
  
  In addition, because of the effect that the accounts receivable transactions have on the related
  revenue accounts, we determined that revenues totaling $2.4 million were invalid, inaccurate,
  or improperly classified.  When informed of the deficiencies, BIA management made the
  necessary adjustments.  
  
  Our audit tests also identified deficiencies in power receivables and revenue as follows:
  
  -  Power receivables and revenue related to fiscal year 1998 transactions totaling $224,000
  were not recorded in the appropriate general or subsidiary ledgers until fiscal year 1999.
  
  -   Power receivables and revenue related to fiscal year 1999 transactions totaling $80,000
  were not timely recorded when earned in the appropriate general or subsidiary ledgers.
  
  These deficiencies occurred because BIA had not established policies and procedures for
  periodically updating its power project receivable balance to reflect current year billing
  transactions when executed.  Further, BIA did not use the correct receivable aging data for
  $16.4 million of irrigation accounts receivable when computing its allowance for doubtful
  accounts estimate because it used the Federal Financial System receivable aging summary
  rather than the National Irrigation Information Management System receivable aging detail
  report to compute the estimate.  This resulted in a $4.6 million misstatement in the receivable
  allowance and bad debt expense general ledger control accounts at September 30, 1999. 
  When informed of this deficiency, BIA management made the necessary adjustments.  
  
  
  
  Recommendation
  
  We recommend that the Assistant Secretary for Indian Affairs direct the Chief Financial
  Officer to establish and implement policies and procedures to ensure that adequate
  documentation is available to support all recorded receivable balances; all recorded
  receivable balances are valid, accurate, and properly classified; all receivable and revenue
  transactions are timely entered into the appropriate general and subsidiary ledgers; and
  accurate receivable aging data are used to compute the allowance estimate.
  
  BIA Response:  BIA concurs with the finding.  While recruiting for a CFO, BIA has
  contracted with NBC to setup better controls over accounts receivables including updating
  written procedures.  
  
  G.  BIA Needs Improved Controls Over Deferred Maintenance Management and
  Reporting 
  
  In accordance with Statement of Federal Financial Accounting Standards No. 6, "Accounting
  for Property, Plant and Equipment," as amended, and Statement of Federal Financial
  Accounting Standards No. 14, "Amendments to Deferred  Maintenance Reporting," we
  reviewed the internal controls related to transactions and other data that support the reported
  supplementary information on deferred maintenance to determine whether BIA estimates
  totaling $5.2 billion were properly supported, processed, and summarized.  We found that
  formal policies and procedures for conducting periodic condition assessment surveys and for
  computing, compiling, and reporting deferred maintenance funding estimates needed to be
  established to promote consistency and improve reliability of the data.  In addition, the
  supervisory and monitoring controls over deferred maintenance required strengthening to
  ensure that deferred maintenance estimates are accurate, complete, and supported by
  adequate documentation.
  
  Recommendation
  
  We recommend that the Assistant Secretary for Indian Affairs direct the Chief Financial
  Officer to establish and implement policies and procedures for conducting periodic condition
  assessment surveys and estimating deferred maintenance needs, including the requirement
  that the data and methodologies used to compute the estimate should be documented,
  reviewed, and approved at the appropriate management levels.
  
  BIA Response:  The BIA agrees that improved controls over deferred maintenance and
  reporting are needed.  The BIA is currently developing programs to implement the
  Departments guidelines that were issued in December, 1999.
  
  STEWARDSHIP AND PERFORMANCE MEASURES
  
  We reviewed BIA's internal controls over the required supplementary stewardship
  information (pages VI-b-1 to VI-b-9) by obtaining an understanding of BIA's internal
  controls relating to the preparation of the required supplementary stewardship information,
  determining whether these internal controls had been placed in operation, assessing the
  control risk, and performing tests of these controls as required by Bulletin 98-08.  However,
  providing assurance on these internal controls was not an objective of our audit, and
  accordingly, we do not provide assurance on such controls.
  
  H.  BIA Needs Improved Controls Over Stewardship and Performance Measure
  Reporting
  
  During our internal control review, we noted certain existence and/or completeness issues
  as follows:
  
  -  BIA omitted the reporting of investments in non-Federal assets for expenses incurred for
  alterations/renovations of facilities, purchases of equipment, and other improvements of
  physical assets for educational facilities and irrigation structures under contract and/or grant
  with tribal entities or owned by tribal entities.  Statement of Federal Financial Accounting
  Standards No. 8 requires that an annual investment in non-Federal assets be reported as
  supplementary stewardship information.  The BIA official responsible for education
  stewardship reporting stated that this decision was made by BIA and/or Departmental
  officials during fiscal year 1998, but he could not provide a rationale for the decision.
  
  -  The Construction-in-Progress in the Indian Schools section (page VI-b-8) did not include
  at least four construction projects that were determined by BIA to be tribally owned and that
  therefore should have been reported as stewardship investments as required by  Statement
  of Federal Financial Accounting Standards No. 8 (Section 83).  In addition, one of the
  construction projects reported in this section was duplicated and also reported as
  construction-in-progress on BIA's Statement of Financial Position.
  
  -  The Human Capital Investment (Investment in Indian Education) totaling $493 million
  reported as "expended" in fiscal year 1999 was actually the obligated amount rather than the
  expended amount as required by Standard No.  8 (Section 94).
  
  -  The Museum Property Collection section included in reported Heritage Assets did not
  identify the number of museum property items added and/or withdrawn during fiscal year
  1999 as required by Standard No.  8 (Section 50).
  
    -  The Accomplishment Report for Fiscal Year 1999 Indian Reservation Roads and Bridge
  Programs showed 4,707 miles of road construction accomplishments; however, BIA's
  regional offices' reports totaled 3,127 miles for road construction accomplishments for fiscal
  year 1999.  Although BIA described its program accomplishments as road construction and
  maintenance, we determined that BIA reported information only on road construction
  accomplishments and omitted information on road maintenance accomplishments.
  
  We considered BIA's internal controls over the performance measures included in the
  Management Discussion and Analysis by obtaining an understanding of BIA's internal
  controls relating to the preparation of the performance measures information to determine
  whether these internal controls had been placed in operation and performed tests of these
  controls as required by Bulletin 98-08, as amended.  However, providing assurance on these
  internal controls was not an objective of our audit, and accordingly, we do not provide
  assurance on such controls.  
  
  During our review, we noted certain existence and/or completeness issues that adversely
  impacted the information provided in BIA's Management and Discussion Analysis.  For
  example, the Analysis did not identify target goals for nine performance measures profiled
  in the Department's Accountability Report for fiscal year 1999 and did not address three of
  the nine performance measures profiled in the Report.  Also, information in the report did
  not agree with information in BIA's Performance Report actual results for four performance
  goals.
  
  Recommendation
  
  We recommend that the Assistant Secretary for Indian Affairs direct the Chief Financial
  Officer to establish and implement stewardship and performance measure management
  systems that include the necessary control procedures to ensure that timely, complete, and
  reliable stewardship and performance measure information, including all supporting
  documentation and listings, is adequately maintained and available.
  
  BIA Response:  The BIA agrees with the recommendation that the CFO improve the control
  procedures over stewardship and performance measure management systems. 
  
  REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS
  
  We conducted our audit in accordance with "Government Auditing Standards," issued by the
  Comptroller General of the United States and with Bulletin 98-08, as amended.
  
  Management of BIA is responsible for complying with applicable laws and regulations.  As
  part of obtaining reasonable assurance as to whether BIA's financial statements are free of
  material misstatement, we performed tests of BIA's compliance with certain provisions of
  laws and regulations, noncompliance with which could have a direct and material effect on
  the determination of financial statement amounts, and certain other laws and regulations
  specified in OMB Bulletin 98-08, as amended, including the requirements referred to in the
  Federal Financial Management Improvement Act of 1996.  
  
  Under the Act, we are required to report whether BIA's financial management systems are
  in substantial compliance with Federal financial management system requirements, Federal
  accounting standards, and the U.S. Government Standard General Ledger at the transaction
  level.  To meet these requirements, we performed tests of compliance using the
  implementation guidance for the Act included in Appendix D of Bulletin 98-08, as amended. 
  However, providing an opinion on compliance with certain provisions of laws and
  regulations was not an objective of our audit, and accordingly, we do not express such an
  opinion.
  
  I.  BIA Needs Improved Controls Over Compliance With Applicable Laws and
  Regulations 
  
  The results of our tests of compliance disclosed no instances of noncompliance with other
  laws and regulations except as discussed in the paragraphs that follow that are required to 
  be reported under the "Government Auditing Standards" or Bulletin 98-08, as amended. 
  However, the results of our tests of compliance with laws and regulations identified five
  instances of noncompliance that are required to be reported as follows:
  
  -  Chief Financial Officers Act of 1990.  In our opinion, BIA did not effectively establish and
  implement general and financial management practices and improve its systems of
  accounting, financial management, and internal controls to ensure the issuance of reliable
  financial information related to the  production of complete, reliable, timely, and consistent
  financial reports and subsidiary ledgers, as discussed in the previous finding paragraphs.  As
  such, BIA was not in compliance with the Act.  
  
  -  Federal Financial Management Improvement Act of 1996.  We noted certain matters which
  we believe indicate that ineffective general controls existed over BIA's automated
  information systems and are significant departures from certain requirements of Office of
  Management and Budget Circulars A-127, "Financial Management Systems," and A-130,
  "Management of Federal Information Resources," and are therefore instances of substantial
  noncompliance with the Federal financial management systems requirements under the
  Federal Managers' Financial Integrity Act of 1982.
  
  Our review also disclosed that BIA's National Irrigation Information Management System
  (NIIMS),  a subsidiary irrigation accounts receivable system, did  not meet Joint Financial
  Management Improvement Program Core Financial System requirements.  Specifically,
  NIIMS did not support the functions required to track financial events; did not provide
  information required for the preparation of financial statements; and did not collect, transmit,
  and report data about financial events.  We also found that NIIMS did not maintain sufficient
  information to distinguish between prior fiscal year and current fiscal year transactions.  All
  bills entered into NIIMS during the current fiscal year are assigned a current fiscal year
  billing document number regardless of the actual fiscal year of the revenues being billed. 
  As a result, if a bill is canceled and subsequently reissued, the revenue accrual is duplicated,
  resulting in an overstatement of current year revenue in the Federal Financial System.  In
  addition, at the beginning of each fiscal year, NIIMS's electronic interface with the Federal
  Financial System identifies all irrigation receivables as current and does not allow for the
  accurate aging and reporting of delinquent receivables from data within the Federal Financial
  System.  Also, NIIMS's electronic interface with the Federal Financial System does not
  distinguish between government and non-government receivables and does not allow for the
  identification of other Federal entities for the purpose of providing accurate financial
  statement year-end eliminations.  Further, we noted from our reviews of BIA internal
  documents that NIIMS does not contain information such as the time, terminal, or date for
  billing and collection information; does not allow for the date of partial payment to be
  entered for computation of interest, penalty, and administrative charges, resulting in
  inaccurate accruals and assessments of interest and penalties; and allows for the overwrite
  of user identification codes when lease or land master records are updated.  
  
  -  Debt Collection Improvement Act of 1996.  The Debt Collection Improvement Act of 1996
  requires that all eligible receivables delinquent for more than 180 days be referred to the
  U.S. Treasury for collection or offset.  Eligible receivables are those receivables that are not
  in bankruptcy, litigation, or foreclosure status and that have not been referred to a private
  collection agency or the Internal Revenue Service for tax refund offset.
  
  BIA did not timely transfer all eligible accounts receivable that were delinquent for more
  than 180 days to the Treasury for collection or offset.  For example, BIA reported that it had
  referred delinquent accounts receivable of $3 million to the Treasury for collection or offset
  at September 30, 1999.  However, we found that BIA had accounts receivable of at least
  $22.8 million that were delinquent for more than 180 days and were eligible for referral at
  September 30, 1999.  
  
  -  Prompt Payment Act.  The Prompt Payment Act requires that Federal agencies pay their
  bills on time, pay interest penalties when payments are made late, and take discounts only
  when payments are made within the discount period and are advantageous to the
  Government.  A January 24, 2000 quality control review prepared by the Chief, Accounting
  Operations Branch, National Business Center, covering the fourth quarter of fiscal year 1999
  stated that the accuracy of BIA's Prompt Payment Report was not acceptable because of the
  number of payment processing errors found.  Our review of all fiscal year 1999 quality
  control quarterly reports disclosed that BIA made incorrect data entries into the Federal
  Financial System ranging from 12 to 36 percent for those items tested.
  
  -  Managerial Cost Accounting Management and Reporting.  In accordance with the full cost
  financial reporting requirements contained in Statement of Federal Financial Accounting
  Standards No. 4 and OMB Bulletin 97-01, we reviewed the processes related to the data that
  supported the reported information for managerial cost accounting.  We found that BIA had
  not developed managerial cost accounting systems that adequately captured all elements
  necessary for assigning indirect costs on a reasonable basis.  Specifically, BIA did not
  allocate indirect costs of $114.2 million to its responsibility segments as of September 30,
  1999.  In addition, BIA did not present segment information for its Statement of Changes in
  Net Position, as required by Bulletin 97-01.  
  
  Recommendation
  
  We recommend that the Assistant Secretary for Indian Affairs direct the Chief Financial
  Officer to develop and implement procedures which ensure compliance with the Chief
  Financial Officers Act of 1990, the Federal Financial Improvement Act of 1996, the Debt
  Collection Improvement Act of 1996, the Prompt Payment Act, and managerial cost
  accounting management and reporting requirements.
  
  BIA Response:  BIA concurs with this finding.  The BIA is currently advertising the Chief
  Financial Officers job as recommended by the National Association of Public
  Administration's study.  
  
  CONSISTENCY OF OTHER INFORMATION
  
  We reviewed the financial information presented in BIA's management discussion and
  analysis (pages I-1 to III-5) and supplementary information (pages VI-b-1 to VI-b-9) to
  determine whether the information was consistent with the principal financial statements. 
  Based on our review, we determined that the information in the management discussion and
  analysis and in the required supplementary information sections were consistent with the
  principal financial statements.
  
  PRIOR AUDIT COVERAGE
  
  We reviewed prior Office of Inspector General and General Accounting Office audit reports
  related to BIA's financial statements to determine whether these reports contained any
  unresolved or unimplemented recommendations that were significant to BIA's financial
  statements or internal controls.  We found that there were no General Accounting Office
  reports that contained significant unresolved or unimplemented recommendations related to
  BIA's financial statements or internal controls.   However, the Office of Inspector General
  had issued nine reports that had significant unresolved or unimplemented recommendations
  which we considered to be reportable weaknesses as follows:
  
  -  The report "Bureau of Indian Affairs Consolidated Comparative Financial Statements for
  Fiscal Years 1998 and 1997" (No. 99-I-937), issued in September 1999, stated that the fiscal
  year 1998 consolidated financial statements and accompanying notes were presented fairly
  except for the amounts reported in the financial statements for 13 accounts (accounts and
  interest receivable and the related revenue, advances, allowance for doubtful accounts, and
  bad debt expense; construction-in-progress; buildings, other structures and facilities, land
  improvements, equipment, and the related accumulated depreciation and depreciation
  expense; and undelivered orders) and the effect that these accounts had on the overall net
  position, change in financial position, budgetary resources and outlays, and the related notes
  to the financial statements.  In addition, the report stated that BIA was not in compliance
  with the Chief Financial Officers Act of 1990, the Federal Financial Management
  Improvement Act of 1996, the Debt Collection Improvement Act of 1996, the Credit Reform
  Act of 1990, and the Prompt Payment Act.  The report contained 23 recommendations, of
  which 1 was considered resolved but not implemented and 22 were considered unresolved
  because BIA did not specifically address those recommendations in its response.
  
  -  The report "Deferred Maintenance, National Park Service, U.S. Fish and Wildlife Service,
  U.S. Geological Survey, Bureau of Indian Affairs, Bureau of Land Management, and Bureau
  of Reclamation" (No. 99-I-874), issued in September 1999, stated that the bureaus needed
  to implement actions to ensure that deferred maintenance information was reliable for
  budgetary and accounting purposes.  We made three recommendations to the Assistant
  Secretary for Policy, Management and Budget.  As of September 30, 1999, management had
  concurred with but had not implemented any of the recommendations related to
  (1) establishing additional criteria for bureaus to use in determining the types of projects or
  items that should be included in their deferred maintenance listings; (2) establishing a
  requirement that bureaus should prepare and maintain documentation to support their
  condition assessments and deferred maintenance cost estimates; and (3) requiring bureaus
  to establish management and system controls to ensure that deferred maintenance data are
  reviewed, approved, and validated.  
  
  -  The report "Followup of General Controls Over Automated Information Systems,
  Operations Service Center, Bureau of Indian Affairs" (No. 98-I-483), issued in June 1998,
  stated that the general control weaknesses and risks identified in our audit report for fiscal
  year 1996 continued to exist during fiscal year 1997.  The report made eight new
  recommendations to address weaknesses found during the followup audit.  As of
  September 30, 1999, BIA  had implemented procedures relating to establishing the use of
  the U.S. Geological Survey's host computer, holding the Information Technology Security
  Manager accountable for performing the position's responsibilities, and removing the safety
  hazards.  BIA concurred with but had not implemented the remaining five recommendations
  related to (1) developing and approving an Office of Information Resources Management
  strategic plan that provides direction to and defines the functions of the Operations Service
  Center; (2) performing a periodic evaluation of the system security program's effectiveness
  and including any resultant corrective actions in future BIA security plans; (3) redetermining,
  based on the Office of Information Resources Management's strategic plan, when BIA can
  begin to perform risk assessments and classifying BIA's resources; (4) obtaining security
  clearances for automated data personnel who are not assigned to the Center that are
  commensurate with their positions; and (5) requiring BIA staff to review and validate the
  appropriateness of users' levels of access to BIA's IBM applications.
  
  -  The report "Bureau of Indian Affairs Consolidated Financial Statements for Fiscal Years
  1995 and 1996" (No. 97-I-834), issued in May 1997, stated that the fiscal year 1996
  consolidated financial statements and accompanying notes were presented fairly except for
  the amounts reported in the financial statements for four accounts (other structures and
  facilities, accounts receivable, revenue, and bad debt expense) and the effect that these
  accounts had on the net position.  In addition, the report stated that BIA had not timely
  collected its accounts and loans receivable and therefore was not in compliance with the Debt
  Collection Act of 1982.  We made three recommendations to address these deficiencies.  As
  of September 30, 1999,  BIA had implemented two of the recommendations.  BIA concurred
  with but had not implemented the recommendation relating to monitoring transactions
  recorded in  its accounting system to ensure that the transactions are recorded to the correct
  accounts.
  
  -  The report "General Controls Over Automated Information Systems, Operations Service
  Center, Bureau of Indian Affairs" (No. 97-I-771), issued in April 1997, stated that BIA's
  general controls over its automated information systems at the Center were not effective. 
  Specifically, according to the report, BIA did not (1) have an effective system security
  program and had not enforced personnel policies and procedures to ensure adequate system
  security, (2) classify its resources to determine the level of security needed, (3) monitor
  visitor activities and perform adequate housekeeping to safeguard computer hardware,
  (4) perform periodic reviews to ensure that users' access levels were appropriate, (5) ensure
  that the proper version of an application was used in production, (6) have segregation of
  duties for the system support functions, (7) have controls over system software to effectively
  detect and deter inappropriate use, and (8) have an effective means of recovering or of
  continuing computer operations in the event of a system failure.  We made
  13 recommendations to address these deficiencies.  As of September 30, 1999, BIA had
  implemented procedures to address five of the recommendations.  BIA concurred with but
  had not implemented seven recommendations, related to (1) elevating the automated
  information system security function, (2) developing and documenting a system security
  program, (3) performing system environment risk assessments, (4) developing and
  implementing personnel security policies, (5) developing and implementing policies to
  classify BIA's computer resources in accordance with OMB Circular A-130, (6) developing
  and implementing policies to match personnel files with system users periodically, and
  (7) developing and implementing policies and procedures to identify individuals responsible
  for application development and changes.  A followup audit report (No. 98-I-483) found that
  the remaining recommendation, relating to moving the applications residing on the Unisys
  computer, was no longer applicable, and the recommendation was not referred for further
  tracking of implementation.
  
  -  The report "Direct and Guaranteed Loan Programs, Eastern Area Office, Bureau of Indian
  Affairs" (No. 97-I-504), issued in March 1997, stated that BIA's Eastern Area Office did not
  adequately manage its loan programs in compliance with applicable requirements. 
  Specifically, the Area Office did not ensure that (1) loan applications were screened and
  analyzed for reasonable assurance of the borrower's ability to repay, (2) outstanding loans
  were monitored adequately, (3) debt collection activities were initiated when appropriate, and
  (4) loan write-offs were adequately justified.  We made six recommendations to address
  these deficiencies.  As of September 30, 1999, BIA had implemented procedures for five
  recommendations and had concurred with but had not implemented the recommendation
  related to complying with the Departmental Manual.  
  
  -  The report "Indian Irrigation Projects, Bureau of Indian Affairs" (No. 96-I-641), issued in
  March 1996, stated that BIA had not taken corrective actions to recover operation and
  maintenance charges of $3 million owed eight projects for fiscal years 1993 and 1994, collect
  reimbursable construction costs totaling $7.7 million from non-Indian landowners at five
  projects, and include reimbursable construction costs of about $3.3 million in repayment
  contracts for two irrigation projects.  We made 13 recommendations to address the
  deficiencies.  As of September 30, 1999, BIA had implemented procedures for seven
  recommendations.  BIA concurred with but had not implemented the remaining six
  recommendations. 
  
  -  The report "Bureau of Indian Affairs Principal Financial Statements for Fiscal Years 1993
  and 1994" (No. 95-I-598), issued in February 1995, stated that we were unable to complete
  the audit and render an opinion on the reliability of the principal financial statements because
  BIA did not provide information to support the balances reported for accounts receivable,
  accounts payable, and the fund balance with Treasury for the irrigation and power accounts. 
  BIA also could not substantiate the amounts reported for real property, construction-in-
  progress, and personal property.  We made six recommendations to address the deficiencies. 
  As of September 30, 1999, BIA had implemented procedures for four recommendations and
  concurred with but had  not implemented the remaining two recommendations, related to
  reconciling subsidiary ledger balances with appropriate general ledger accounts and
  developing and implementing procedures to ensure that accounting activities related to the
  construction-in-progress account are properly coordinated, accurate and updated as needed
  and that the amounts reported in BIA's general ledger accounts for five accounts
  (construction-in-progress; buildings; other structures and facilities; roads, bridges, and trails;
  and improvements to land) are also properly coordinated, accurate, and updated.  
  
  -  The report "Wapato Irrigation Project, Bureau of Indian Affairs" (No. 95-I-1402), issued
  in September 1995, said that the Wapato Project Office was not adequately assessing, billing,
  or collecting annual operation and maintenance charges.  We made six recommendations to
  address the deficiencies.  As of September 30, 1999, BIA had  implemented procedures for
  four recommendations and  had concurred with but had not implemented the remaining two
  recommendations, related to determining the full cost of properly operating and maintaining
  the Project and establishing reserve funds to rehabilitate and replace facilities and equipment. 
  
  
  OBJECTIVE, SCOPE, AND METHODOLOGY
  
  Management of BIA is responsible for the following:
  
  -  Preparing the principal financial statements and the required supplementary information
  referred to in the Consistency of Other Information section of this report in conformity with
  generally accepted accounting principles and for preparing the other information contained
  in the Annual Report for fiscal year 1999.
  
  -  Establishing and maintaining an internal control structure over financial reporting.  In
  fulfilling this responsibility, estimates and judgments are required to assess the expected
  benefits and related costs of internal control structure policies and procedures.
  
  -  Complying with applicable laws and regulations.
  
  We are responsible for the following:
  
  -  Expressing an opinion on BIA's principal financial statements.
  
  -  Obtaining an understanding of the internal controls based on the internal control objectives
  contained  in Bulletin 98-08, which require that  transactions be properly recorded,
  processed, and summarized to permit the preparation of the principal financial statements and
  the required supplementary information in accordance with Federal accounting standards;
  that assets be safeguarded against loss from unauthorized acquisition, use, or disposal; and
  that transactions and other data that support reported performance measures be properly
  recorded, processed, and summarized to permit the preparation of performance information
  in accordance with criteria stated by management.
  
  -  Testing BIA's compliance with selected provisions of laws and regulations that could
  materially affect the principal financial statements or the required supplementary
  information.
  
  To fulfill these responsibilities, we took the following actions:
  
  -  Examined, on a test basis, evidence supporting the amounts disclosed in the principal
  financial statements.
  
  -  Assessed the accounting principles used and the significant estimates made by
  management.
  
  -  Evaluated the overall presentation of the principal financial statements.
  
  -  Obtained an understanding of the internal control structure related to safeguarding assets;
  compliance with laws and regulations, including the execution of transactions in accordance
  with budget authority; financial reporting; and certain performance measures information
  reported in the annual report.
  
  -  Tested relevant internal controls over the safeguarding of assets; compliance with laws and
  regulations, including the execution of transactions in accordance with budget authority; and
  financial reporting.
  
  -  Tested compliance with selected provisions of laws and regulations.
  
  We did not evaluate all of the internal controls related to the operating objectives as broadly
  defined by the Federal Managers' Financial Integrity Act, such as those controls related to
  preparing statistical reports and ensuring efficient operations.  We limited our internal
  control testing to those controls needed to achieve the objectives outlined in our report on
  internal controls.
  
  Based on BIA's July 13, 2000 response, we consider Recommendations C.1 and D.1
  resolved and implemented and Recommendations A.1, B.1, E.1, F.1, G.1, H.1, and I.1
  resolved but not implemented.  Accordingly, the unimplemented recommendations will be
  referred to the Assistant Secretary for Policy, Management and Budget for tracking of
  implementation. 
  
  Since the recommendations are considered resolved, no further response to the Office of
  Inspector General is required (see Appendix 1).
  
  Section 5(a) of the Inspector General Act (5 U.S.C. app. 3) requires the Office of Inspector
  General to list this report in its semiannual report to the Congress.  In addition, the Office of
  Inspector General provides audit reports to the Congress.  
  
  This report is intended for the information of management of the Department of Interior and
  OMB and the Congress.  However, this report is a matter of public record, and its
  distribution is not limited
  
  
  
  Roger La Rouche
  Acting Assistant Inspector General
  for Audits
  
  
  
  [CONTACT THE BUREAU OF INDIAN AFFAIRS FOR INFORMATION ON ITS FINANCIAL STATEMENTS
  FOR FISCAL YEAR 1999, WHICH ARE NOT INCLUDED]
  
  
  APPENDIX 1