[Independent Auditors Report on U.S. Geological Survey Financial Statements for Fiscal Years 1999 and 1998]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 00-I-708

Title: Independent Auditors Report on U.S. Geological Survey Financial
       Statements for Fiscal Years 1999 and 1998

   
  Date: September 28, 2000
  
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  E-IN-GSV-007-99-R
  
  
  
  
  
  
  September 28, 2000
  
  INDEPENDENT AUDITORS REPORT
  
  
  Memorandum
  
  To:  Director, U.S. Geological Survey
  
  Subject:  Independent Auditors Report on U.S. Geological Survey Financial Statements
  for Fiscal Years 1999 and 1998 (No. 00-I-708)
  
  SUMMARY
                              
  In our audit of the U.S. Geological Survey's (USGS) financial statements  for fiscal years
  1999 and 1998, we found the following:
  
  -  The principal financial statements were fairly presented in all material respects.  USGS's
  principal financial statements consist of the Consolidated Balance Sheet as of September 30,
  1999 and September 30, 1998; the Consolidated Statement of Net Cost and Consolidated
  Statement of Changes in Net Position for the fiscal years ended September 30, 1999 and
  September 30, 1998; and the Combined Statement of Budgetary Resources and Combined 
  Statement of Financing for the fiscal year ended September 30, 1999.   
  
  -  Our tests of internal controls identified material weaknesses in the areas of accounts
  receivable/advances, unliquidated obligations, and accrued liabilities.
   
  -  Our tests of compliance with laws and regulations identified noncompliance with
  Statement of Federal Financial Accounting Standards No. 4, "Managerial Cost Accounting
  Standards." 
  
  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 USGS's principal
  financial statements for the fiscal years ended September 30, 1999 and September 30, 1998
  as contained in USGS's accompanying Annual Financial Report for fiscal year 1999.  These
  financial statements are the responsibility of USGS, 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
  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 11-15) present fairly, in all material
  respects, the financial position of USGS, its consolidated net cost, and its changes in net
  position as of and for the years ended September 30, 1999 and September 30, 1998 and its
  combined statement of budgetary resources and statement of financing for the fiscal year
  ended September 30, 1999 in conformance with generally accepted accounting principles.
  
  As discussed in Note 1G to USGS's financial statements, in fiscal year 1999 the
  capitalization threshold for personal property was increased from $5,000 to $15,000,
  resulting in a decrease to equipment and related accumulated depreciation.  In addition, as
  discussed in Note 10 and in the Report on Internal Controls section, fiscal year 1998
  liabilities were increased and unexpended appropriations were decreased by about
  $69 million for accrued liabilities that had not been recognized.  
  
  Our audit was conducted for the purpose of forming an opinion on the consolidated and
  combined principal financial statements taken as a whole.  The accompanying consolidating 
  and combining information is presented for purposes of additional analysis of the
  consolidated and combined principal financial statements.  The consolidating and combining
  financial statements for fiscal year 1999 (pages 16-18) were subject to auditing procedures
  applied in the audit of the consolidated and combined principal financial statements and, in
  our opinion, are fairly stated in all material respects in relation to the consolidated and
  combined principal financial statements taken as a whole.
  
  In addition, the deferred maintenance and supplementary stewardship information that
  follows the financial statements (pages 27-32) is not a required part of the principal financial
  statements but is supplementary information required by the Federal Accounting Standards
  Advisory Board.  We have applied certain limited procedures, including discussions with
  management, on the methods of measurement and presentation of the supplementary
  information.  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.  
  
  USGS management 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 the 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 (1) laws governing the use of budget
  authority and with other laws and regulations that could have a direct and material effect on
  the principal financial statements and (2) any other laws, regulations, and Governmentwide 
  policies identified by the Office of Management and Budget.
  
  -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 considered USGS's internal controls over financial
  reporting by obtaining an understanding of USGS's  internal controls, 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 the supplemental statements of net cost
  and changes in net position and not to provide assurance on the internal controls over
  financial reporting.  Consequently, we do not express an opinion on internal controls. 
  
  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, 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 USGS's ability to record, process, summarize,
  and report financial data consistent with the assertions made by management in the principal
  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 matters
  concerning internal controls and their operation that we consider to be material weaknesses.
  
  Material Weaknesses
  
  We identified material weaknesses as discussed in the paragraphs that follow.
  
  A. USGS Needs Improved Controls Over its Advances From Others and Unbilled
  Accounts Receivable
  
  USGS did not establish adequate internal control procedures to ensure that its advances from
  others and unbilled accounts receivable were fairly stated in the subsidiary ledgers.   USGS
  made adjustments after year-end to correct the account balances.  The adjustments were
  made for the following reasons:
  
  - Advances from others and  unbilled accounts  receivable were  increased by over
  $20 million because negative unbilled accounts receivable should have been recorded as
  advances.  These negative unbilled receivables occurred because (1) the system does not
  allow intrabureau collections to be recorded as advances and (2) the system does not
  reestablish the advance when costs allocated to a customer are reduced. 
  
  - Advances from others and unbilled accounts receivable were decreased by about
  $4.9 million because the system did not always liquidate advances based on earnings.  This
  resulted in both advances from others and unbilled accounts receivable being overstated.
  
  - Advances from others and unbilled accounts receivable were decreased by about
  $6.4 million because collections were not matched to the correct budget fiscal year of the
  agreement.
  
  In addition, in reviewing the adjustments we noted that adjustments for working capital fund
  accounts receivable unbilled and advances from others were made twice:  (1) as a journal
  voucher posted to the pre-closing trial balance and (2) as an adjustment in Hyperion after
  closing.  When we brought these matters to management's attention, they made an
  adjustment of about $8.9 million.  
  
  We have reported controls over advances from others and unbilled accounts receivable as a
  reportable condition in previous years' audit reports; however, because of the continuing
  problems in this area, we have reclassified it as a material weakness.  We are not making
  recommendations related to advances from others and unbilled accounts receivable because
  recommendations have been made on this issue in prior years' reports. 
  
  USGS Response:   In the August 11, 2000, response (Appendix 1) to the draft report, the
  Acting Chief, Office of Program Support, indicated that the office would address the first
  two reported conditions by providing us with documentation of the "work around"
  procedures for the Project Cost Accounting System deficiency.  
  
  Office of Inspector General Reply:  Based  on  the response,  we  anticipate  that  the 
  work-around procedures will be effective and that this finding will not be reported in fiscal
  year 2000.  However, all of the procedures were not officially in effect for fiscal year 1999. 
  The documentation of the procedures in fiscal year 1999 was limited to a memorandum from
  the Chief of Accounts Receivable Branch to an office accountant outlining the procedures. 
  The procedure to provide Crystal reports to the divisions for them to review for unnatural
  unbilled accounts receivable/advance balances was not discussed in this memorandum.  In
  addition, the $20 million adjustment was made more than 2 months after the end of the fiscal
  year.  Furthermore, the adjustment made to correct the third condition was made based on
  information received from our audit.   As noted in the finding and not addressed in the
  response, the adjustments to correct the working capital accounts receivable and advance
  accounts were made twice.  Based on these facts, it is our opinion that this finding meets the
  definition of a material weakness.
  
  As you requested, we changed the wording of the third condition to reflect your
  determination of the cause of this condition.  
  
  B. USGS Needs Improved Controls Over its Accrued Liabilities and Expenses
  
  USGS did not establish adequate internal controls to ensure that liabilities and expenses were
  properly accrued at year-end for fiscal years 1998 and 1999.  In our testing of 74 expenses
  for fiscal year 1999, we identified 16 items that should have been expensed in prior years. 
  In our testing of 127 undelivered orders as of September 30, 1999, we identified 36 items
  where the amount of the undelivered orders should have been reduced and a liability should
  have been established because the goods or services had been received.  This occurred
  because USGS had not implemented adequate policies and procedures to recognize liabilities
  for which an obligation had been recognized for goods or services received but for which an
  invoice had not been received.  As a result, liabilities were understated and undelivered
  orders were overstated.  When we informed management of this condition, they made an
  adjustment of about $69 million to accrued liabilities, undelivered orders, and related
  accounts for both fiscal years 1999 and 1998  based on a statistical sample of undelivered
  orders.
  
  In addition, our testing of accrued expenses at year-end identified 3 of 26 items that were not
  valid expenses. When we brought this matter to management's attention, they made an
  adjustment of about $2 million.
  
  Recommendation
  
  We recommend that the Director, USGS, establish policies and procedures for recognizing
  accruals.
  
  USGS Response:  In the August 11, 2000 response (Appendix 1) to the draft report, the
  Acting Chief, Office of Program Support, agreed with this recommendation. 
  
  C. USGS Needs Improved Controls Over its Unliquidated Obligations/Undelivered
  Orders
  
  USGS did not establish adequate internal control procedures to ensure that the undelivered
  orders subsidiary ledger was  fairly stated.  Our testing of 127 undelivered  orders as of
  September 30, 1999 identified 7 items that were invalid orders and that therefore should have
  been deobligated. When we informed management of this condition, they made an
  adjustment of about $8.9 million to undelivered orders based on a statistical sample of
  undelivered orders. 
  
  Recommendation
  
  We recommend that the Director, USGS, implement procedures to assess the validity of
  undelivered orders and deobligate the order when needed. 
  
  USGS Response:  In the August 11, 2000 response (Appendix 1) to the draft report, the
  Acting Chief, Office of Program Support, agreed with the recommendation.
  
  STEWARDSHIP AND PERFORMANCE MEASURES
  
  We considered USGS's internal controls over the required supplementary stewardship
  information (pages 27-31) by obtaining an understanding of USGS's internal controls
  relating to the preparation of the required supplementary stewardship information to
  determine whether these internal controls had been placed in operation and performed 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.
    
  With respect to the internal controls related to the performance measures reported in USGS's
  Performance Measurement section (pages 37-40), we obtained an understanding of the
  design of significant internal controls related to the existence and completeness assertions 
  as required by Bulletin 98-08.  Our procedures were not designed to provide assurance on 
  internal controls over reported performance measures, and accordingly, we do not provide
  an opinion on such controls.  
  
  REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS
  
  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
  Bulletin 98-08.  
  
  USGS management is responsible for complying with laws and regulations applicable to that
  agency.  As part of obtaining reasonable assurance as to whether USGS's principal  financial
  statements are free of material misstatement, we performed tests of USGS's compliance with
  certain provisions of laws and regulations, noncompliance with which could have a direct
  and material effect on the determination of  financial statements amounts and certain other
  laws and regulations specified in Bulletin 98-08, including the requirements referred to in
  the Federal Financial Management Improvement Act of 1996.  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.  
  
  The results of our tests of compliance with laws and regulations discussed in the preceding
  paragraph exclusive of the Federal Financial Management Improvement Act disclosed one
  instance of noncompliance that is required to be reported under the "Government Auditing
  Standards" or Bulletin 98-08.
  
  Under the Federal Financial Management Improvement Act, we are required to report
  whether USGS's financial management systems were in substantial compliance with
  requirements for Federal financial management systems, 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
  Federal Financial Management Improvement Act included in Appendix D of Bulletin 98-08. 
  The results of our tests disclosed one instance in which USGS's financial management
  system was not in substantial compliance with these three requirements, as discussed in the
  paragraphs that follow.
  
  D.  Noncompliance With Managerial Cost Accounting Standards
  
  Based on our tests of compliance with laws and regulations, we found that USGS was not
  in full compliance with managerial cost accounting standards because it did not identify the
  cost of outputs and the unit cost of outputs.  Statement  of Federal Financial Accounting 
  Standards No. 4, "Managerial Cost Accounting Concepts and Standards," requires agencies
  to establish responsibility segments and to measure and report the full costs of resources
  consumed by the segment in producing each segment's  outputs.   According to Standard 
  No. 4, "Outputs produced by responsibility segments should be accumulated and, if
  practicable, measured in units [and] the full costs . . . should be assigned to outputs." 
  However, USGS has not identified the costs of all outputs and the costs per unit.  For
  example, USGS reports as a performance measure the number of "decision-support systems
  or predictive models developed or improved and delivered to customers" but does not
  provide information on the costs of the decision-support systems.  
  
  Recommendation
  
  We recommend that the Director, USGS, devise and implement a system that would measure
  and report the full cost of resources consumed by the segment in producing each segment's
  outputs.
  
  USGS Response:  In its August 11, 2000 response (Appendix 1) to the draft report, USGS
  did not concur with the recommendation.  USGS stated that it "aligns its cost and
  Government Performance and Results Act (GPRA) information to comply with the
  managerial cost accounting standard."  USGS further stated that its fiscal year 1999
  responsibility segments "were identical to their Performance Act program performance
  goals" and that USGS "reported the full cost of these responsibility segments as required by
  the standard."  USGS further said, "This reporting is supported by the Department of the
  Interior and fully meets [the Department's] cost accounting guidance."   
  
  Office of Inspector General Reply:  We agree that USGS took actions to align cost
  information with Government Performance and Results Act  information and used this
  strategy as a means to comply with Standard No. 4.  We do not agree, however, that USGS
  has fully complied with the standard.  According to the standard, "The purpose of cost
  accounting by a responsibility segment is to measure the costs of its outputs."  Although
  USGS has assigned full costs to responsibility segments and aligned the responsibility
  segments with Government Performance and Results Act program activities, it has not
  identified all the outputs of the responsibility segments or the costs of those outputs.  
  
  The Department of the Interior has developed guidance for implementing managerial cost
  accounting, which we believe is a positive step in the direction of compliance with Statement
  of Federal Financial Accounting Standards No. 4. We believe that if USGS complies with 
  the actions proposed by the Department, those actions will be sufficient  for USGS to be in
  compliance with the managerial cost accounting requirements for fiscal year 2000.
  
  CONSISTENCY OF OTHER INFORMATION
  
  We reviewed the financial information presented in USGS's Strategic Plan and Budgetary
  Integrity section (pages 1-6) and supplemental information (pages 27-63) to determine
  whether the information was consistent with the principal financial statements.  Based on our
  review, we determined that the information was consistent with the principal financial
  statements.
  
  PRIOR AUDIT COVERAGE
  
  Other than the unimplemented recommendations discussed in the Report on Internal Controls
  section of this report, our review of prior Office of Inspector General and General
  Accounting Office audit reports disclosed that there were no significant unresolved or
  unimplemented recommendations which affected USGS's principal financial statements.
  
  OBJECTIVE, SCOPE, AND METHODOLOGY
  
  USGS management is responsible for the following:
  
  -  Preparing the principal financial statements and the required supplemental 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 USGS's financial statements  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 USGS's principal financial statements.  
  
  -  Obtaining an understanding regarding the effectiveness  of the internal controls based upon
  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 supplemental 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 USGS'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 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 measure information
  reported in the Program Highlights.  
  
  -  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.  
  
  -  Reviewed the internal controls relevant to the existence and completeness assertions for
  systems producing the performance measures reported in the Program Highlights.  
  
  -  Tested compliance with selected provisions of laws and regulations.
  
  We did not evaluate all of the internal controls relevant to the operating objectives as broadly
  defined by the Federal Managers' Financial Integrity Act, such as those controls relevant 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.
  
  We identified other issues that, in our judgment, were not required to be included in this
  audit report but that should be communicated to management. These issues will be
  communicated separately in a management letter. 
  
  Based on USGS's response, we consider Recommendations B.1 and D.1  resolved and
  implemented and Recommendations A.1 and  C.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 2).  
  
  This report is intended for the information of management of Reclamation and the Office of
  Management and Budget and for 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 U.S. GEOLOGICAL SURVEY FOR INFORMATION ON ITS FINANCIAL
  STATEMENTS FOR FISCAL YEAR 2000, WHICH ARE NOT INCLUDED.]   APPENDIX 1
  
  
  
  
  
  
  MEMORANDUM
  
  August 11, 2000
  
  
  To:  Assistant Inspector General for Audits
  
                           From:  Carol F. Aten     /s/ Timothy E. Calkins, for
  Acting Chief, Office of Program Support 
  
  Subject:  Comments on the Draft Report on U.S. Geological Survey
  (USGS) Financial Statements for Fiscal Year (FY) 1999
  
  Thank you for the opportunity to comment on your draft report.  Our comments are keyed
  to the recommendations in the report.
  
  A.  Accounts Receivable
  
  The first two conditions cited were likewise cited in your FY 1996 audit report.  At that time, 
  USGS and the Office of Inspector General audit staff agreed that it would be impractical to
  implement the recommendation to reprogram the Project Cost Accounting System (PCAS)
  and agreed to do the adjustment mentioned in the audit report.  We have developed a "work
  around" for the system deficiency and devoted approximately one-half of a position to
  manually correct advances and unbilled accounts receivable.  We will provide you with
  documentation of these "work around" procedures, and request reclassification of this
  finding based upon our previous agreement and subsequent efforts.
  
  We agree with the effect of the third condition but not the cause.  Collections are being
  posted correctly to the budget fiscal year (BFY) on the associated bill, but imbalances are
  created when either (1) the BFY included on the billing document differs from the BFY
  where expenses were incurred or (2) reimbursable receipts are recorded as 'collections' and
  not 'advances' in the Federal Financial System.  We are addressing the first condition by
  increasing our monitoring of advances and accounts receivable reports to detect these
  situations.  To address the second condition we added a review and correction of all
  collections to our monthly reconciliation procedure.  We are also developing procedures that
  would allow field offices to move advances from one BFY to another BFY for multi-year
  agreements, subject to review and approval by the central finance office.  
  
  B.  Accrued Liabilities
  
  The USGS agrees with this recommendation.  We have explained the necessity for reviewing
  unliquidated obligations and establishing an accrual for goods or services received with
  various finance and administrative groups throughout the bureau.  We have also formalized
  the year-end accrual policy and procedures in our closeout instructions for FY 2000.  We will
  continue to work with program staff to address this problem.
  
  C.  Unliquidated Obligations
  
  The USGS agrees with this recommendation and has taken a number of steps in FY 2000 to
  address the topic of invalid unliquidated obligations.  We have issued instructions for
  reviewing USGS reports of unliquidated obligations.  We have also established an inter-
  bureau group to address unliquidated obligations; that group has concentrated on
  intergovernmental unliquidated obligations and has developed several solutions.  We have
  also issued a formal policy statement and procedures for deobligating invalid unliquidated
  obligations.  Finally, we will participate in the Departmental group addressing this topic.  We
  will continue to work on this issue with program staff and address the status of unliquidated
  obligations through our budget execution review process.
  
  D.  Cost Accounting
  
  We do not concur with this finding.  The USGS aligns its cost and Government Performance
  and Results Act (GPRA) information to comply with the managerial cost accounting
  standard.  Our FY 1999 responsibility segments were identical to our GPRA program
  performance goals, and we reported the full cost of these responsibility segments as required
  by the standard.  This reporting is supported by the Department of the Interior and fully
  meets its cost accounting guidance.
  
  Please feel free to contact Jack Blickley at (703) 648-7609 or  [email protected] if you
  have any questions concerning this response.
  
  
                                                        APPENDIX 2
  
  
              STATUS OF AUDIT REPORT RECOMMENDATIONS