[Audit Report on Statement of Assets and Trust Fund Balances at September 30, 1995, of the Trust Funds Managed by the Office of Trust Funds Management, Bureau of Indian Affairs]
[From the U.S. Government Printing Office, www.gpo.gov]
Report No. 97-I-196
Title: Audit Report on Statement of Assets and Trust Fund Balances
at September 30, 1995, of the Trust Funds Managed by the
Office of Trust Funds Management, Bureau of Indian Affairs
Date: December 13, 1996
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United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240
MEMORANDUM
TO: The Secretary
FROM: Wilma A. Lewis
Inspector General
SUBJECT SUMMARY: Final Audit Report for Your Information - "Statement of
Assets and Trust Fund Balances at September 30, 1995, of
the Trust Funds Managed by the Office of Trust Funds
Management, Bureau of Indian Affairs" (No. 97-I-196)
Attached for your information is a copy of the subject final audit report. The objective of
the audit was to determine whether the Trust Funds statement of assets and trust fund
balances at September 30, 1995, was fairly presented; whether the internal control
structure used by the Office of Trust Funds Management to account for the Trust Funds
met the objectives established by the Office of Management and Budget; and whether the
Office of Trust Funds Management had complied with laws and regulations in managing
the Trust Funds. The Trust Funds consist of tribal and individual Indian monies and other
special appropriations funds.
We reviewed the audit, which was performed by Griffin and Associates, P. C., an
independent accounting firm, and found that it was performed in accordance with the Chief
Financial Officers Act of 1990, as amended, and Office of Management and Budget
Bulletin 93-06, "Audit Requirements for Federal Financial Statements. " This was the first
audit of the financial statements of the Trust Funds since 1990, and to establish the
beginning balances, only the statement of assets and trust fund balances was prepared and
audited.
The independent public accountant rendered a qualified opinion on the statement of assets
and trust fund balances at September 30, 1995, because of deficiencies in the accounting
policies, practices, data, and automated systems and because cash and overnight
investments could not be independently verified. These conditions prevented certain
material accounts from being audited. In addition, the report stated that various tribal
organizations and individual Indians for whom the Office held assets did not agree with
certain balances reported by the Office and have filed claims against the Office over its
fiduciary responsibilities. The public accountant's report on the internal accounting control
structure contained 16 recommendations to address four material weaknesses, six
reportable conditions, and six advisory comments. Further, the report stated that the Office
CONTENTS
Page
REPORT ON FINANCIAL STATEMENT AT SEPTEMBER 30, 1995,
OF TRIBAL, INDIVIDUAL INDIAN MONIES AND OTHER
SPECIAL APPROPRIATION FUNDS MANAGED BY
THE OFFICE OF TRUST FUNDS MANAGEMENT,
BUREAU OF INDIAN AFFAIRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1
APPENDIX - STATUS OF AUDIT REPORT RECOMMENDATIONS . . . . . . 54
C-IN-BIA-003-95
United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240
Memorandum
To: Special Trustee
Office of Special Trustee for American Indians
From: Robert J. Williams
Acting Assistant Inspector General for Audits
Subject: Audit Report on Statement of Assets and Trust Fund Balances at September 30,
1995, of the Trust Funds Managed by the Office of Trust Funds Management,
Bureau of Indian Affairs (No. 97-I-196)
This report presents the results of the audit of the Trust Funds statement of assets and trust
fund balances at September 30, 1995, by Griffin and Associates, P. C., an independent
public accountant. The Trust Funds, which are managed by the Office of Trust Funds
Management, Bureau of Indian Affairs, 1 consist of tribal and individual Indian monies and
other special appropriations funds.
The audit is required by the Chief Financial Officers Act of 1990, as amended. Our
responsibility was to ensure that the audit was performed in accordance with the
requirements of the Act and Office of Management and Budget Bulletin 93-06, "Audit
Requirements for Federal Financial Statements. " We made quality control reviews of the
audit work performed by the accounting firm and provided technical assistance to both
the accounting firm and the Office of Trust Funds Management. Based on our review,
we found that the audit work by the independent public accountant was performed in
accordance with the requirements of the Act and the Bulletin.
This was the first audit of the financial statements of the Trust Funds since 1990, and it
was necessary to establish the beginning balances for future audits. Therefore, only the
statement of assets and trust fund balances at September 30, 1995, was prepared by the
Office of Trust Funds Management and audited by the independent public accountant. In
1 On February 9, 1996, the Trust Funds and the Office of Trust Funds Management were transferred
from the
Bureau of Indian Affairs to the Office of Special Trustee for American Indians, within the Office of
the
Secretary.
fiscal year 1996 the Office of Trust Funds additional financial statement to be audited.2
In its report on the financial statement, the Management anticipates preparing one
independent public accountant issued a qualified opinion because of deficiencies in the accounting
policies, practices, data, and automated systems and because cash and overnight investments could
not be independently verified. These conditions prevented certain material accounts from being
audited. In addition, the report stated that various tribal organizations and individual Indians for
whom the Office of Trust Funds Management holds assets did not agree with certain recorded
accountings and balances and have filed, or are expected to file, claims against the Office
over its fiduciary responsibilities. The accountant's report further stated that a potential
liability to the Federal Government existed because of these actual or potential lawsuits.
The independent public accountant's report on the internal control structure contained 16
recommendations to address four material weaknesses, six reportable conditions, and six
advisory comments as follows:
- The four material internal control weaknesses related to cash balances that were
unconfined and unreconciled, premiums or discounts on investments that were not being
amortized as required by the accounting standards, differences in trust fund balances that
were not reconciled, and area and agency offices' accounting policies and procedures that
were not being applied consistently. In addition to these four material control weaknesses,
the report also discussed material internal control operating deficiencies within the Office
of Trust Funds Management. Specifically, the inadequate number of staff, the staff's
inexperience and lack of training, and the inadequate computerized accounting systems all
contributed significantly to limiting management's ability to manage the trust funds.
However, the accountant's report stated that no recommendations were made for the
operating deficiencies because the Office of Special Trustee for American Indians3 had
developed a strategic plan to address these issues.
- The six nonmaterial but reportable internal control findings identified weaknesses
related to monthly earnings distributions that did not equal monthly earnings received,
investment records that were incomplete, monies deposited into special deposit accounts
within the Individual Indian Monies system that had not been distributed to beneficiaries'
2 Office of Management and Budget Bulletin 94-01, "Form and Content of Agency Financial
Statements, "
requires four financial statements to be prepared and audited. However, three of the required
financial
statements do not apply to trust entities. As a result, the Office of Trust Funds Management plans
to request,
from the Department of the Interior and from the Office of Management and Budget, that a statement
of
changes in assets and trust fund balances be substituted for the three required financial statements
that do not
apply. Therefore, only two financial statements, the statement of assets and trust fund balances and
the
statement of changes in assets and trust fund balances, will be prepared and audited in the future.
3 See footnote 1.
2
accounts and invested timely, delays in the updating of lease ownership records, a lack of
written operating policies and procedures, and a lack of an accounts receivable system.
- The six advisory internal control comments related to improving cash reconciliation
procedures, implementing a disaster recovery plan for the accounting data, improving
password controls, operating parallel accounting systems after changes were made to the
automated accounting programs, converting to a new computer system, and reporting the
interest distributions to the Internal Revenue Service.
The independent accountant's report on compliance with laws and regulations stated that
there were no instances of material noncompliance with selected provisions of laws and
regulations that were tested for fiscal year 1995 but that there were six nonmaterial issues
of noncompliance with laws and regulations. Although the report contained no
recommendations, the Office of Trust Funds Management responded to each of the six
nonmaterial issues.
Based on the response from the Office of Trust Funds Management to the 16
recommendations in the independent accountant's report, we consider all of the
recommendations resolved but not implemented. Accordingly, the recommendations will
be referred to the Assistant Secretary for Policy, Management and Budget for tracking of
implementation and no further response to the Office of Inspector General is required (see
the Appendix).
The legislation, as amended, creating the Office of Inspector General requires semiannual
reporting to the Congress on all audit reports issued, actions taken to implement audit
recommendations, and identification of each significant recommendation on which
corrective action has not been taken.
3
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
FINANCIAL STATEMENT
SEPTEMBER 30, 1995
WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
TABLE OF CONTENTS
SEPTEMBER 30, 1995
OVERVIEW
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT
STATEMENT OF ASSETS AND TRUST FUND BALANCES
NOTES TO THE FINANCIAL STATEMENT
SUPPLEMENTARY COMBINING STATEMENT OF ASSETS
AND TRUST FUND BALANCES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
INTERNAL CONTROL STRUCTURE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
COMPLIANCE WITH LAWS AND REGULATIONS
Page
1-5
6-7
8
9-23
24
25-40
41-44
*
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
OVERVIEW
SEPTEMBER 30, 1995
HISTORICAL PERSPECTIVE
Funds have been held in trust for American Indians by the federal
government since 1820. The Office of Indian Affairs (OIA) was made a part
of the War Department on March 11, 1824, and almost immediately criticisms
arose regarding the management of Indian financial matters. The OIA
operated informally until 1832, when the first Commissioner of Indian
Affairs was appointed by Congress. In 1834, during the 23rd Congress, the
House of Representatives Committee on Indian Affairs passed legislation to
address the management of Indian trust funds. In 1849, the OIA was
transferred to the Department of the Interior. The Act of February 12,
1929 authorized the payment of interest on certain funds held in trust by
the United States for Indian Tribes, and the Act of June 24, 1938
authorized the deposit and investment of Indian monies. In 1947, the
Bureau of Indian Affairs (BIA) was officially established. Since then, the
responsibility for the management of Indian trust funds has been determined
by a series of treaties, statutes, and court decisions.
In 1994, H.R. 4833, "American Indian Trust Fund Management Reform Act of
1994", was passed by the 103rd Congress and signed by President Clinton on
October 25, 1994. The major provisions of H.R. 4833 allows Indian Tribes
greater input and control over their trust fund accounts by:
1) providing for voluntary withdrawal and management of their own
funds,
2) provisions to return withdrawn funds,
3) establishing a Special Trustee, reporting directly to the
Secretary of the Interior, to oversee all aspects of trust
funds management reform within the BIA , Bureau of Land
Management and the Minerals Management Service including the
coordination of policies, practices, systems development,
technical assistance, training and recruitment of Indians in
the management of trust funds, and regular reporting to Tribal
and Individual Indian Money (IIM) account holders, and,
4) providing a grant program to address tribal capacity building
for investment and management of trust funds, development of a
comprehensive tribal investment plan, and training of personnel
responsible for monitoring the investment of trust funds.
TREATIES, LAWS AND AGREEMENTS
The responsibility, or trusteeship, for the holding of funds by the United
States for the benefit of individual Indians and Indian Tribes was first
and most importantly established by treaties. However, it was not until
1820 that the federal government adopted the policy of holding tribal funds
in trust.1 However, since 1871, the Congress, acting within the scope of
1 Historical and Legal Analysis of the Federal Government's Fiduciary
Duties Regarding American Indian Trust Funds, by Curtis G. Berkey, May,
1988, Indian Law Resource Center.
its constitutional powers, controlled and managed Tribal and individual
Indian funds through legislation.
There are also agreements involving fund management between the Tribes and
the Federal government by which a particular/specific Indian trust fund is
established. The holding and management of trust funds has also been a
long standing policy of the federal government.
DESIGNATED TRUSTEE
The Secretary of the Interior has been designated as trustee of funds held
by the federal government for Indian Tribes and individual Indians. The
Secretary delegated authority for the management of trust funds to the
Assistant Secretary - Indian Affairs. This authority was re-delegated to
the BIA and was exercised by the BIA's Office of Trust Funds Management.
Secretarial Order No. 3137, dated October 26, 1989, established the Office
of Trust Funds Management (OTFM) . It is responsible for establishing
proper controls and accountability for operation and management of trust
funds , and reports directly to the Deputy Commissioner of Indian Affairs.
The OTFM, located in Albuquerque, New Mexico, oversees the trust fund
operations at the BIA Area/Agency Offices. Prior to October 1989, trust
funds management within the BIA was spread across various offices with
little or no coordination of policy and/or management controls. The
mission of OTFM is, "To assure the highest level of accuracy,
responsiveness and service in the collection, investment and disbursement
of all judgment awards, Special Acts and income from trust resources
belonging to Native Americans."
Secretarial Order No. 3197, dated February 9, 1996, established the Office
of the Special Trustee for American Indians, and transferred the OTFM and
other financial trust services functions from the BIA to the Office of the
Special Trustee. The Special Trustee is required to develop and recommend
a Strategic Plan of Reforms to the Secretary, Office of Management and
Budget (OMB) and Congress. Once the plan is approved, the Special Trustee
oversees but does not direct the implementation of the plan. Upon
completion, the Special Trustee is terminated. There are no plans to
transfer any other office or any other trust functions to the office of the
Special Trustee. OTFM will be transferred to another unit, determined by
congress, when the Office of the Special Trustee terminates.
FIDUCIARY RESPONSIBILITY
In carrying out the management and oversight of the Indian Trust Funds, the
Secretary has a fiduciary responsibility to ensure that trust accounts are
properly maintained and invested in accordance with applicable laws, and
that accurate and complete reports are provided to the account holders.
Decisions of the Supreme Court reviewing the legality of administrative
conduct in managing Indian property have held officials of the United
States to "moral obligations of the highest responsibility and trust" and
"the most exacting fiduciary standards, " and be "bound by every moral and
2
equitable consideration to discharge its trust with good faith and
fairness. "
TRUST FUND ACCOUNTS
Indian Tribes and individual Indians trust funds are primarily derived from
judgment awards from claims and proceeds from surface and sub-surface
leasing such as agriculture, business, timber, minerals, or oil and gas.
The major portion of tribal funds (69%) consist of judgment awards while
individual Indian funds historically have come from per capita distribution
of proceeds collected. The composition of trust funds in terms of the
source of funds has not changed significantly over the years, however, the
value of the funds and number of the accounts has grown.
OTFM PROGRAM STRUCTURE
The Office of Trust Funds Management was reorganized in 1994 and now
operates in the following program structure.
o Division of Trust Funds Quality Assurance - Responsible for
internal audits, financial and compliance reviews, and issues
policies and procedures.
Division of Trust Funds Services - The Branch of Investments is
responsible for trust fund investment functions and the Branch
of Customer Service interacts directly with account holders to
provide timely and courteous customer services to tribal and
individual account holders.
Division of Trust Funds Accounting - Responsible for the day to
day operations for all investment, Tribal and Individual Indian
Money accounting functions.
Division of Trust Funds Systems - Responsible for providing
technical assistance to users of the OTFM systems, as well as
new software systems or hardware enhancements.
Division of Trust Funds Reporting/Reconciliation - Responsible
for past/current reconciliation efforts and responsible for all
financial reporting to the Office of Management and Budget,
Department of the Treasury and other special reports.
TRUST FUND ACCOUNTING SYSTEMS
Prior to April 1, 1995, the primary accounting system for all trust funds
accounts managed by 0TFM was the Trust Funds Management System (TFMS).
TFMS was a system developed in the 1960's by the BIA and was used by the
BIA for all accounting activities prior to 1991. In 1991, the BIA
3
transferred its accounting functions onto Federal Finance System (FFS) ,
while the trust funds remained on the TFMS.
During the TFMS era, a subsidiary accounting system was contracted for the
purpose of managing the investment portfolios of the trust accounts. This
system was known as the Money Max system, and later as Series II.
Individual Indian Money (IIM) accounts are kept on a subsidiary accounting
system known as the IIM system. The IIM system is part of a larger BIA
system known as the Integrated Records Management System (IRMS) .
In addition to the main systems mentioned above there are additional
smaller systems and applications developed to assist in various functions
involved in management of the Indian trust funds.
There were, and are, many accounting, procedural, and systems problems
associated with the accounting systems at OTFM. These difficulties led
0TFM to contract for a commercial trust asset management system. The
system selected, known as the OmniTrust system is used by a number of major
trust departments across the country. On April 1, 1995, the OmniTrust
system replaced the TFMS and the Money Max/Series II systems. The IIM
accounts continue to be maintained on the IIM/IRMS system.
The OTFM continues to develop and implement incremental improvements to its
existing systerms. Despite these improvements, the current systems,
including OmniTrust, are expected to continue to be deficient in various
respects. The Special Trustee's assessment of the problems is that, "the
u. s. Government, using present systems, was, is and will continue to be
unable to furnish beneficiary American Indian Tribes and individual Indians
with an accurate and full accounting of trust funds."
TRUST FUND REPORTING ENVIRONMENT
The Indian trust funds managed by OTFM are held in eight separate Treasury
accounts called "Appropriations ." Each appropriation may contain one or
many separate trust funds, created and managed for different purposes and
groups of beneficiaries. The financial activity in each of the
appropriations is reported to Treasury on a monthly and annual basis
through a series of reports required and defined by the Treasury.
Each of the Indian trust funds managed by 0TFM has a particular history and
set of organic documents which define why the trust was created, what its
purposes are, who its beneficiaries are, and other information needed to
manage the fund in accordance with the intent of its creators. In almost
every trust the beneficiaries are either Indian Tribes, Native Alaska
Villages, or Individuals. The beneficiaries are often referred to as
account holders. Tribal trust funds managed in the OmniTrust system
receive monthly and annual statements on their accounts. Other optional
statements are available on request. Indians whose accounts are managed in
the IIM system receive quarterly statements, as required by the American
Indian Trust Funds Management Reform Act.
Financial statements on the Indian trust funds also must be filed as
described by the Chief Financial Officers Act of 1990 (CFO Act) , and the
4
American Indian Trust Funds Management Reform Act of 1994. The form and
content of these financial statements, of which this overview is a part,
are defined by the Office of Management and Budget. The CFO Act further
requires that agencies obtain an annual financial audit in accordance with
generally accepted government auditing standards . There is on-going
discussion with the Federal Accounting Standards Advisory Board ("FASAB")
as to whether the Indian Trust Funds are subject to the reporting
requirements of the CFO Act.
CONCLUSION
The OTFM has made great strides in the improvement of the services it
provides to account holders. Despite these strides, there still exists a
wide disparity between what a private sector trustee offers its customers,
and what the federal government provides its account holders. However, the
OTFM is motivated, inspired, committed and challenged to close the gap of
disparity.
5
GRIFFIN & ASSOCIATES, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
DAN D. GRIFFIN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT
To the U.S. Department of the Interior
Bureau of Indian Affairs:
We have audited the accompanying Statement of Assets and Trust Fund
Balances for the Tribal, Individual Indian Monies and Other Special
Appropriation Funds managed by the U.S. Department of the Interior Bureau
of Indian Affairs Office of Trust Funds Management (the "OTFM") as of
September 30, 1995. This financial statement is the responsibility of
management of the OTFM. Our responsibility is to express an opinion on
this financial statement based on our audit. As discussed in Note 2, the
accounting policies used by OTFM to prepare this financial statement are in
accordance with Office of Management and Budget (OMB) Bulletin Number 94-
01, which is a comprehensive basis of accounting other than generally
accepted accounting principles.
Except as discussed in the following paragraph, we conducted our audit in
accordance with generally accepted auditing standards, standards for
issued by the Comptroller General of the United States and Office of
Financial Statements". Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statement. An audit also includes assessing the accounting
principles used, and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
As discussed further in the Notes to the Financial Statement, (1) cash and
overnight investments are maintained by a related U.S. Governmental Agency
(U.S. Treasury) and cannot be independently confirmed, (2) cash balances
reflected in the accompanying financial statement are materially greater
than balances reported by the U.S. Treasury, (3) major inadequacies in the
Trust Fund accounting systems, controls and records caused them to be
unreliable, (4) various Tribal organizations and classes of Individual
Indians for whom the OTFM holds assets in trust do not agree with certain
OTFM accountings and balances recorded by the OTFM; and certain of these
parties have filed, or are expected to file, claims against the OTFM. This
may result in a potential liability to the Federal government so large that
it is not reasonably estimable. Because of these matters, it was not
practicable to extend our auditing procedures to enable us to express an
opinion regarding the basis on which cash and trust fund balances are
stated.
In our opinion, except for the effect on the financial statement of
adjustments that might have been determined had we been able to perform
adequate audit procedures to verify the financial elements described in the
preceding paragraph, the financial statements referred to above present
fairly, in all material respects, the financial position of the Tribal,
Individual Indian Monies and Other Special Appropriation Funds managed by
the U.S. Department of the Interior Bureau of Indian Affairs Office of
Trust Funds Management as of September 30, 1995, in conformity with the
comprehensive basis of accounting described in paragraph one above.
We have also issued separate reports dated May 17, 1996, on the OTFM's
internal control structure and on its compliance with laws and regulations.
The information in the Overview Section, which management is required to
submit , is not a required part of the basic financial statement, but is
supplementary information required by OMB Bulletin Number 94-01, "Form and
Content of Agency Financial Statements ." We did not audit this
information, and because of the exceptions set forth above, we do not
express an opinion on such information.
Our audit was made for the purpose of forming an opinion on the basic
financial statement taken as a whole. The supplementary combining
statement of assets and trust fund balances as reflected on page 24 is
presented for purposes of additional analysis and is not a required part of
the basic financial statement. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statement,
and in our opinion, except for the exceptions set forth above, is fairly
stated in all material respects in relation to the basic financial
statement taken as a whole.
GRIFFIN & ASSOCIATES, P.C.
Boulder, Colorado
May 17, 1996
7
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
STATEMENT OF ASSETS AND TRUST FUND BALANCES
SEPTEMBER 30, 1995
ASSETS
Non-Entity assets:
Intragovernmental assets:
Fund balance with Treasury (Note 4) :
Cash
Investments (Note 5) :
Overnight investment
Government backed securities
Accrued interest receivable
Governmental assets:
Investments (Note 5) :
Certificates of deposit
Equity securities
Mortgage backed securities
Accrued interest receivable
Accrued dividends receivable
194,561,000
2,090,359,573
26,256,216
63,047,244
35,740,200
246,458,007
4,717,016
197,500
Total assets
$ 2,671,451,120
TRUST FUND BALANCES
TRUST FUND BALANCES, held for Indian Tribes,
individuals and Special Appropriation Funds held
under trust, including unallocated balances $ 2,671,451,120
The accompanying notes are an integral part of this statement.
8
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
NOTE 1 -- BACKGROUND AND DESCRIPTION OF THE ORGANIZATION
A. Overview of Trust Funds, the Bureau of Indian Affairs and the Office of
Trust Funds Management ("OTFM")
Formation of the Trust Funds - The legislation which authorizes the
Secretary of the Interior ("Secretary") to manage the Tribal and Individual
Indian Monies ("IIM") Trust Funds ("Trust Funds") gives formal recognition
to the relationship that exists between the Indian Tribes and the U.S.
Government. At the time the U.S. Government was founded, Indian
sovereignty was recognized. Agreements between the U.S. Government and the
various Indian Tribes, therefore, took the form of treaties. During the
course of the nation's history and the U.S. Government's varying policies
toward Indian Tribes, this relationship has retained its original sovereign
characteristics.
The balances that have accumulated in the Trust Funds have generally
resulted from payments of claims by the U.S. Government, land use
agreements, oil, gas and mineral extraction, and investment income.
The Secretary has been designated by the U.S. Congress as the U.S.
Government trustee on behalf of the account holders of the Trust Funds.
Through February 8, 1996, the Secretary, in turn, delegated authority for
management of the Trust Funds, including accounting and financial
reporting, to the Assistant Secretary - Indian Affairs, who carried out the
management of the Trust Funds through the OTFM. As discussed in Note 7, on
February 9, 1996, the Secretary delegated authority for management of the
Trust Funds to the Office of the Special Trustee for American Indians,
which now oversees the OTFM.
Organization of the Bureau of Indian Affairs (" the Bureau") - The
management of the Trust Funds is accomplished through a network of offices
within the Bureau.
Agency and Field Office - The Bureau's 93 Agency and Field Offices
maintain direct contact with the Tribes located throughout the United
States. Generally, Agency and Field Offices are physically located
near the Tribes served. The Agency and Field Offices may play a
significant role in tribal affairs through assistance in financial
planning, financial operations, and policy and program development.
Area Office - Each of the Agency and Field Offices is organized under
one of 12 Area Offices. The Area Offices provide administrative and
operational support for their respective Agency and Field Offices.
9
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
and Staff Offices.
evaluation program. The division advises the OTFM on the
efficiency, economy, legality and effectiveness of operations at
the program and field level. It is responsible for receiving,
communicating and monitoring compliance with all mandated laws and
regulations.
- This Division provides daily
Bureau-wide data system support for Trust Funds. It is
responsible for proper maintenance of the existing systems and
support of the financial management of trust funds.
- This Division processes and
controls accounting activities which record and report funds
collected, disbursed, invested, and held in trust. It plans,
develops, and recommends policies and procedures governing
collection of trust funds and monitors collection and recording of
funds. The Division disburses funds from trust accounts in
coordination with other Federal agencies managing trust funds
programs . It is also responsible for investment accounting
activities and for providing custodial services for investment
activities.
O Division of Trust Funds Services - This Division plans, develops,
operates, and controls the buying, selling, and trading of
investments in accordance with applicable laws, regulations, and
policies. It provides technical advice and assistance to Area
Offices, Agency Offices, and Indian Tribes in developing financial
plans and investment strategies for trust funds.
O Division of Reporting/Reconciliation - This Division is
responsible for reconciling subsidiary accounts and monitoring
Trust Fund activities. The Division prepares certain financial
and accounting reports for use within the federal government and
for inclusion in various Bureau-wide reports.
10
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
B. Description of the Trust Funds
The Trust Funds are managed by OTFM on behalf of Tribes, IIM account
holders, and Other Special Appropriation Funds (formally referred to as
"public finds") . A brief description of each Trust Fund follows:
Fund; however, some Tribes have multiple accounts. As a result,
approximately 1,600 separate accounts comprise the Tribal Fund.
Approximately 71% of the Tribal Fund assets are held on behalf of 5%
of the Tribes.
Accounts are maintained for Tribes within the Trust Funds. Tribes
realize receipts from a variety of sources including land use
agreements , royalties on natural resource depletion, tribal
enterprises related to trust resources, awards of Indian claims and
investment income.
The IIM Fund is primarily a deposit fund for individuals
as well as estates, Tribes and other organizations which may have a
fiduciary interest in the Trust Funds. IIM account holders realize
receipts primarily from royalties on natural resources depletion,
land use agreements, enterprises having a direct relationship to
Trust Fund resources and investment income. In addition, the IIM
Fund contains disbursing accounts for certain tribal operations and
enterprises. Approximately 346,000 accounts are held for
participants and tribal enterprises in the IIM Fund. Approximately
83% of the IIM fund assets are held by six Area Offices, on behalf of
the account holders they serve. Because of the nature of Trust Fund
assets , these interests may represent allocated or unallocated monies
derived from a variety of sources.
ropriation Funds - Other Special Appropriation Funds
represent other trust assets currently managed by the Bureau.
Authorization for management of these assets is based on U.S.
Congressional Acts establishing such Funds. A brief description of
each Fund follows:
O Alaska Native Escrow Fund - The Alaska Native Escrow Fund was
established by Congressional act for Alaska Native Corporations
and Villages for land of which boundaries were disputed. Proceeds
received or deposited into this fund were derived primarily from
contracts, leases, licenses, permits, rights-of-way, etc. The
proceeds, plus accrued interest, are paid out to the appropriate
corporation or individual to which the land was conveyed by the
U.S. Government.
11
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
0 Cochiti Wetfields Fund - The Pueblo de Cochiti ("Pueblo") and the
Us. Army Corps of Engineers entered into a settlement agreement
for water seepage problems at the Cochiti Dam on tribal lands.
The agreement established a fund for the sole and specific purpose
of operating, maintaining, repairing and replacing this drainage
system. Although the fund is invested and managed by the OTFM,
the fund remains the property of the United States, and will
revert to the Department of the U.S. Treasury ("Treasury") if
Cochiti Dam becomes non-operational and the Pueblo agrees that the
drainage system is no longer needed.
Fund - The Three Affiliated Tribes and
the Standing Rock Sioux Tribe were awarded a settlement for land
by the U.S. Government for the site of the Garrison Dam and
Reservoir and the Oahe Dam and Reservoir. The fund will be used
for educational, social welfare, economic development, and other
programs, subject to the approval of the Secretary.
Cheyenne Tribe was awarded a settlement for reserved water rights
claims in the Tongue River Basin. This fund was established by
the Treasury to implement the Tongue River Dam Project, which was
to correct safety inadequacies of the dam, conserve and develop
the fish and wildlife resources in the Tongue River Basin, and to
authorize certain modifications to the management and operation of
the Big Horn Reservoir.
The Papago Tribe, with respect to the
San Xavier Reservation and the Schuk Teak District of the Sells
Papago Reservation, was awarded a settlement in the form of water
rights for water which was taken from reservation land. The water
rights give the Tribe flexibility in the management of water
resources and encourage allocation of those resources to their
highest and best uses. The awarded funds are to be used for
Tribal government, health, education, social services, capital
improvements and economic development programs.
Fund was established to support the rehabilitation and improvement
of Navajo communities and to enhance the economic, educational,
and social condition of Navajo and Hopi families impacted by the
Navajo and Hopi Indian Relocation Amendments of 1988.
The Bureau maintains eight (8) contributed
funds which were established by donations. The individual funds
each have a specific use or purpose in some form to better the
American Indians by giving assistance for education or tribal
operations.
12
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
terms of the bequest, for expenditure, as determined by the
Assistant Secretary - Indian Affairs, for the relief of indigent
American Indians.
Certain of the Tribal, IIM and Special Appropriation Funds described above
are subject to legal, regulatory, budgetary, court ordered or other
restrictions. In addition, certain account beneficiaries have
discretionary investment decision-making rights.
c. Investment of Trust Fund Assets
Authorizing legislation and a substantial body of case law specify how the
Indian Trust Fund assets should be managed and which financial instruments
constitute appropriate investments for the Indian Trust Fund. Indian Trust
Fund assets are invested with financial institutions at which such deposits
are subject to Federal depository insurance, or collateralized by U.S.
Government securities for amounts deposited in excess of Federal depository
insurance limitations. Trust fund assets are also invested in U.S.
Government securities, including U.S. Treasury and certain U.S. Government
Agency issues, as well as certain other securities which are guaranteed by
the U.S. Government.
NOTE 2 -- S UMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Accounting
The Secretary of the Treasury, the Director of the Office of Management and
Budget ("OMB") and the Comptroller General have approved a hierarchy of
accounting principles that constitutes an other comprehensive basis of
accounting. The accounting principles and standards applied in preparing
the principal financial statement and described in this note are in
accordance with the following hierarchy of accounting principles:
These
statements reflect the accounting principles, standards , and
requirements recommended by the Federal Accounting Standards Advisory
Board and approved by the Comptroller General of the United States,
the Director of OMB and the Secretary of the Treasury,
in OMB Bulletin No. 94-01 (Form and Content of Agency Financial
Statements) , and
13
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
and Bureau accounting policy and procedures manuals, and/or related
guidance.
The Bureau uses the cash basis of accounting for the Trust Funds; however,
accrual adjustments were recorded in the accompanying financial statements
as of September 30, 1995, to reflect interest and dividends earned and to
record any applicable accretion of discount/amortization of premium over
the terms of the investments. Investments are stated at amortized
historical cost. Investments have not been adjusted to reflect changes in
market value because the Bureau's intent is to generally hold investments
until maturity.
The Trust Funds account for assets held for others in a trust capacity and
do not involve measurement of operations. Receipts, other than interest on
invested funds, are recorded when received because it is not practicable to
measure the majority of such items prior to receipt. Accordingly,
receivables other than accrued interest receivable are not reflected in the
accompanying financial statement. The accompanying financial statement
includes only the balances held in trust by the Bureau and the OTFM for
others and does not include (1) the account balances of the Bureau (general
appropriations, personnel and occupancy costs, etc.) , or (2) the values of
Indian Lands, buildings or other non-monetary assets regardless of the
source of funding (Tribal monies, Congressional appropriations, Indian
Trust Fund resources, etc.) . In addition, the Bureau does not have the
accounting systems or personnel resources necessary to accumulate or
account for the value of oil and gas, and other mineral reserves held in
trust on Indian lands. Such information is typically disclosed by
commercial enterprises that engage in natural resource extraction
activities.
B. Interest Income
IIM Fund account holders receive an allocated portion of interest earned on
the total IIM investment pool based on an average return applied to each
individual account. Accrued interest earned by the pool is then used to
fund distributions to account holders. Interest is recorded to IIM
accounts using the average daily balance method and is distributed on a
monthly basis.
Resources in the Tribal Trust and Other Special Appropriation Funds are
invested separately by account with interest recorded based on actual
income from each investment. The Tribal Trust and Other Special
Appropriation Funds earn interest in two ways: (1) directly from
investment securities in which the Tribal funds are placed, such as
certificates of deposit at financial institutions or U.S. Government Agency
securities, or (2) from a U.S. Treasury ("Treasury") overnight investment
14
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
which earns a rate comparable to Treasury bill rates. The
interest on the overnighter investments is calculated daily, compounded,
accumulated separately for participating accounts, and posted to the
separate accounts monthly.
c. Financial Statement Captions
Brief descriptions of the major captions used in the accompanying financial
statement as recommended by the OMB follow:
Assets - These are assets that are held by the Trust
Fund but are not available to the U.S. Government.
Assets - Intragovernmental nonentity
assets are claims of the Trust Fund against U.S.
Governmental entities. These amounts, when collected, can
be spent by the Trust Fund on behalf of beneficiaries
unless otherwise restricted.
- Balances on deposit, suspense
and clearing accounts that are assets of the Trust Fund on
behalf of beneficiaries unless otherwise restricted.
- Governmental nonentity assets are claims of
the Trust Fund against nonfederal entities. These amounts, when
collected, can be spent by the Trust Fund on behalf of
beneficiaries unless otherwise restricted.
Comparative data for the prior year has not been presented because this
is the first year financial statements have been prepared for the Trust
Fund since fiscal year 1990. In future years, comparative data is
expected to be presented to provide an understanding of changes in the
financial position and operations of the Trust Fund.
NOTE 3 -- ACCOUNTING SYSTEMS AND MATERIAL INTERNAL CONTROL
WEAKNESSES
The accounting systems and internal control procedures used by the Bureau
and the OTFM have suffered from a variety of system and procedural internal
control weaknesses and other problems; such as understaffed accounting
15
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
operations at all levels, a lack of experienced accounting supervisors, a
lack of minimum standards for key positions in the accounting process,
inadequate training programs, and out-of-date accounting policy and
procedure manuals. Certain of these internal control weaknesses are so
pervasive and fundamental as to render certain significant accounting
systems unreliable. Some of these problems are as follows:
lack of consistency in the accounting and related
procedures being utilized Bureau-wide, which has caused accounting
errors in the Indian Trust Funds. Standardized documented policies
and procedures have not been instituted for some significant Bureau-
wide accounting processes, while certain others remain seriously out-
of-date.
the accounting processes performed at the Area and Agency Offices.
inconsistent and inadequate to ensure the
proper filing and safekeeping of Trust Fund records to support trust
financial activity.
accounting principles and standards. Most significantly, accretion
of discounts and amortization of premiums are either not recorded, or
are recorded in a manner inconsistent with OMB accounting principles
and standards.
reporting for Trust Fund investments lacks adequate
investment performance information. These financial and managerial
reporting deficiencies are detrimental to the 0TFM's ability to
effectively manage the Trust Funds.
contains certain accounts with
negative balances aggregating approximately $46 million.
subsidiary ledger and the corresponding general ledger control
account.
balances reflected in the accompanying financial statement and the
balances held by Treasury. Treasury reports reflect balances
significantly less than OTFM balances.
16
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
entirely independent of the OTFM, in that Treasury records are in
part updated with information reported by the 0TFM, as well as other
federal agencies.
As a result of the material weaknesses in internal controls referred to
above, it is not possible to determine whether cash and trust fund balances
as reflected in the accompanying financial statements are fairly stated and
presented.
In some instances, the 0TFM has researched and corrected the balances held
in trust for specific Indian Tribes, individuals, and Other Special
Appropriation Funds. Many individual Tribal and IIM accounts still need to
be reconciled and/or resolved through negotiation and settlement before
reliance can be placed on the balances reflected in the Trust Fund
accounts.
The OTFM recognizes the weaknesses noted above and is in the process of
implementing several corrective measures to address them. These measures
include certain organizational changes, including recent appropriations to
increase staffing levels, the conversion in March 1995 to a new trust and
investment system, Omni, and the new oversight authority of the U.S.
Department of the Interior Office of the Special Trustee for American
Indians, as more fully discussed in Note 7.
NOTE 4 -- CASH AND OVERNIGHT INVESTMENTS WITH U.S. DEPARTMENT OF THE
TREASURY
Treasury functions as the disbursing agent for the OTFM. When Treasury
checks are written by the OTFM, the amounts are deducted from the Indian
Trust Funds, regardless of when (and whether) the checks written are
eventually negotiated by payees. During the fiscal year ending
September 30, 1995, Treasury checks are only negotiable for one year from
the date of issuance and the OTFM receives credit, and credits back to the
appropriate account holders, amounts which are not negotiated. Cash
balances do not include any checks on hand at the Area and Agency Offices
waiting for deposit to Treasury.
Overnight investments consist of available cash invested with Treasury. As
investments are required to be called in to Treasury by 1:00PM, the
overnight investment balance generally totals the prior day available cash
balance, adjusted for current day cash activity up to sweep cut-off time,
plus overnight investment interest earned month to date.
17
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
NOTE 5 -- INVESTMENTS
Investments are recorded at cost adjusted for accumulated amortization of
premiums and accretion of discounts utilizing the effective interest
method .
The Trust Fund assets have a concentration of credit risk in U.S.
Government securities.
Insurance Coverage and Pledged Securities
Following is an analysis of depository insurance and collateral on
certificates of deposit at September 30, 1995:
Deposits covered by depository insurance $ 8,004,037
Deposits covered by securities pledged as collateral 55,043,207
Total certificates of deposit 63,047,244
18
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
Maturities
Investments with scheduled maturities at September 30, 1995, are as follows:
Fair Market Value
Equity securities
no scheduled
maturities
Mortgage backed
securities with
varying maturities
143,026,398 107,375,071
$1,677,829,860 $ 479,123,475
Other Special
Appropriation
Funds Combined
$ 39,601,552 $ 294,645,172
105,615,037 687,543,166
119,744,789 871,199,309
28,365,799 309,956,108
293,327,177 2,163,343,755
36,535,288
250,401,469
$ 293,327,177 $ 2,450,280,512
Amortized Cost
Other Special
Less than 1 Year
1-5 Years
5-10 Years
Greater than 10 Years
Equity securities with
no stated
maturities
Mortgage backed
securities with
varying maturities
15,740,200 20,000,000
139,984,032 106,473,975
$1,655,246,592 $490,353,692
Appropriation
Funds Combined
$ 39,536,734 $ 294,613,897
104,835,441 692,897,173
118,815,714 867,350,825
26,816,851 298,544,922
290,004,740 2,153,406,817
35,740,200
19
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
The original cost, net accumulated amortization and accretion, amortized cost and
market value of the investments held at September 30, 1995, are as follows:
Tribal Net
Accumulated
(Amort.)/
Investment Class cost Accret. Amortized Cost Market Value
Government backed
securities 258,986,778 3,214,572 262,201,350 265,523,787
Mortgage backed
securities
$ 286,790,168 $ 3,214,572 $ 290,004,740 $ 293,327,177
20
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
The Secretary has been designated by Congress as the fiduciary with
responsibility for investing resources held in trust, collecting all monies
due from outside individuals/organizations for the use of Indian lands and the
extraction of natural resources from Indian lands, and disbursing such monies
collected to the appropriate beneficiaries.
Tribal organizations and classes of Indian individuals have filed various
claims against the United States for failure to fulfill its fiduciary
responsibilities and for related charges. Neither the OTFM nor the Office of
the Solicitor for the U.S. Department of the Interior can presently determine
the outcome of these actions or the total amount, responsibility and funding
source of the potential liability.
Any actual liabilities resulting from adverse outcomes of the contingencies
described above are generally expected to be satisfied with U.S. Government
funds, and not assets of the Trust Fund. No amounts have been accrued in the
accompanying Trust Fund financial statement for potential claims receivable
from the U.S. Government.
NOTE 7 -- REALIGNMENT UNDER THE OFFICE THE OF SPECIAL TRUSTEE
On February 9, 1996, Secretarial Order 3197 implemented Department of the
Interior's Office of the Special Trustee for American Indians (OSTAI) , which
was established by the American Indian Trust Fund Management Reform Act of
1994. The Order also transferred the OTFM, and financial trust services
performed at Bureau of Indian Affair's Area and Agency Offices, from the
Bureau to the OSTAI.
NOTE 8 -- TRUST FUND BALANCES
Disputed Balances and Beneficiaries Unable to Confirm Balances and Similar
Matters
A portion of the Beneficiaries for whom the Bureau holds assets in trust do
not receive adequate information to determine whether their account balances
reflected in the Bureau's records are proper.
A significant number of IIM accounts and balances are held for the benefit of
minors and other individuals who have been determined by the Bureau to require
assistance in managing their trust account activities and balances. It is the
practice of the Bureau to not forward financial data to minors and other IIM
account holders with supervised accounts. Agency Superintendents typically
act as custodians for these supervised accounts. In addition, some IIM
account holders have not furnished the Bureau their addresses which would
allow the Bureau to forward their account statements. Accordingly, certain
21
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
account holders do not, or are unable to, agree with the balances reflected in
their accounts.
The ultimate account holders of a portion of the monies held in the IIM Trust
Fund have not been determined by the Bureau and, accordingly, such monies have
not been distributed. Also , included in the Tribal Trust Funds are balances
not identified to specific Tribes because judgment awards were granted to
several Indian Tribes in a particular geographic area for settlement of claims
related to certain lands. Because such amounts were not awarded to a specific
Tribe or individual, there is no independent party (independent of the Bureau)
to determine the ownership of these account balances.
IIM account holders who have been determined by the Bureau to require
assistance in managing their financial affairs have had instances of payments
made from their accounts that have not been adequately reviewed and approved
in accordance with applicable regulations. At many Bureau locations
procedures are inadequate to ensure that such expenditures are made in
accordance with applicable regulations.
Unallocated Balances, Net
The net unallocated balances for the IIM Trust Fund balances, consisting of
cumulative differences between Omni and subsidiary detail of account holders'
balances and activity ("IRMS System") totaled $30,440,708 as of September 30,
1995.
NOTE 9 -- SIGNIFICANT TRANSACTIONS WITH OTHER U.S. GOVERNMENT
ORGANIZATIONS
Debt Arrangements
The Bureau is a party to various note payable agreements. These agreements
are primarily between the Indian Tribes and the U.S. Department of Agriculture
Farmers Home Administration or the U.S. Department of Commerce
Economic Development Administration ("EDA") . The proceeds of the FmHA loans
are used by Indian Tribes to repurchase fractional ownership interests in
allotted lands from individual Indians.
The receipts from the acquired ownership interests are deposited into "Special
Deposit" accounts in the IIM Trust Fund, and principal and interest payments
are made from these accounts. EDA loans are utilized for construction of
tribal facilities (governmental/administrative buildings, and facilities for
enterprise activities such as manufacturing, hotel/motel facilities, etc.) .
Individual Tribes are primarily liable for repayment of these loans, however,
trust funds are utilized for payment on these loans.
22
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENT
SEPTEMBER 30, 1995
Minerals Management Services
The Bureau receives royalty payments from the U.S. Department
Minerals Management Service ("MMS") on behalf of Indian Tribes
holding mineral rights. MMS generally transfers the royalty
of the Interior
and individuals
payments to the
Bureau upon receipt. At the time the royalty payments are received, MMS also
provides the Bureau with a breakdown of the tribal royalties, thus permitting
the Bureau to allocate the receipts directly into tribal accounts. However,
MMS does not provide the Bureau with ownership information for IIM account
holders until several weeks after the related royalty payments are received.
Accordingly, the Bureau holds the royalty receipts until it receives
information on how the royalties are to be allocated. Upon receipt of the IIM
account holders royalty ownership data, the Bureau distributes the royalty
receipts to the IIM account holders. IIM account royalty payments are then
either paid by check or held in IIM accounts until account holders wish to
make a withdrawal. MMS and the U.S. Department of the Interior Bureau of Land
Management both perform auditing and other monitoring procedures of mineral
royalties collected.
Overpayments are sometimes made by private companies to MMS. These are first
paid to the Bureau on behalf of Indian Tribes and individuals, and then
disbursed by the Bureau to the beneficiaries. The overpayments generally
result from payments being made based on estimated mineral production, in
order to comply with the Federal Oil and Gas Royalty Management Act of 1982
which requires timely distribution of royalties. Such overpayments are
recovered by the private companies by adjusting future payments. The amount
of such overpayments as of September 30, 1995, have not been quantified.
Other
As discussed in Note 4, the Treasury holds cash and overnight investments and
acts as a disbursing agent for the Bureau. As discussed in Note 6, the U.S.
Department of the Interior Office of the Solicitor serves as legal counsel for
the Bureau.
NOTE 10 -- CONVERSION TO NEW TRUST AND INVESTMENT SYSTEM
The OTFM converted from its old general ledger system (TFMS) and the related
investment subsidiary system (MoneyMax) to a new trust and investment system
(OmniTrust) as of March 31, 1995. The OmniTrust systerm eliminates the
necessity for subsidiary systems because cash and investment activity is
entered and recorded directly on the OmniTrust system. However, IIM activity
is grouped together and reflected as one line item in OmniTrust. The IIM
Trust balances are still maintained on a subsidiary ledger.
23
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
SUPPLEMENTARY COMBINING STATEMENT OF
ASSETS AND TRUST FUND BALANCES
SEPTEMBER 30, 1995
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND OTHER SPECIAL
APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
SUPPLEMENTARY COMBINING STATEMENT OF ASSETS AND TRUST FUND BALANCES
SEPTEMBER 30, 1995
Individual Other Special
Tribal Indian Appropriation Combined
Trust Monies Funds Total
ASSETS
Investments (Note 5) :
Overnight investment 169,860,872 3,906,061 20,794,067 194,561,000
Government backed securities 1,464,284,398 363,873,825 262,201,350 2,090,359,573
Accrued interest receivable 18,098,231 4,341,646 3,816,339 26,256,216
Governmental assets:
Investments (Note 5) :
Certificates of deposit 35,237,962 5,892 27,803,390 63,047,244
Equity securities 15,740,200 20,000,000 35,740,200
Mortgage backed securities 139,984,032 106,473,975 246,458,007
Accrued interest receivable 2,606,475 859,412 1,251,129 4,717,016
TRUST FUND BALANCES
The accompanying notes are an integral part of this statement.
24
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON INTERNAL
CONTROL STRUCTURE
SEPTEMBER 30, 1995
GRIFFIN & ASSOCIATES, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
DAN D. GRIFFIN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON INTERNAL CONTROL
STRUCTURE
To the U.S. Department of the Interior
Bureau of Indian Affairs:
We have audited the Statement of Assets and Trust Fund Balances for the
Tribal, Individual Indian Monies and Other Special Appropriation Funds
managed by the U.S. Department of the Interior Bureau of Indian Affairs
Office of Trust Funds Management ("OTFM") as of September 30, 1995, and
have issued our report thereon dated May 17, 1996.
We conducted our audit in accordance with generally accepted auditing
standards, the standards for financial audits contained in Government
Auditing Standards (1994 Revision) issued by the Comptroller General of the
United States and Office of Management and Budget (OMB) Bulletin Number 93-
06, "Audit Requirements for Federal Financial Statements." Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
The management of OTFM is responsible for establishing and maintaining an
internal control structure. In fulfilling this responsibility, estimates
and judgments by management are required to assess the expected benefits
and related costs of internal control structure policies and procedures.
The objectives on an internal control structure are to provide management
with reasonable, but not absolute, assurance that assets are safeguarded
against loss from unauthorized use or disposition, that transactions are
executed in accordance with management' s authorization and recorded
properly to permit the preparation of financial statements in accordance
with the comprehensive basis of accounting described in OMB Bulletin Number
94-01, "Form and Content of Agency Financial Statements". Also, projection
of any evaluation of the internal control structure to future periods is
subject to the risk that procedures may become inadequate because of
changes in conditions or that the effectiveness of the design and operation
of policies and procedures may deteriorate.
In planning and performing our audit of the Statement of Assets and Trust
Fund Balances for the Tribal, Individual Indian Monies and Other Special
Appropriation Funds managed by OTFM as of September 30, 1995, we obtained
an understanding of the internal control structure. With respect to the
internal control structure, we obtained an understanding of the design of
relevant policies and procedures and whether they have been placed in
operation, and we assessed control risk in order to determine our auditing
procedures for the purpose of expressing an opinion on the Statement of
Assets and Trust Fund Balances and not to provide an opinion on the
internal control structure. Accordingly, we do not express such an
opinion. Also, in accordance with OMB Bulletin Number 93-06, for those
significant internal control structure policies and procedures that were
4730 TABLE MESA DRIVE, SUITE C100, BOULDER, COLORADO 80303
PHONE (303)543-8868 . FAX (303)543-8869
properly designed and placed in operation, we performed tests to determine
whether such policies and procedures were operating effectively at
September 30, 1995.
We noted certain matters involving the internal control structure and its
operation that we consider to be reportable conditions under standards
established by the American Institute of Certified Public Accountants and
OMB Bulletin Number 93-06. These matters are described in the "Reportable
Conditions" section of this report. Reportable conditions involve matters
coming to our attention relating to significant deficiencies in the design
or operation of internal control structure that, in our judgment, could
adversely affect OTFM's ability to record, process, summarize and report
financial data consistent with the assertions of management in the
financial statements and in reported performance measures in the Overview
section.
A material weakness is a reportable condition in which the design or
operation of one or more of the internal control structure elements does
not reduce to a relatively low level the risk that errors or irregularities
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.
These matters are described in the "Material Weakness" section of this
report.
We also noted other matters involving the internal control structure and
its operation as well as certain other advisory comments which we did not
consider to be reportable conditions. These comments are set forth in the
"Other Advisory Comments" section Of this report.
Material Weaknesses
Cash
Cash balances converted
approximately $27 million
from the prior general
higher than the balance
ledger to
per the U.S.
Omni were
Treasury.
Cash reconciliation procedures only reconcile current activity from Omni to
Treasury and do not address the unreconciled beginning balance. The
composition of the difference is not known and no reliance has been
obtained that either the OTFM balance or the Treasury balance is accurate.
This results in an unconfirmed and unreconciled cash balance on OTFM'S
books .
The General Accounting Office's report dated September 1994, (GAO/AIMD-94-
185) , recommended that the OTFM contract for banking services. The report
noted that "Maintaining trust fund cash balances in a bank or other
financial institution could help BIA to provide its account holders with
comprehensive trust account statements, automatic interest accruals, and
reporting of taxable interest earnings to the Internal Revenue Service. If
BIA decides to maintain Indian trust funds in financial institutions, it
would need to provide instructions, in accordance with its fiduciary
responsibility, to the financial institutions on how the accounts are to be
managed." Moving trust fund cash balances to a bank or other financial
26
institution would also provide a reliable third party from which to obtain
balance confirmation. This would be an important step in removing the
related audit report qualification from future audit reports.
Recommendation (1) - In addition to moving cash balances to a financial
institution, the resolution of the unreconciled difference between the
general ledger
volume and age
internal and
difference, an
be practical.
beneficiaries
difference.
and the U.S. Treasury needs to be addressed. Due to the
of transactions comprising this difference, and the lack of
independent documentation to effectively analyze the
eventual successful reconciliation of the difference may not
We suggest that OTFM begin efforts to mediate with the
and the U.S. Treasury to eliminate the unreconciled
Client Response (1) - Treasury balances are reconciled monthly. Treasury
activity is reconciled daily. Differences are isolated to the period of
October 1, 1992 and prior, and have been controlled since that date.
Adjusting entries are made with proper documentation and review.
Moving the function to a private sector financial institution has been
discussed and poses two major obstacles. The first obstacle is the
negotiability of a private sector check versus a U.S. Treasury check. This
would obviously cause problems for account holders in remote locations as
U.S. Treasury checks are readily negotiated at local merchants. A private
sector financial institutions checks would not be as negotiable. The
second obstacle is the financial resources required to obtain the services
of a private sector institution. Treasury services that are currently
provided could not be provided by a private sector financial institution at
the funding level the Treasury currently operates within. With the
streamlining of government comes the decrease in funding each year which
would clearly be an issue with a private sector financial institution.
Investments
The Omni trust and investment system does not amortize premiums nor accrete
discounts on investment purchases using the effective interest method as
required by OMB 94-01, "Other Comprehensive Basis of Accounting."
The amortization and accretion calculations must be computed separately and
recorded as an adjustment at year end.
This results in interim financial reporting which does not reflect the
investment portfolio's true yield.
Omni can calculate amortization and accretion only on the straight line
method but currently is unable to calculate on the effective interest
method.
Recommendation (2) - Management should
implementing reporting features including,
described below:
of premiums
effective interest method.
investigate and consider
but not limited to, those
and discounts utilizing the
27
earnings for IIM account holders.
performance measurement reports to management and
beneficiaries, detailed by month and by year. It should also have
annual historical detail for at least five years, on the following
information:
carrying values and market values detailed by
individual securities
and
benchmarks
Client response (2) - Amortization and accretion. The OTFM is in the
process of contracting for a new system that will handle amortization and
accretion for the assets using the Effective Interest Method (Retrospective
for Collateralized Mortgage Obligations) in order to show the assets at
cost in the OTFM financial statements as required by the CFO Act. We have
requested a Solicitor's opinion to determine whether the OTFM should be
complying with the Uniform principal and Income Act with regards to
fiduciary customer account information and statements . The Uniform
Principal and Income Act is the accepted practice for the private sector
trust industry. The Uniform Principal and Income Act states that no
allowance or adjustments should be made for amortization and accretion on
assets which receive at least an annual interest payment. In the event
that it is determined that we should be con-plying with the Uniform
Principle and Income Act, the Branch of Investment Accounting will reflect
in OmniTrust amortization and accretion for redeemed, called or matured
securities using the Effective Interest Method.
Timely and accurate calculation and posting of interest and investment
earnings for IIM account holders. The findings described are the result of
not having adequate systems. Once new systems are in place, the following
options would be available.
Option 1. Continue to operate as we are, based on reasonable assurances of
the long term nature of the IIM program. This is to be tempered, however,
with the new ten year horizon limitation as expressed in the proposed
Investment Policy Guidelines. With a portfolio ultimately laddered by the
month out to ten years, exposure to market volatility would be drastically
reduced from present levels and presumably would minimize gains and losses
from a substantial liquidation. Also , income yields to account holders
will be reduced from past and present levels.
28
Option 2. Take Option #1 a step further to include a monthly portfolio
valuation with the unrealized gain or loss versus the previous month's
valuation being added to or subtracted from the current month' s earnings.
This step would virtually eliminate market volatility as a concern, but
would probably result in greater gyrations in the monthly interest rate
than is presently experienced.
Option 3. Establish a mutual fund. This requires that all balances and/or
receipts go into the fund at dollar amounts represented by shares. i.e. ,
if an account is opened at $125.50, then at the end of business that day,
the account holder would own 125.5 shares of the fund. At the close of
business each day all investments are marked to market (appraised by a
third party pricing service as to their market value) . The total market
value of all assets is then divided by the number of shares outstanding to
determine the fund's Net Asset Value (NAV) . Subsequent deposits into the
fund by account holders are issued shares at that day's NAV. Obviously,
this option produces a changed NAV each day, assuming the pool of
investments is made up of fixed income marketable securities as prescribed
in 25 U.S.C. 162. It would take a great deal of education in Indian
Country to explain how a mutual fund works, and even when explained
properly, the tolerance for great price fluctuations in NAV would be a
constant source of irritation to the participants and tribal leadership.
To hold the NAV fluctuations to a minimum, the maturities of the securities
owned should be shortened, and the variety should be limited to only the
most readily marketable type of security to minimize price fluctuations.
The result would be the effective yield in the portfolio would greatly
diminish from the past levels enjoyed by IIM account holders. Since there
are several thousand mutual funds in existence, it would be easy to
contract out the entire operation of the IIM fund to establish mutual fund
operations service providers. It could be run as a proprietary fund with
investment decisions made by our staff, or by a contract money manager.
All options would have various effects upon costs to operate OTFM.
Option 4. Establish a Money Market Fund. The mechanics of this option are
basically the same as described above in the Mutual Fund Option. The major
difference is in the type of investments owned by the portfolio. A money
market fund invests in very short term, high liquid, cash equivalent
securities , and CD's with maturities not exceeding 90 days. The result is
that the NAV is maintained at $1.00 with no fluctuation. The significant
difference to the IIM account holder would be that his yield would drop
considerably from present and past levels. This is not a prudent strategy
for long term accounts such as minor accounts.
Option 5. Establish a Credit Union with the IIM pool. This option would
require that the investments be segregated as an asset account and the
deposits as liabilities just like any credit union or bank enterprise. The
IIM accounts would essentially be passbook savings accounts. Rather than
calculating and paying a floating rate each month as we are now doing, a
set interest rate would be paid on the accounts, changing only periodically
to reflect "profit" levels experienced from the investment of the assets.
On the premise that the program continues to have a long life expectancy,
the market value of the portfolio could again take a back seat, being
replaced with the new discipline of shortening duration through judicious
sales and more prudent/restrictive buying practices. Account holders
probably would like the idea of predictable interest rates even if their
29
yield is lower. This option would probably be the easiest to explain to
the IIM account holders and tribal leadership since the majority of people
understand and accept the concept of being paid a fixed rate on a "deposit"
account. Excess earnings might one day become available for defraying
expenses or they might be used to pay periodic bonuses to account holders.
The investments and accounting could continue to be done with the present
OTFM staff with little modification to job activities. This option would
fit as an integral part of conceptual development bank mentioned by the
Special Trustee.
Option 6. Create a "Fund" with U.S. Treasury. Place all of the IIM funds
with Treasury to invest in non-marketable Treasury securities. It is our
understanding that Treasury pays the average of all Treasury securities
with maturities greater than four years to government employees
participating in the Thrift Savings Plan "G Fund". The accounting would be
similar to the credit union concept, only the investment process would be
greatly simplified. The result would be a less costly operation to run,
but the yield to the IIM account holder would decline from present and past
levels, but not as drastically as in the other options.
Option 7. Treasury Overnighter. If the Treasury can't be convinced that
the approach discussed as Option 6 represents a savings to the taxpayer,
then we could default to the Treasury's "Overnighter" program. This would
virtually eliminate the investment process, reducing the fund to a money
market account with a one day average life paying the "fed funds" rate. It
would be super liquid, no portfolio accounting would be required once all
existing investments had matured or been sold, and no investment staff
would be needed. Of course, the account holder would earn much less on his
"deposit" during periods when the yield curve is positively sloped which is
most of the time.
All of the options listed will produce lower yields to the account holders
than they presently are receiving, but a much more equitable distribution
of earnings would be achieved.
Investment Performance Measurement. Although the Omni System is state of
the art in many aspects, the contractor has been unable to provide the
performance measurements and amortization and accretion capabilities
required of the OTFM. The OTFM is presently negotiating with vendors in
the private sector to provide performance measurement capability currently
not available. Included will be all of the features listed in the
recommendation as well as the ability to evaluate the performance of
individual OTFM portfolio managers. We recognize the requirements of the
Association for Investment Management and Research (AIMR) . The AIMR
requirements will be included in any state-of-the art system.
Implementation should be completed the end of fiscal year 1996.
Trust Fund Balances
The Budget Clearing Account #6875 with Treasury has a balance of
approximately $11.7 million, of which only approximately $168,000 is
reflected on Omni. This is a shared account with the Division of
Accounting Management and it cannot be determined at this time to whom the
balances belong.
30
An "Undistributed Interest Account from TFMS" (the prior general ledger
systerm) exists on Omni with a balance of approximately $1.8 million at
September 30, 1995.
There is a difference between the general ledger summary account of
Individual Indian Monies ("IIM") on Omni and the total of the balances per
the IIM subsidiary ledger detail. The difference was approximately $30
million at September 30, 1995 with the general ledger carrying the higher
balance. There are also negative cash balances on the IIM subsidiary
system aggregating approximately $46 million.
The effect of the above items is to further substantiate the unreliability
of the trust fund balances as reflected by OTFM.
The above differences have arisen over time due to a lack of reconciliation
successes.
Recommendation (3) - Differences existing at the individual trust fund
balance level between OTFM subsidiary detail records and corresponding
general ledger control accounts, as well as differences between OTFM
accounting records and the U.S. Treasury are pervasive. These past
differences need to be analyzed and resolved, and current reconciliation
procedures established and closely monitored to prevent future problems.
Management is currently in the process of isolating and analyzing
differences between the IIM subsidiary system and the corresponding general
ledger control account. Based on preliminary assessments, it appears that
OTFM will require additional funds to fully rectify the existing problem.
We encourage this process and recommend continued efforts to resolve the
problem.
Client Response (3) - Budget Clearing. The account referred above as a
Budget Clearing Account is actually a Bureau Suspense Account (14x6875)
shared with the Division of Accounting Management. The portion of the
suspense account balance identified as Indian trust funds, approximately
$168,000 at September 30, 1995, is reflected on the OmniTrust System. The
Bureau, Division of Accounting Management, has a contractor working jointly
with OTFM to identify and clear the remaining balances in the shared
portion of this account. The target date for identifying the balances is
September 30, 1996.
Undistributed Interest. Undistributed Interest Account from Trust Funds
Management System (TFMS). The OTFM, Branch of Tribal Trust Funds
Accounting is currently working on a reconciliation of the Undistributed
Interest Account from TFMS (OT-8365-01-8). The amounts in this account
were accumulated prior to the conversion to the OmniTrust System.
Difference between the general ledger summary account of Individual Indian
Monies (IIM) on Omni and the total of the balances per the IIM subsidiary
ledger detail. As stated in the audit report, these differences and
negative balances are an accumulation of many years of out of balance
situations . By September 30, 1996, the differences and the negative
balances will be segregated from the aggregate pool, and researched as
funding is made available.
31
Area and Agency Offices
A review of questionnaire responses from the Area and Agency offices
indicated that there is no consistency in the application of accounting
processes and procedures. There were also inconsistencies reported in
duties performed by certain key personnel at the Agency offices, as well as
inadequate segregation of duties. During the period under audit, staff in
the Area and Agency offices were supervised by the Bureau, and did not
report to the OTFM.
During 1994, the OTFM prepared and distributed to Area and Agency offices a
desktop operating manual which documents IIM procedures. The Areas and
Agencies often did not rely on the most recent procedure manuals. The 42
BIAM was reported as being utilized most frequently, yet several Agencies
reported not having a copy of the 42 BIAM.
This lack of standardization resulted in the OTFM having minimal control
over the staff accounting for the majority of the receipts and
disbursements in the IIM system. With the exception
transactions, transactions affecting the IIM system
and Agency offices.
Recommendation (4) - During fiscal year 1996,
of investment related
originate in the Area
the OTFM was given
responsibility for approximately 170 Area and Agency office financial trust
accounting personnel. With this direct authority, we recommend the OTFM
begin comprehensive and aggressive efforts to implement and enforce
standard and consistent operating procedures. This process will require a
comprehensive review of the applicability and adequacy of existing
procedures, focusing on sound internal accounting controls and operating
efficiencies. Once the procedures are implemented, the OTFM should provide
ongoing training and continually monitor performance and compliance with
the prescribed procedures.
Client Responses (4) - Area and Agency Offices. Preparation for a
comprehensive review of existing procedures in use at the Area and Agency
offices is underway and will be reviewed and updated continually as funding
is available.
General
The accounting systems and internal control procedures used by the OTFM
have suffered from a variety of system and procedural internal control
weaknesses, and other problems, such as understaffed accounting operations
at all levels, a lack of experienced accounting supervisors, a lack of
minimum standards for key positions in the accounting process, inadequate
training programs and inherent limitations in existing computerized
accounting systems. In addition, current management is burdened with the
ongoing impact of decades of accumulated errors in the accounting records.
These factors place significant limitations on management's ability to
effectively manage the Trust
In an effort to effectively
placed under the direction
American Indians ("OSTAI") ,
Funds entrusted to the OTFM.
address these pervasive issues, the OTFM was
of the Office of the Special Trustee for
effective February 9, 1996. The OSTAI has
32
developed the conceptual framework for a comprehensive strategic plan to
address the issues set forth herein. However, given the recency of the
OSTAI involvement, it is not possible at this time to provide any
meaningful feedback on the viability of the strategic plan or to assess
progress on its implementation.
Reportable Conditions
Cash
Negative Cash Balances
There are thirteen (13) cash accounts on Omni with negative balances
totaling approximately $742,000.
Standardized procedures have been instituted to address the handling of
negative cash balances and a time limit has been established to address
such balances. We recommend that the OTFM continue such procedures. The
current balances, however, are likely to remain intact until the U.S.
Government and the beneficiaries reach a resolution regarding past
activities and balances.
IIM Investment Earnings
During the fiscal year ended September 30, 1995, no IIM reconciliation
process was in place to reconcile the cash interest received during the
month to the cash interest withdrawn per the monthly interest accrual. In
addition, no process existed to reconcile the interest allocated to
individual accounts to the amounts distributed. Due to the manually
calculated distributions made during the month, the interest ultimately
distributed by the Area and Agency offices does not agree to the actual
amount of interest earnings.
Recommendation (5) - Standardized procedures should be introduced to
reconcile the monthly interest allocation at the IIM account level. In
addition, a policy should be developed to address the clearing of
differences created during the allocation process. Time limits should be
established for items to be cleared and a review process should be
instituted to ensure that these procedures are followed.
Client Response (5) - IIM Investment Earnings. The OTFM, Branch of
Investment Accounting is currently working on bringing current a
reconciliation of IIM accrued earnings distributed to interest payments
received. In addition, the Branch of Investment Accounting is tracking all
amortization and accretion distributed on assets held in order to properly
reflect gains and losses in the IIM monthly factor. The OTFM, Branch of
IIM has drafted procedures for the field staff covering the reconciliation
of interest distributed to the individual accounts to interest funded by
the OTFM. All differences will be resolved on a monthly basis. The target
date for the reconciliation procedures to be in place is July 1996 for the
June interest distribution. These procedures will be fully automated with
the conversion to a modern fund type of IIM system. This system will be
implemented as funding is made available.
33
Investments Records Management
As part of the investments testwork, specific investments were selected and
the carrying value per Omni was agreed to third party purchase
documentation. The third party documentation consisted of brokers~
advices confirming the purchase amount, interest rate and other
information. Of a sample of 73 securities, 14 (19 percent) were not
supported by purchase confirmations. Three securities, or 4 percent of the
missing documentation, related to securities purchased during fiscal year
1995. All of the documents were later obtained by contacting brokers
directly and having the information faxed to the OTFM or were verified in
the custodial reconciliation process.
Recommendation (6) - A review of the investment records management process
should be performed. A step should be added and enforced to ensure that
the filing of information is secure and available if needed to prove
ownership by the OTFM.
Client Response (6) - Investment Records Management. The OTFM, Branch of
Investments Accounting holds the official purchase ticket file which
contains all critical information on a security purchase. A log has been
put in place which tracks all missing information on individual security
purchases. Outstanding documents on the log will be requested. This
official purchase ticket file is now secured. These records are kept in
the Branch of Investments Accounting for 60 days, then placed in the Branch
of Records Management secured storage until archived. Any documents needed
must be checked out and signed for in order to ensure the integrity of the
file. It should also be noted that a custodian reconciliation is performed
monthly to compare securities in the OmniTrust System Inventories to the
third party custodial statements.
The OTFM, Branch of Records Management protects all OTFM records, to
include Investment Records, in accordance with requirements of the National
Records Act, as well as those of the Department Manual (DM) . This includes
records storage requirements such as limited access to these documents and
by storing them in secure storage facilities within the organization.
Individuals can research records but only if they are supervised by Records
Management personnel. Storage procedures include locks on the basement
storage area, with access limited to Records Personnel. An inventory of
all OTFM records, to include investment records, is 90% complete. The
remaining 10% will be completed no later than December 31, 1996. Most
documents can be located within the hour on the OTFM automated inventory.
IIM Special Deposit Accounts
Through the Area and Agency offices, the Bureau deposits money into special
deposit accounts within the IIM system when a means to allocate the money
is not immediately clear. There appears to be no control at the central
office or at the Area and Agency office level to verify that items are
eventually cleared.
These monies which may belong to a trust beneficiary, remain unposted to
the beneficiary's account and subsequent investment or disbursement of the
funds is delayed.
34
Lack of standardized procedures and adequate resources to identify and
allocate these monies is the primary cause of the deposit account balances.
Recommendation (7) - Standardized procedures should be introduced for the
use of special deposit accounts. Included in these standardized procedures
should be a time limit for items to be cleared and a review and
reconciliation process for ensuring that these procedures are followed.
Client Response (7) - Preparation for a comprehensive review of existing
procedures in use at the Area and Agency offices is underway and will be
reviewed and updated continuously as funding is available.
Ownership Records
Ownership records at the Area and Agency offices are not updated in a
timely manner. This results in the potential for inaccurate distributions
of lease income to IIM account holders. Lack of resources to process the
significant number of changes causes this backlog.
Recommendation (8) - The long-term solution is to identify and implement a
system for handling the ownership changes in a more efficient manner.
However, until a more capable system is implemented, additional staff
should be added to reduce and eliminate the backlog, and then to maintain a
current status. Standards should be written identifying time limits for
making changes to the existing system and a review process should be
implemented to verify that the standards are being met on a consistent
basis.
Client Response (8) - Ownership records. Ownership records are maintained
by the Land Titles and Records Center and are updated in the automated Land
Records Information System (LRIS) . This system is managed by the BIA. OTFM
has submitted a copy of this Internal Control Report to the Deputy
Commissioner of Indian Affairs for consideration.
General
Policies and Procedures
In reviewing the internal control structure for the 0TFM, other than the
IIM desktop manual, we were unable to locate current written policies and
procedures. No formal written procedures were located to document the
investment process, accounting for investments and accounting for Tribal
Trust Funds.
Recommendation (9) - Written polices and procedures should be updated for
every process and transaction handled by the OTFM. Once written, policies
and procedures should be implemented and OTFM personnel thoroughly trained.
Compliance with 0TFM policies and procedures should be closely monitored
and personnel should be held accountable for noncompliance. A rotating
schedule should also be established for periodic review and updating of all
policies and procedures.
Client Response (9) - Policies and Procedures. In May 1996, 0TFM published
25 CFR Part 144, 103-412, The
35
American Indian Trust Fund Management Reform Act in the Federal Register.
This rule describes the process for Tribes to remove their funds from
trust . In Nov. , 1994, the Loss Policy was published as Supplement 5, Chap.
85 of the Bureau of Indian Affairs Manual (85 BIAM). In addition, since
1992 the 0TFM has issued Numbered Memorandums regarding its trust fund
management activities. These include Accounting, Systems, Investment, and
ISSDA areas. These documents were all to be published in 85 BIAM.
However, the February, 1996 transfer of OTFM from BIA to the Office of the
Special Trustee delayed this plan. Now all OTFM policies will be placed in
the Departmental Manual (DM) . The OTFM Numbered Memorandums are currently
reviewed once a year for accuracy, and updated as necessary. In addition,
OTFM also relies on the 25 CFR for direction in such matters as IIM, per
capita payments, and management of trust funds. Finally, a number of
documents are in draft such as the Investments Policy, and the OmniTrust
Policies and Procedures Manual. Once policies and procedures are published
in the DM, formal training of all staff will be performed, and reviews and
updates will be made on a rotating schedule. In the meantime, informal
training is performed by a number of ways: (1) notification of publication
of new OTFM policy, regulation, or procedure (this is by the Branch of
Policies and Procedures, and includes hard copies, explanations, etc.); or
(2) establishment of a Task Force to address new procedures, such as
Withdrawal of Trust Funds Workgroup, which reviews Tribal requests to
withdraws funds from trust.
Accounts Receivable System
The Bureau does not have an accounts receivable system in place. The GAO,
in its report dated April 25, 1994, (GAO/AIMD-94-llOR) recommended that the
Bureau develop an accounts receivable system. Currently, the Bureau has no
assurance that all lease revenues are billed and subsequently collected.
Such a system should provide reasonable assurance that earned revenues are
billed, collected and posted to the appropriate beneficiary's account.
Recommendation (10) - We recommend that an accounts receivable system be
developed and implemented. The system should encompass all revenue
susceptible to accrual and should integrate with both the Tribal Trust and
the IIM accounting systems.
Client Response (10) - Accounts Receivable System. Accounting of trust
receipts begins once the funds are received by the government. The accrual
and billing of income from trust resources resides with systems currently
managed by BIA. With the Omni System, 0TFM is able to utilize reports that
detail upcoming investment security interest payments, principal pay downs,
maturities and calls. A copy of this Internal Control Report has been
provided to BIA for consideration.
Other Advisory Comments
Cash Reconciliation Process
The daily cash reconciliation prepared is not presented in a traditional
bank reconciliation format with adjusted bank agreed to adjusted book. The
36
reconciliation ignores the differences between Omni's opening balance and
that of the Treasury and lists only reconciling items created subsequent to
the conversion. A section of the daily reconciliation is titled "Omni
adjustments and prior period" with all the items in this section
representing partial clearings of the opening difference. If the opening
difference were carried on the daily reconciliation, the items in this
section could be netted against the opening difference and would no longer
need to be included on the daily reconciliation worksheet. Because the
daily reconciliation does not reflect the actual cash balance per Treasury,
a second reconciliation is performed at month end which reconciles the
Treasury cash per the daily reconciliation to the actual month-end cash
balance reported by Treasury.
Recommendation (11) - The daily reconciliation should be presented in a
traditional bank reconciliation format comparing adjusted book to adjusted
bank. In addition, the month end reconciliation of the Treasury balances
should be incorporated into the daily reconciliation process. All
reconciling items between the total cash per Omni and the total cash per
Treasury, including the opening difference, should be listed in the daily
reconciliation. This presentation would make it easier to identify which
reconciling items were applicable to the Treasury and which were applicable
to Omni. In addition, all the reconciling items would be on one document
providing a complete picture of the differences between Omni and the
Treasury.
Client Response (11) - Cash
daily cash reconciliation
reconciliation format. In
presented as a separate item.
Electronic Data Processing
Disaster Recovery
Reconciliation Process. Presentation of the
presently appears in a traditional bank
the future, the unknown difference will be
Disaster recovery planning over the Omni application is adequate. However,
our review noted there currently is no formal agreement for disaster
recovery pertaining to the Unisys A-17 or the IBM 3090. Our observations
also noted that the physical location of the two mainframes is at the
Albuquerque Federal Court Building, a high risk location. Informal
arrangements have been made with other governmental agencies to provide
recovery services in the event of a disaster.
Recommendation (12) - We suggest that disaster recovery planning over the
mainframe environment continue to be a high priority for the Bureau. Our
understanding is that the disaster recovery contract is currently up for
bid and has been delayed pending government funding. In the interim, steps
should be taken to ensure the Bureau has the ability to efficiently and
effectively recover operations in order to reduce both the risk of
financial loss and the level of disruption to the Bureau and its Area
offices. Recovery from government agencies with compatible systems is a
viable option; however, tests of such arrangements should
identify potential compatibility or capacity problems.
Client Response (12) - Disaster Recovery. The IBM 3090 and
are managed by the BIA. A copy of this Internal Control
37
be performed to
the Unisys
Report has
A-17
been
provided to the Deputy Commissioner of Indian Affairs for consideration.
The OTFM has been in contact with BIA officials and has learned that
inquiries have been initiated to determine the cost of using COLD (Computer
Output to Laser Disk) technology to store the transactions developed within
the IIM system on a monthly, weekly or daily basis. Contact has been made
with FEDSIM and a local COLD provider has been determined. Resolution
should be achieved prior to second quarter fiscal Year 1997 with an
emergency purchase order developed to cover the short term need. Two CD's
would be created. One would be held here at the OTFM an the other will be
stored at Commons Warehouse.
Password Controls
Security controls over the Unisys A-17 mainframe are inadequate. The
system does not require automatic password changes periodically, users are
not automatically logged out after a specified period of inactivity, and
there is no limit to the number of invalid password attempts made by a
user. Furthermore, our discussion noted that "Help Desk" personnel have
the ability to reinstate or reset passwords which have been revoked.
Recommendation (13) - We suggest that the Bureau evaluate options to
increase the level of security controls implemented. Those controls
identified in the observation should be taken into consideration. We also
suggest that only those individuals with system administrator designation
be allowed to reset passwords.
Client Response (13) - Password Controls. The Unisys A-17 is managed by
the BIA. A copy of this Internal Control Report has been provided to the
Deputy Commissioner of Indian Affairs for consideration. Access to the IIM
system is one of the items which will be changed when IIM is removed from
the A-17. 0TFM proposes to move the system to the IBM 3090 prior to
movement to a client server. The OTFM would like to make this move prior
to December 31, 1996.
Application Change Controls
Our review noted that changes to the Individual Indian Monies (IIM)
application are not performed in a test environment on the Unisys A-17
mainframe. There are also no procedures in place for subsequent review
after changes have been implemented by the programmer. Review is limited
to verification of the output by the requesting party.
Recommendation (14) - We suggest that the Bureau evaluate the cost/benefit
of developing a segregated test and production environment on the Unisys.
Separate environments will assist in maintaining the integrity of the data
and the production application. Procedures should be implemented requiring
the review of all application changes by a technical individual other than
the programmer. At a minimum, each of the two IIM programmers should
review the work of the other and document approval before Data Management
places the application into production.
Client Response (14)- Application Change Controls. The Unisys A-17 is
managed by the BIA. A copy of this Internal Control Report has been
provided to the Deputy Commissioner of Indian Affairs for consideration.
38
When the IIM system is moved from the A-17, a test/development region will
be established.
Conversion to OmniTrust
We noted that the OTFM did not retain an outside consultant to assist in
the 1995 computer conversion. Although an OTFM employee was responsible
for the conversion, they also had daily tasks to perform and could not
devote 100% of their time to the conversion process.
Recommendation (15) - Because the OTFM is currently in the process of
investigating, and later implementing a new IIM system, a computer
conversion is again anticipated. Due to the complexity and volume of the
information carried on the IIM system, a systems consultant should be
considered. A consultant would have the benefit of not having every day
tasks to perform for the 0TFM and could dedicate time to an initial and
ongoing needs analysis, investigating and presenting alternative systerns
and rating their advantages and disadvantages. The consultant would also
be able to assist in the implementation of the system and the training of
OTFM personnel. Before another conversion is undertaken, the OTFM should
complete a detailed plan noting who will be involved, what each
individual' s responsibilities will be, and their corresponding
deliverables.
Client Response (15) - Conversion to OmniTrust. OTFM agrees with the
recommendation and will pursue hiring of a consultant for future system
conversions as funding is available.
1099 Interest Reporting
Currently, there are individuals with no known social security number
receiving interest income on trust investments. Because the social
security number is unknown, the 0TFM reports the interest earnings to the
Internal Revenue Service ("IRS") with no recipient social security number.
They do not withhold taxes prior to the interest distribution, Of the
approximately 260,000 accounts on the IIM system held by individuals,
approximately half, or 130,000, have no social security number.
Recommendation (16) - Tax withholding prior to distribution of interest
earnings to individuals should be implemented. A program of withholding
taxes and subsequent remittance to the IRS, if implemented properly, would
ensure the collection of taxes and timely reporting to the IRS. This
program would eliminate any exposure to the OTFM for penalties assessed by
the IRS for non-reporting of interest distributions.
Client Response (16) - 1099 Reporting. The OTFM desires and anticipates
development t and implementation of such a program as funding is made
available. Upon implementation of a new IIM system, a tax withholding
module will be available. Funding for data clean-up and the new IIM system
has been requested in the President's fiscal year 1997 budget request.
39
Our consideration of
disclose all matters
reportable conditions
reportable conditions
defined above.
the internal control structure would not necessarily
in the internal control structure that might be
and, accordingly, would not necessarily disclose all
that are also considered to be material weaknesses as
This report is intended for the information of the
Assistant Secretary for Indian Affairs, the Office
American Indians of the U.S. Department of Interior
Inspector
of Special
General, the
Trustee for
and management of 0TFM
and is not intended for any other purpose. However, this report is a
matter of public record and its distribution is not limited.
Boulder, Colorado
May 17, 1996
40
U.S. DEPARTMENT OF THE INTERIOR
BUREAU OF INDIAN AFFAIRS
TRIBAL , INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON COMPLIANCE WITH
LAWS AND REGULATIONS
SEPTEMBER 30, 1995
1
GRIFFIN & ASSOCIATES, P.C.
CERTIFIED PUBLIC ACCOUNTANTS DAN D. GRIFFIN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON COMPLIANCE WITH LAWS
AND REGULATIONS
To the U.S. Department of the Interior
Bureau of Indian Affairs:
We have audited the Statement of Assets and Trust Fund Balances for the
Tribal, Individual Indian Monies and Other Special Appropriation Funds
managed by the U.S. Department of the Interior Bureau of Indian Affairs
Office of Trust Funds Management ("the OTFM") as of September 30, 1995, and
have issued our report thereon dated May 17, 1996.
We conducted our audit in accordance with generally accepted auditing
standards, the standards for financial audits contained in Government
Auditing Standards (1994 Revision) issued by the Comptroller General of the
United States and Office of Management and Budget (OMB) Bulletin 93-06,
"Audit Requirements for Federal Financial Statements." Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
Compliance with laws and regulations applicable to the OTFM is the
responsibility of the management of the OTFM. As part of obtaining
reasonable assurance about whether the statement referred to above is free
of material misstatement, we performed tests of OTFM and compliance with
certain provisions of laws and regulations. As part of our audit, we also
obtained an understanding of management's process for evaluating and
reporting on internal control and accounting systems as required by the
Federal Managers' Financial Integrity Act (FMFIA) and compared the material
weaknesses reported in the Bureau of Indian Affairs, Office of Trust Funds
Management's FMFIA report that relate to the financial statement under
audit to the material weaknesses and other reportable conditions found
during the evaluation we conducted of the OTFM's internal control system.
However, the objective of our audit was not to provide an opinion on
overall compliance with such provisions. Accordingly, we do not express
such an opinion.
Material instances of noncompliance are failures to follow requirements, or
violations of prohibitions, contained in law or regulations that cause us
to conclude that the aggregation of the misstatements resulting from those
failures or violations is material to the Statement of Assets and Trust
Fund Balances, or the sensitivity of the matter would cause it to be
perceived as significant by others. The results of our tests disclosed no
material instances of noncompliance that are required to be reported under
Gove rnment Auditing Standards.
As communicated to us by the Office of the Solicitor (Solicitor) for the
Department of the Interior, tribal organizations and classes of Indian
individuals have filed various claims against the U.S. Government for
failure of the Federal Government to, fulfill its fiduciary responsibilities
and related charges.
We also noted certain immaterial instances of noncompliance. The results
of our tests of compliance disclosed the following instances of immaterial
noncompliance.
of noncompliance with 25 CFR, Part 162 were noted during
visits to Agency offices as follows:
the lease.
obtained.
1995, payment was received June 2, 1995. No
interest was charged nor received on the late payment.
Uinta and Ouray Agency had two leases with the following
exceptions:
let at fair market rental.
obligation.
Client Response - The leasing of trust resources is the responsibility of
the BIA. A copy of this Report on Compliance with Laws and Regulations has
been forwarded to the BIA.
whereby funds had been accumulated in excess of $1,000 and a timely
deposit was not made.
Client Response - The collection officer function at the Pima Agency is
currently performed by BIA. A copy of this Report on Compliance with Laws
and Regulations has been forwarded to BIA. In addition, 0TFM will reach an
agreement with BIA whereby the collection officer at the Pima Agency routes
the collections to the Phoenix Area Office for deposit using certified
overnight mail versus regular mail (regular mail time lag, 2-3 days) . The
42 BIAM Supplement 3 states, "Deposits shall, to the extent possible, be
made within 24 hours of the receipt of public funds, or the next workday,
in a designated Federal Depository."
the CFO Act.
42
Client Response - It was determined that the cost of auditing the
intervening years cannot be justified by the benefits to be obtained. The
recently concluded (20 year backward) reconciliation project demonstrated
that the financial records were not supportive of an audit effort. The
problems encountered by the past reconciliation project contractor (Arthur
Andersen and Company, LLP) only began to be addressed during the 1993
through 1995 period, primarily at the central office level. OTFM believes
the audit of current operations will provide the best information for
moving forward with continuous improvements in trust fund management policy
and practice. A contract is in place for Fiscal Year 1996 CFO Act
financial statement audit requirements.
125 and 127.
Client Response - To comply with OMB Circular 125 the OTFM is in the
process of a comprehensive review of all existing policies and procedures
in order to update them . In addition, draft accounting operating
procedures for the Omni System are in process. The February 1996 transfer
of OTFM from BIA to the Office of the Special Trustee has complicated the
process as now all OTFM policies and procedures will need to be
incorporated into the Departmental Manual (DM) . 0TFM numbered policy and
procedure memorandums currently in use will be reviewed in the Branch of
Policy and Procedure annually. Completion of the comprehensive review is
dependent on adequate funding.
To comply with OMB Circular 127 the 0TFM will established performance
measurements for fiscal year 1998.
aware of certain possible violations of various laws and regulations
which may affect the 0TFM.
Client Response - OTFM agrees that the Office of the Solicitor is aware of
certain possible violations of various laws and regulations that may affect
OTFM. OTFM is in close contact with the Office of the Solicitor regarding
all issues with potential liability for the Federal Government.
Accounting Office Accounting Series pronouncement.
Client Response - To comply with the Comptroller General's internal
control standards as required by the Federal Managers' Financial Integrity
Act of 1982, the OTFM is in the process of conducting a comprehensive
review of the internal control structure. Additionally, OTFM has
established the Division of Quality Assurance which includes the Branches
of Policy and Procedures, Field Review and Internal Review. The Branch of
Field and Internal Review was not fully staffed until fiscal year 1996. In
fiscal year 1996, the Branch of Field Review completed several field
visits. The Branch of Policies and Procedures was also not fully staffed
until fiscal year 1996. A complete review of all the internal and field
policies (regulations, BIAMs, DMs and other federal guidance) was begun but
progress was delayed due to the impacts of the February 1996 secretarial
43
order which transferred
Numerous initiatives to
as the reorganization
organization, policies
improvements have been
OTFM from BIA to the Office of the Special Trustee.
improve internal controls were begun in 1996 such
of OTFM to include the field locations. The
and control of records were all assessed, and
made throughout the year. OTFM continues to
implement improvements as funding is available.
Except as described above, the results of our tests of compliance indicate
that, with respect to the items tested, the OTFM complied with the
provisions referred to in the third paragraph of this report, and with
respect to items not tested, nothing came to our attention to cause us to
believe the OTFM had not complied, in all material respects, with those
provisions.
This report is intended for the information of the Inspector General, the
Assistant Secretary for Indian Affairs, the Office of Special Trustee for
American Indians of the U.S. Department of Interior and management of 0TFM
and is not intended for any other purpose. However, this report is a
matter of public record and its distribution is not limited.
44
`i
APPENDIX
STATUS OF AUDIT REPORT RECOMMENDATIONS
Finding/Recommendation
Reference Status
1-16 Resolved; not
implemented.
Action Required
No response to this report is
required. The
recommendations will be
referred to the Assistant
Secretary for Policy,
Management and Budget for
tracking of implementation.
54
ILLEGAL OR WASTEFUL ACTIVITIES
SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENERAL BY:
Sending written documents to: Calling:
Within the Continental United States
U.S. Department of the Interior Our 24-hour
Office of Inspector General Telephone HOTLINE
1849 C Street, N.W. 1-800-424-5081 or
Mail Stop 5341 (202) 208-5300
Washington, D.C. 20240
TDD for hearing impaired
(202) 208-2420 or
1-800-354-0996
Outside the Continental United States
Caribbean Region
U.S. Department of the Interior (703) 235-9221
Office of Inspector General
Eastern Division- Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209
North Pacific Region
U.S. Department of the Interior (700) 550-7428 or
Office of Inspector General COMM 9-011-671-472-7279
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910
Toll Free Numbers:
1-800-424-5081
TDD 1-800-354-0996
HOTLINE
1849 C Street, N.W.
Mail Stop 5341
Washington, D.C. 20240
had complied with material applicable laws and regulations in its management of the Trust
Funds.
Based on the Office's response to the recommendations in the independent accountant's
report, we consider the 16 recommendations resolved but not implemented.
If you have any questions concerning this matter, please contact me at (202) 208-5745 or
Mr. Robert J. Williams, Acting Inspector General for Audits, at (202) 208-4252.
Attachment