[Audit Report on the Financial Statements for Fiscal Year 1996 for the Office of the Special Trustee for American Indians Tribal, Individual Indian Monies, and Other Special Trust Funds Managed by the Office of Trust Funds Management]
[From the U.S. Government Printing Office, www.gpo.gov]
Report No. 98-I-206
Title: Audit Report on the Financial Statements for Fiscal Year
1996 for the Office of the Special Trustee for American
Indians Tribal, Individual Indian Monies, and Other Special
Trust Funds Managed by the Office of Trust Funds Management
Date: January 23, 1998
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A printed copy of this report may be obtained by referring to the PDF file or by calling the Office
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******************************
CONTENTS
Page
REPORT ON FINANCIAL STATEMENTS FOR FISCAL YEAR 1996
FOR THE OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN
INDIANS TRIBAL, INDIVIDUAL INDIAN MONIES, AND OTHER
SPECIAL TRUST FUNDS MANAGED BY THE OFFICE OF
TRUST FUNDS MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
APPENDICES
1. STATUS OF RECOMMENDATIONS FOR AUDIT REPORT 97-I-196 . . . . . . 67
2. RESPONSE FROM THE BUREAU OF INDIAN AFFAIRS . . . . . . . . . . . . . . . . 68
3. STATUS OF AUDIT REPORT RECOMMENDATIONS . . . . . . . . . . . . . . . . . . o 70
G-IN-BIA-001-97
United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240
JAN 23 1998
Memorandum
To: Special Trustee for American Indians,
Office of the Special Trustee for American Indians
From: Robert J. Williams
Assistant Inspector Genera1 for Audits
Subject: Audit Report on the Financial Statements for Fiscal Year 1996 for the Office of the
Special Trustee for American Indians Tribal, Individual Indian Monies, and Other
Special Trust Funds Managed by the Office of Trust Funds Management (No. 98-I-206)
Thus report presents the results of the audit of the Statement of Assets and Trust Fund Balances
and the Statement of Changes in Trust Fund Balances for Tribal, Individual Indian Monies,
and Other Special Trust Funds as of and for the year ended September 30, 1996, performed
by the independent certified public accounting firm of Griffin and Associates, PC. The Trust
Funds, which are managed by the Office of Trust Funds Management, under the Office of the
Special Trustee for American Indians, consist of tribal and individual Indian monies and other
special appropriated funds.
The audit was required by the Chief Financial Officers Act of 1990, as amended. This is the
second audit of the financial statements of the Trust Funds. 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 Griffin and
Associates and provided technical assistance as appropriate. Based on our reviews, we found
that the audit work by Griffin and Associates was performed in accordance with the
requirements of the Act and the Bulletin. We believe that the financial statements, along with
Griffin and Associates opinion, the report on the internal control structure, and the report on
compliance with applicable laws and regulations, and our review of that work provide the
Office of Trust Funds Management, the Special Trustee, and the Department of the Interior's
Chief Financial Officer with a basis for evaluating the financial position of the Trust Funds
and the limited progress made by the Office of Trust Funds Management in improving its
overall operations.
In the report on the financial statements, Griffin and Associates issued a qualified opinion
because cash and overnight investments could not be independently verified, cash balances
were materially greater than those reported by the U.S. Treasury, major deficiencies in
accounting systems controls and records caused the systems to be unreliable, and certain Trust
Furxis beneficiaries disagreed with balances recorded by the Office of Trust Funds
Management and had filed or were expected to file claims against the Office of Trust Funds
Management. These conditions prevented the cash and trust funds balances and the receipts
and disbursements from being audited. In addition, a potential liability to the Federal
Government exists because of the claims filed by the beneficiaries over the Government's
fiduciary responsibilities.
The independent public accountant's report on the internal control structure contained 14
recommendations to address three material weaknesses, nine reportable weaknesses, and two
advisory comments as follows:
- The three material internal control weaknesses (pages 40-45) identified were: (1)
inadequate internal financial reporting, which hampered management's ability to analyze
receipt and disbursement activity; (2) unapproved disbursements totaling $900,000 from the
trust funds; and (3) the ineffective or inconsistent implementation of management policies and
procedures by field offices.
- The nine reportable internal control weaknesses (pages 45-53) identified were the:
(1) failure to include the cash located in suspense and budget clearing accounts as part of the
cash reconciliation analysis; (2) recording of prior period adjustments to the individual Indian
monies subsidiary ledger without adequate documentation; (3) lack of reliable individual
Indian monies account balances for investing; (4) understatement of investments by $679,642
by the newly implemented Bolt II investment accounting system; (5) inadequate policy and
procedures governing the use of the individual Indian monies special deposit account and the
use of this account by field staff in a manner inconsistent with management's stated purposes;
(6) inconsistent distribution practices for interest earnings. which resulted in inequitable
distributions to individual Indian monies account holders; (7) inclusion of individual Indian
monies accounts with negative balances in the determination of interest earnings distributed
to all accounts, which lowered the earnings distributed to accounts with positive balances; (8)
lack of distribution of individual Indian monies interest earnings from mortgage-backed
securities when earned because of an inappropriate accounting practice; and (9) overstatement
of trust funds balances by $4 million because some transfers were recorded as receipts.
- The two advisory internal control comments (pages 53-55) identified were the: (1)
lack of written policies and procedures for overnight investments and (2) failure to develop
a needs assessment and implementation plan for converting to the new Bolt II investment
accounting system.
The independent public accountant's report on compliance with laws and regulations
contained a notice that some tribal organizations and classes of Indian individuals have filed
various claims against the Federal Government for failure to fulfill its fiduciary
responsibilities. The report also addressed a material noncompliance issue relating to the
unauthorized disbursement of trust funds (pages 63 and 64) and three immaterial
2
noncompliance issues (pages 64 and 65). Although the report contained no recommendations
for these issues, the Office of Trust Funds Management responded to all four of the
noncompliance issues.
In addition to the results of the audit of the Statements as of and for the year ended
September 30, 1996, the Report of Independent Public L4ccounts also contains information on
the Office of Trust Funds Management's and the Bureau of Indian Affairs minimal progress
in addressing the material weaknesses and reportable conditions (Recommendations 1-16,
pages 55-61) identified in the prior audit report "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-l96), issued in December 1996. The
corrective actions concerning these prior year findings are summarized in Appendix 1.
The independent public accountant's report on compliance with laws and regulations also
summarized the noncompliance issues identified in the fiscal year 1995 audit report (pages 65
and 66).
Based on the response from the Office of Trust Funds Management (which was incorporated
into the independent auditor's report) and the response from the Bureau of Indian Affairs (see
Appendix 2) to the 14 recommendations (Nos. 17-30) addressing fiscal year 1996 activities,
we consider Recommendations 17-26 and 28 and 29 resolved but not implemented and
Recommendations 27 and 30 resolved and implemented. Accordingly, the unimplemented
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 Appendix 3).
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.
cc: Assistant Secretary for Indian Affairs
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE
FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
\
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
TABLE OF CONTENTS
SEPTEMBER 30, 1996
OVERVIEW
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND TRUST FUND BALANCES
STATEMENT OF CHANGES IN TRUST FUND BALANCES 10
NOTES TO THEi FINANCIAL STATEMENTS
SUPPLEMENTARY COMBINING SCHEDULE OF ASSETS
AND TRUST FUND BALANCES
SUPPLEMENTARY COMBINING SCHEDULE OF CHANGES
IN TRUST E'UND BALANCES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
INTERNAL CONTROL STRUCTURE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
COMPLIANCE WITH LAWS AND REGULATIONS
Paqe
l-6
7 -8
9
11 - 26
27
28
29 - 51
52 - 55
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
OVERVIEW OF THE REPORTING ENTITY
SEPTEMBER 30, 1996
MISSION AND ORGANIZATIONAL STRUCTURE
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 managezmnt 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 Conmittee 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.
The American Indian Trust Fund Management Reform Act of 1994 (P.L. 103-412) was
passed by the 103rd Congress and signed by President Clinton on October 25, 1994.
The major provisions of P.L. 103-412 allow Indian Tribes greater input and control
over their trust fund accounts and the reaffirmation of the Governmentfs
responsibility by:
Title I - Recognition of Trust Responsibility;
(1) Providing affirmative action, responsibility for the daily and annual
balances of Indian Trust Funds, payment of interest on Individual Indian
Moneys accounts, and authority for payment of claims for interest owed.
Title II - Indian Trust F'und Management Program;
(2)
Providing for voluntary withdrawal and management of the Indian Tribes
own funds, providing Indian Tribes with technical assistance, authority
to award grants to Indian tribes for the development and implementation
of investment plans of Indian tribal trust funds, and provisions to
return withdrawn funds.
Title III - Special Trustee for American Indians;
(3) Establishing a Special Trustee to oversee all aspects of trust
management reform within the BIA, Bureau of Land Managermnt and the
Minerals Management Service including the coordination of policies,
practices, systems development, technical assistance, training and
recruitment of Indians in the Trust management programs, and regular
reporting to Tribal and Individual Indian Money (IIM) account holders.
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
iqortantly established by treaties. However, it was not until 1820 that the
federal government adopted the policy of holding tribal funds in trust.' However f
since 1871, the Congress, acting within the scope of its constitutional powersI
controlled and managed Tribal and individual Indian funds through legislation.
There are also agreements involving fund managmnt between the Tribes and the
Federal government by which a specific Indian trust fund is established. The
holding and management of trust funds has also been a long standing principle of the
federal govermmnt.
DESIGNATED TRUSTEE
The Secretary of the Interior (the Secretary) is designated as Trustee of funds held
by the federal governme nt for Indian Tribes and individual Indians. The Secretary
delegated authority for the management of Indian trust funds to the Assistant
Secretary - Indian Affairs. This authority was re-delegated to the BIA and was
administered by the BIAls Office of Trust Funds Management.
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.
Secretarial Order No. 3137, &ted October 26, 1989, established the Office of Test
Funds Management (OTFM). The OTFM is responsible for the development and
implementation of all policies and procedures governing the trust funds management
prow- I and prior to February 1996, reported directly to the Deputy Commissioner of
Indian Affairs. The OTEM, located in Albuquerque, New Mexico, oversees the Indian
trust fund operations at the BIA Area/Agency Offices as opposed to the general trust
responsibility, such as education, housing, social programs of all types and other
American Indian services provided by the BIA. 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 American Indians."
Secretarial Order No. 3197 f &ted February 9, 1996, established the Office of the
Special Trustee for American Indians (OST) f and transferred the OTF'M and other
financial trust services functions from the BIA into the Office of the Special
Trustee.
Under P-L. 103-412, the Special Trustee is required to develop and recommend a
Strategic Plan of Reforms to the Secretary and the Committee on Natural Resources of
the House of Representatives and the Committee on Indian Affairs of the Senate.
Once the plan is approved, the Special Trustee oversees the implementation of the
Strategic Plan of Reforms. Conditioned upon iqlempntation of rtformsf the OST
shall continue until all reforms identified in the strategic plan have been
iqlemented. There are no plans to transfer any other office or any other trust
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.
2
functions into the OST. The OTFM will be transferred to another unit, detemnined by
Congress, when the Office of the Special TN8tee it Sunset.
FIDUCIARY RESPONSIBILITY
In carrying out the management and oversight of the Indian Trust Funds, the
Secretary has a fiduciary responsibility to ensure that tNst 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 %ozal
obligations of the highest Iresponsibility and tnzst" and "the 2nost exacting
ficiuciaxy standards," and be %ound by cvcry moral and equitable consideration to
discharge its trust with good faith and fairness."
TRUST
ACCOUNTS .
Indian Tribes and individual Indians trust funds are primarily derived from claims
judgment awards and proceeds from surf ace and sub-surf ace leasing such as
agriculture, business' timber, minerals, or oil and gas. The major portion of
tribal funds consist of judgment awards (68% as of September 30, 1996) while
individual Indian funds realize receipts primarily from royalties on natural
resource depletion, land use agre-nts, enterprises having a direct relationship to
Trust fund resources f per capita payments, and investment income. The composition
of Indian trust funds, when taken as a whole, in terms of the source of funds has
not changed significantly since April 1993 with the establishment of the Tribal
Economic Recovery Fund, however f the value
have grown.
of the funds and number of the accounts
OTFM PROGRAM STRUCTURE
The Office of Trust Funds Management operates in the following program structure.
0 Division of Trust Funds Quality Assurance - Responsible for issuing policies
and procedures, and records keeping while establishing a basis for performing
internal, financial and compliance reviews.
o 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 custoaber services to tribal
and individual account holders.
0 Division of Trust Funds Accounting - F2esponsible for the day to day operations
for all investments, Tribal and Individual Indian Money accounting functions.
0 Division of Trust Funds systems - Responsible for providing technical
assistance to users of the OTFM systems, as well as new software systems and
hardware enhancements.
3
9
o Division of Trust mnds Reporting/Reconciliation - Responsible for financial
reconciliation efforts and responsible for all financial reporting to the OMB,
Department of the Treasury, Department of the Interior and providing other
special reports.
TRUST EWND ACCOUNTING SYSTEMS
Prior to April 1, 1995, the primary accounting system for all trust funds accounts
managed by OTE'M was the Trust Funds Management System (TFMS). The TF'MS was a system
developed in the 1960s by the BIA and was used for all accounting activities prior
to 1991. In 1991, the BIA converted its accounting activity to the Departnrnt of
Interior's Federal Financial System (FFS), while the trust funds remain on the TFMS.
During the TFMS era, a subsidiary accounting system was contracted for the purpose
of managing the investzmnt portfolios of the trust accounts. This system was known
as the Money Max system, and later as Series II, as provided under contract by
SunGard.
The 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).
On April 1, 1995, the OTE'M converted to a commercial trust asset management system
known as the OmniTrust system. The OmniTrust system replaced the TFMS and the Money
Max/Series II systems and is used by a number of major trust departments across the
country. The IIM accounts continue to be maintained on the IIM/IRMS system.
The OmniTrust system does not amortize premiums nor accrete discounts on investment
purchases using the effective interest method in accordance with commercial
standards. In 1996, OTFM implemented the Bolt II system to satisfy financial
reporting requirements in order to appropriately perform amnrtization and accretion
calculations for the investment portfolio, in accordance with Statmnt of Financial
Accounting Standards No. 91 guidelines.
TRUST EWND REPORTING ENVIRONMENT
The Indian trust funds managed by OTE'M are held in eight separate Department of the
Treasury (Treasuxy) accounts, called Qppropriations." Appropriations are reported
as funds with Treasury. The appropriations vary from Treasury Account Symbols.
Treasury Account Synrbols are for reporting Clearing and Suspense Accounts by Agency
Location Code.
Indian Trust Fund appropriations represent separate Indian trust funds and Special
Trust Funds, created and managed for different purposes and groups of beneficiaries.
The financial activity in each of the Appropriations is reported to the Treasury on
a monthly and annual basis through a series of reports required and &fined by the
Treasury.
Each of the Indian trust funds managed by OTFM has a particular history and set of
documents which define why the trust was created, purpose for which it is intended,
who its beneficiaries are, and other information needed to manage the fund. In
almost every trust, the beneficiaries are either Indian Tribes, Alaska Native
4
Corporations and Villages, or individual American Indians. The beneficiaries are
often referred to as account holders. Tribal trust funds managed in the OmniTrust
system receive quarterly and annual statements on their accounts. Other optional
statements are available on request. American Indians whose accounts are managed in
the IIM system receive quarterly statements, as required by P.L. 103-412.
Financial statements for the American Indian Trust Funds are required as defined by
the Chief Financial Officers Act of 1990 (CFO Act), and P.L. 103-412. The form and
content of the OTFM's financial statements as of Septerrber 30, 1996, which this
Overview is a part, are defined by the OMB Circular 94-01. The CFO Act further
requires that agencies obtain an annual financial audit in accordance with Federal
government standards. The accompanying financial statements have been produced by
the OTEM management to comply with these requirements.
The OTFM and the DOI, Financial Management Office are working
authoritative accounting body and/or the Federal Government
language addressing financial reporting and public disclosu
financial trust activities for Tribal, Individual Indians and
Funds, managed by the Federal Government.
jointly to have an
to issue specific
re requirements of
other Special Trust
The OTE'M currently is required to account for its trust fund activities under the
compiehensive accrual method of accounting, in accordance with the CFO Act and
Generally Accepted Accounting Principles ??? o The accrual accounting method
however is not consistent with financial reporting requirements for commercial trust
activities, which utilize the cash basis method of accounting.
The preceding paragraph is just one example of financial trust reporting
discrepancies that exist between the Federal Gove rnment and the commercial sector.
The disparity in accounting practices for trust funds managed by the Federal
Government versus trust funds managed in the commercial sector needs to be reviewed.
This review should culminate with the issuance of authoritative guidance on the
topic of financial reporting and public disclosure requirements of financial trust
activities for Tribal, Individual Indians and other Special Trust Funds managed by
the Federal Government. These reporting and disclosure requirements should be
required in order for the Federal Government to provide and compile meaningful
financial trust information and trust financial statements to external and internal
users.
The OTFM believes that the financial trust activities that it oversees should have
financial and disclosure requirements consistence with that of the commercial
sector. However, until financial reporting and disclosure requirements are issued
that supersede current requirements, the OTE'M will continue to report for Indian
financial trust activities in accordance with CFO Act requirements.
FINANCIAL PROGRAM
PERFORMANCE
IIMPROVEMENTS
Since Secretarial Order No. 3137, dated October 26, 1989, established the Office of
TNst Funds Management (OTFM). The OTFM is responsible for establishing proper
controls and accountability for operation and management of Indian trust funds as
well as receiving from the BIA reportable Material Weakness of Individual Indian
Monies (IIM) and Tribal Trust Funds.
5
11
There have been changes to the internal control structure subsequent to September
30, 1995: The significant administrative control elements instituted in the OTFM
organization is the direct supervision of field offices and operations by Chief,
Division of Field Operations. This position has been encumbered since January 1997.
Second, the Memorandum of Understanding between OST/OTF'M and BIA will &fine the
operational capabilities for the trust fund operations and is anticipated for
implementation in Fy 1997. Other progressive steps have been iqlemented like the
issuance of Investment Policy, establishment of an investments Executive Review
Committee, IIM Reconciliation Project, Investments Records Management, and increased
training.
The Special Trustee, of which the OTFM is an organization within the OST, is
preparing to deliver a Strategic Plan of Reforms to the Secretary and United States
Congress that will address the trust managurrnt problems in calendar year 1997.
PERFORMANCE GOALS AND RESULTS
Secretarial Order No. 3197, &ted February 9, 1996, ilcmcnted the OST as defined
in P.L. 103412, American Indian Trust Fund Management Reform Act, and transferred
the OTFM and other financial trust serVices functions from the BIA into the Office
of the Special Trustee. In preparation of the Fiscal Year 1998 Budget
Justification, the OTFM has expressed language on annual perfo rmanceplans under the
Government Performance and Results Act (-RN. The expression of term8 of
objective, relevant measures that disclose the extent to which its programs are
achieving the intended objectives will be the initial co-ications in the
evaluation processes.
LIMITATIONS OF THE FINANCIAL STATEMENTS
The financial statements have been prepared to report the assets and trust fund
balances, and changes in fund balances as of September 30, 1996.
The statements have been prepared from the books and records of the OTFM in
accordance with the formats prescribed by OMB.
The statements are a footnote as a component of the U.S. Government, a sovereign
entity. One implication of this is that liabilities cannot be liquidated without
legislation that provides resources to do so.
CONCLUSION
The spirit and intent of the American Indian Trust E'uncis has its traces back to the
early 1800s. The OTFM, in its brief history, nmhraces the honor and cozuaitment to
manage and adequately maintain and administer the fiduciary responsibility to the
account holders. The Office of the Special Trustee for American Indians and the
Office of Trust Funds Management are enthusiastic about the reforms and conceptual
plans for the future regeneration of the inherent accountability and responsibility
to our account holders.
6
12
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST EWNDS MANAGEMENT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIX, STA-TS
SEPTEMBER 30, 1996
13
GRIFFIN & ASSOCIATES, IX.
CERTIFIED PUBLIC ACCOUNTANTS DAND.GRIFFIN
REPORT OF INDEPENDENT. PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENTS
To the U.S. Department of the Interior
Office of the Special TNStee for Azmrican Indians:
We have audited the accoqanying Statement of Assets and Trust Fund Balances and the
related Statement of Changes in Trust Fund Balances for the Tribal, Individual
Indian Monies and Other Special Trust Funds managed by the U.S. Deparbnent of the
Interior Office of the Special Trustee for American Indians Office of Trust Fund8
Management (the ~OTE'W') as of and for the year ended September 30, 1996. These
financial statements are the responsibility of management of the OTFM.
responsibility is to express an opinion on these financial statements based on OUI
audit. As discussed in Note 2, the accounting policies used by OTFM to prepaxe
these financial statements 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 financial audits contained
in Gove znment Auditing Stan&x& (1994 Revision) issued by the Comptroller General
of the United States and OMB Bulletin 93-06, "Audit Requiznnents for Feciexal
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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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
overnight investments
in
are
the Notes
maintained
to
bY
a re
Finan ci .a1
lated U . s.
Statements,
Governmental
(1)
cash
Agency
and
(U.S.
Treasury) and cannot be independently confirmed, (2) cash balances reflected in the
accompanying financial statements are materially greater than balances reported by
the U.S. Treasury, (3) major inadequacies in the Trust Fund accounting systems,
controls and records caused the system 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 OTFH accountings and balances recorded by the OTFM;
and certain of these parties have filed, or are expected to file, claims against the
OTE'M. This may result in a potential liability to the Federal gove nment so larye
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 E'und balances in the Statement of Assets
and Trust Fund Balances and individual categories within the Statement of Changes in
Trust Fund Balances are stated.
In our opinion, except for the effect on the financial statements of adjustments
that might have been determined had we been able to perform adequate audit
d-30 K4BLE MESA4 DRIVE, SUITE ClOO, BOC'LDER, COLORADO 80303
PHONE (303)543-8868 o FAX (303) 543-8869
Members of the American Institute of Certified Public Accountants
14
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 and change in Trust Fund balances of the Tribal, Individual
Indian Monies and Other Special Trust Funds managed by the U.S. Department of the
Interior Office of the Special Trustee for American Indians Office of Trust Fund8
Management as of September 30, 1996, and for the year then ended in conforzaity with
the comprehensive basis of accounting described in paragraph one above.
We have also issued separate reports dated January 17, 1997, on the OTF?#s internal
control structure and on its coqliance with laws and regulations.
The information in the Ovelrview Section, which management is required to submit, is
not a required part of the basic financial statements, but is supplementary
information required by OMB Bulletin Number 94-01, \\Fonn 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
statements taken as a whole. The Supplementary Combining Schedule of Assets and
Trust Fund Balances, and the related Supplementary Combining Schedule of Changes in
Trust Fund Balances as reflected on pages 27 - 28 are presented for purposes of
additional analysis and are not a required part of the basic financial statexmnts.
Such information has been subjected to the auditing procedures applied in the audit
of the basic financial statements, and in our opinion, except for the items set
forth above,
are fairly stated in all material respects
financial statements taken as a whole.
GRIFFIN 6 ASSOCIATES, P.C.
Certified Public Accountants
relation to the basic
Boulder, Colorado
January 17, 1997
8
15
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
16
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
STATEMENT OF ASSETS AND TRUST FUND BALANCES
SEPTEMBER 30, 1996
ASSETS
Non-Entity assets:
Intragovernme ntal assets:
Fund balance with Treasury (Note 4):
Cash
Invesmnts (Note 5):
Overnight inveswnts
Governme nt backed securities
Accrued interest receivable 29,867,169
Governmental assets:
Investments (Note 5):
Certificates of deposit
Equity securities
Mortgage backed securities
Accrued interest receivable 2,268,916
Total assets $ 2,814,613,730
S 3,776,896
224,073,381
2,251,340,436
33,826,175
17,657,OOO
251,803,757
TRUST E'UND BALANCES, held for Indian Tribes,
individual Indians and Other Special
Trust Funds (Note 8)
$ 2,814,613,730
The accompanying notes are an integral part of these statmnts.
9
17
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
STATEMENT OF CHANGES IN TRUST FUND BALANCES
FOR THE YEAR ENDED SEPTEMBER 30, 1996
RECEIPTS:
Interest and dividends earned
on invested funds (Note 2):
Intragovermm ntal assets
G0Ve- ntal assets
Gains on disposition of investments:
Intragovernmental assets
Governme ntal assets
Other Receipts (Note 2C)
DISBURS-S:
Payments to and on behalf of
Indian Tribes, individual Indians
and Other Special Trust Funds (Note 2D)
Withdrawal of trust fund
assets by Tribes
Receipts in excess of disbursememts
TRUST FUND BALANCES, beginning of year
S 167,588,167
26,036,247
16,744,975
779,881
604,847,979
815,997,249
(626,803,944)
(46,030,695)
143,162,610
2,671,451,120
TRUST EVND BALANCES, end of year (Note 8) $ 2,814,613,730
The accoqanying notes are an integral part of these statements.
10
18
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST EWNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 -- BACKGROUND AND DESCRIPTION OF THE ORGANIZATION
A. Ovelrview of Trust Funds, the Office of the Special Trustee for American Indians
(\\OST") and the Office of Trust Funds Management (mOTFM')
Formation of the Trust Funds - The legislation which authorizes the Secretary of
the Interior (\\ the Secretary") to manage the Tribal and Individual Indian Monies
(YIMW) 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. Gove rnmenYs 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. The
American Indian Trust Fund Management Reform Act of 1994 (\\P.L. 103-412fl) provided
for the establishment of the OST. As discussed in Note 7, on February 9, 1996, the
Secretary delegated authority for management of the Trust Funds to the OST, which
now oversees the OTFM.
Organization of the OST - The managmnt of the Trust Funds is accomplished through
a cooperative arrangement with the Bureau of Indian Affairs (Vhe Bureau"), OST and
OTFM.
+ Agency and Field Office - The Bureau maintains 89 Agency and Field Offices
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. OST
personnel located at most of the Agency offices perform various functions
related to trust activities.
+ 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.
11
19
`i i
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
+ Office of Trust Funds Management - The OTFM, established October 26, 1989, and
located in Albuquerque, New Mexico, has management responsibility ovex all
Indian Trust Funds. The OTFM carries out its responsibilities through the
following Divisions and Staff Offices:
0 Division of Trust Funds Quality Assurance - This division plans, de~lops,
operates and controls the internal management systems evaluation program.
The division advises OTFM management on the efficiency, economy, legality
and effectiveness of operations at the program and field level. 9 It is
responsible for receiving, communicating and monitoring compliance with all
mandated laws and regulations.
0 Division of Trust Funds Systems - This division provides daily OTFM-wide
technical system support.
0 Division of Trust Funds Accounting - 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, as well as monitoring
collections and recording of funds. It is also responsible for investment
accounting activities and for providing custodial services for investxmnt
activities.
0 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 invesmnt strategies for Trust Funds.
0 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 OTEM-wide reports.
B. Description of the Trust Funds
The TNSt Funds are managed by the OTFM on behalf of Tribes, IIM account holders,
and Other Special Trust Funds. Certain of the Tribal, IIM and Special Trust Funds
described above are subject to legal, regulatory, budgetary, court ordered or other
restrictions. In addition, certain account beneficiaries have discretionary
investmznt decision-making rights.
A brief description of each Trust Fund follows:
12
20
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST EWNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
+ Tribal Fund - Approximately 315 Tribes have an interest in the Tribal F+and;
however, some Tribes have multiple accounts. As a result, approximately 1,600
separate accounts comprise the Tribal Fund. Approximately 31% of the Tribal
Fund assets are held on behalf of six Tribes.
Accounts are maintained for Tribes within the Trust Funds. Tribeas 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.
Reclassifications to Becrinnina Trust Fund Balances
' Although not discreetly reported in the accompanying Statement of Assets and
Trust Fund Balances, a portion of the beginning aggregate fund balance was
reclassified from Other Special Funds to Tribal Trust in fiscal year 1996.
The funds for the specific appropriations described below do not contain any
reversionary clauses. The monies have been pe zmanently awarded to each
particular Tribe as follows:
Balance
Reclassified
Navajo Rehabilitation Trust Fund - The Navajo Rehabilitation
Trust 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 i-acted by the Navajo and Hopi Indian
Relocation Amendments of 1988.
Tribal Economic Recovery Fund - The Three Affiliated Tribes
and the Standing Rock Sioux Tribe were awarded a settlement
for land by the U.S. Government fox 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.
$ 5,182,398
Northern Cheyenne Reserved Water Ricrhts Fund - The Northern
Cheyenne Tribe was awarded a settlement for resemmd 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, consenm 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 Resentoir.
$249,785,87X
$ 18,530,619
13
21
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR ?MERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST E'UNDS
MANAGED BY THE
OFFICE OF TRUST FWNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
I:M Fund - 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 resource 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 317,000 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 &rived from a variety of sources.
+ Other Special Trust Funds - Other Special Trust E'unds represent other trust
assets currently managed by the OTFM. Authorization for management of these
assets is based on U.S. Congressional Acts establishing such Funds. Each of
these funds either reverts back to the U.S. Government upon certain
conditions, or the corpus of the fund is non-expendable. A brief description
of each Fund follows:
Alaska Native Escrow Fund - The Alaska Native Escrow Fund was established
by Congressional act for Alaska Native Corporations and Villages fox 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.
- The Pueblo de Cochiti (\\Pueb10~) and the U.S.
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 Departmmt of the U.S. Treasury
("Treasury") if Cochiti Dam becomes non-operational and the Pueblo agrees
that the drainage system is no longer needed.
with respect to the San Xavier
Reservation and the Schuk Toak District of the Sells Papago Reservation,
was awarded a settlement in the fom of water zights for water which was
taken from resemation 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
14
22
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIEsAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
for Tribal gove rnment, health, education, social services, capital
iqrovements and economic development programs.
0 Contributed Eknds - The OTFM 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.
0 George C. Edgeter Fund - This fund is available, according to the terms of
the bequest, for expenditure as determined by the Assistant Secretary -
Indian Affairs for the relief of indigent American Indians. ,
c. Wvestment of Trust E'und 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 Indian Trust Funds. A portion of Indian Trust Funds
assets are invested with financial institutions at which such deposits are covered
by Federal depository insurance, or collateralized by U.S. Treasury or U.S.
Government Agency securities for amounts deposited in excess of Federal depository
insurance limitations. Trust funds assets are also directly invested in U.S.
Government securities, including U.S. Treasury and U.S. Government Agency issues, as
we11 as certain other securities which are guaranteed by the U.S. Government.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Accountina
The Secretary of the U.S. Treasury, the Director of the OMB and the U.S. Coqtroller
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 statements and described in this note are in
accordance with the following hierarchy of accounting principles:
+ Statements of Federal Financial Accounting Standards (SFFAS) . These
statements reflect the accounting principles, standards and requirements
recommended by the Federal Accounting Standards Advisory Board and agreed to
by the U.S. Co-troller General, the Director of the OMB and the Secretary of
the U.S. Treasury and published by OMB and the U.S. General Accounting Office,
+ Interpretations related to the SFFAWs issued by OMB in accordance with the
procedures outlined in OMB Circular A-134, @\Financial Accounting Principles
and Standard&~,
15
23
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
+ Form and content requirements for financial statements, as presented in OMB
Bulletin No. 94-01 (Form and Content of Agency Financial Statements), and
+ The accounting principles and standards contained in the DO1 and OTFM
accounting policy and procedures manuals and/or related guidance when such
principles *rove the meaningfulness of the financial statements.
The OTF'M uses the cash basis of accounting for the Trust mnds; however, accrual
adjustments were recorded in the accompanying financial statements as of September
30, 1996, 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. Interest receipts reported in
the Statement of Changes in Trust Fund Balances reflects the net of interest earned
and amortization expense or accretion income recognized during the fiscal year.
Investments have not been adjusted to reflect changes in market value, because it is
the OTFWs intent and ability to generally hold these 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
are not reflected in the accompanying financial statements. The accompanying
financial statements include only the balances held in trust by the OST and OTFM for
others and do not include (1) the account balances of the OST and OTFM (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.).
B. Interest Receipts
Tribal Trust and Other Special Trust Funds are invested separately by account with
interest recorded based on actual income from each investment. IIM Trust Funds are
pooled and invested. Interest is received in two ways: (1) directly from
investment securities in which the Trust Funds are placed, such as certificates of
deposit at financial institutions or U.S. Treasury, Agency or U.S. government
sponsored securities, or (2) from a U.S. Treasury overnight investment
("overnighter"), which earns a rate comparable to "Fed Funds" rates. The interest
on the overnighter investments is calculated daily, coqounded, accumulated
separately for participating accounts and posted to the separate accounts monthly.
Interest receipts as reflected in the Statement of Changes in Trust Fund Balances
are net of amortization expense/accretion income for the fiscal year.
16
24
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST EWNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
C. Other Receipts
Approximately one-third of other receipts are payments as a result of claims and
judgment awards to Tribes, Other Special Trust Funds, and Individual Indians by the
U.S., State and local governments, and private entities and individuals.
Other trust receipts are generated from a variety of assets which are held in trust by
the U.S. government and managed by the various Agencies and the Bureau on behalf of
Tribes and Individual Indians. Payments are received from various leasing activities,
mineral royalties, and sales of extracted minerals, timber and forest products.
Payments are also derived from related fees and fines, and the granting of easements.
D. Disbursements
Payments disbursed to Tribes, Individual Indians and Other Special Trust Funds consist
of investment income as well as funds from various income producing activities such as
leasing, royalty payments, minerals extraction and timber and forest product sales.
Under certain conditions, Tribes disburse per capita payments to their enrolled
members from the Trust Funds. Payments are made to Tribes from the proceeds of
various judgment awards. won submission and approval of the required Use and
Distribution Plans, Tribes may submit requests for payments in accordance with terms
and conditions of the awards.
P.L. 103-412 specifically allows for the voluntary withdrawal from the Trust Funds
program. An Indian Tribe may subzcCt a plan to withdraw some or all fun* held in
trust for the Tribe. The plan must be approved by the Secretary, DOI, and the
appropriate Tribal gove rnmental body, and must provide an indication as to the
capability and experience of the individuals or institutions managing the Trust Funds.
E. Financial Statement Captions
Brief descriptions of the major captions used in the accowanying financial
statements as recommended by the OMB follow:
+ Non-Entity Assets - These are assets that are held by the Trust Fund but
are not available to the U.S. Government.
0 Intragovernmental 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.
0 Fund Balances with Treasury - Fund Balances with Treasury are
balances on deposit, suspense and clearing accounts that are
assets of the Trust Fund on behalf of beneficiaries unless
otherwise restricted. 24ll of the E'und Balances with Treasury
17
25
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
contained in the accoqanying financial statements are for
Trust Funds.
0 Governmental Assets - Governmental nonentity assets are claimn 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.
F. Comparative Data
Comparative data for the prior year has not been
prior year Statement of Changes in Trust Fund Bal
presented
tances was
, because an audi
not performed.
tof the
NOTE 3 -- ACCOUNTING SYSTEMS AND MATERIAL INTERNAL CONTROL
WEAKNESSES
The accounting systems and internal control procedures used by the OST and 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 out-of-date accounting
policies and procedures 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:
+ There is a lack of consistency in the accounting and related procec@res being
utilized OTF`M-wide, which has caused accounting errors in the Indian Trust
Funds. Standardized documented policies and procedures have not been
instituted for some significant accounting processes, while certain others
remain seriously out-of-date.
4 There is inadequate segregation for many key duties, particularly in the
accounting processes performed at the Area and Agency Offices.
+ Records management is inconsistent and inadequate to ensure the proper filing
and safekeeping of Trust Fund records to support trust financial activity.
+ Internal financial statements are not prepared in accordance with OMB
accounting principles and standarda.
+ Internal reporting for Trust Fund investments lacks adequate investment
performance information. These financial and managerial reporting
deficiencies are detrimental to the OTFWs ability to effectively manage the
Trust Funds.
18
26
OFFICE
U.S. DEPARTMENT OF THE INTERIOR
OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
+ The IIM detailed subsidiary ledger contains certain accounts with negative
balances aggregating approximately $44,000,000.
+ There is approximately $142,000,000 held in suspense in more than 28,000
Special Deposit Accounts in the IIM subsidiary ledger. There are inadequate
controls and a lack of management reporting and accountability over the use of
these accounts.
+ There is an unreconciled difference of approximately $29,000,000 between the
IIM &tailed subsidiary ledger and the corresponding general ledger control
account.
+ There is an unreconciled difference of approximately $35,000,000 between the
total cash balances reflected in the accompanying Statement of Assets and
Trust Fund Balances and the balances held by Treasury. Treasury reports
reflect balances less than OTFM balances.
+ The balances reflected in the Treasury records are not maintained entirely
independent of the OTFM, in that Treasury records are in part updated with
information reported by the OTFM, as well as other Federal Agencies.
As a result of the material weaknesses in internal controls, certain of which are
referred to above, it is not possible to determine whether cash and Trust Fund
balances and individual categories within the Statement of Changes in Trust Fund
Balances as reflected in the accompanying financial statements are fairly stated and
presented.
In some instances, the OTF'M has researched and corrected the balances held in trust
for specific Indian Tribes, individuals, and Other Special Trust rUnds. 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 September 1996 to a new investment accounting system, Bolt II, 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.
19
27
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 4 -- CASH AND OVERNIGHT INVESTMENTS
The U.S. Treasury functions as the disbursing agent for the OTFM. When Treasury
checks are written by the OTF'K, the amounts are deducted from the- Indian Trust
Funds, regardless of when (and whether) the checks written are eventually negotiated
Starting with fiscal year ending Septrmbar 30, 1992, Treasury cheukr are
by payees.
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 consist of cash deposits to Treasury between the cut-off
time for-overnight invesbent, LOO p.m., and the end of the business day. Howe-r,
amounts on hand at the Area and Agency Offices waiting for deposit to Treasury arc
not included.
overnight investments consist of available cash invested with Treasury.
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.
Certificates of Deposit
Following is an analysis of depository insurance
deposit at September 30, 1996:
and collateral on certificates of
Deposits covered by depository insurance $ 6,222,785
Deposits covered by securities pledged as collateral 27,603,390
Total certificates of deposit $ 33,826,175
20
28
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST EWNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
Maturities
Investments with scheduled maturities at September 30, 1996, are as follows:
Amortized cost
Tdbal
Trust
Individual
Indian Other special Camhi
Monies Trust EUnds Total
Government backed securities:
Less than 1 Year $ 272,905,963 $ $ 8,311,039 $ 281,217,002
l- 5 Years 670,477,631 29,051,449 12,010,445 711,539,525
5 - 10 Years 704,483,932 222,574,123 11,240,362 938,298,417
Greater than 10 Years 177,532,692 130,269,872 12,482,928 320,285,492
1,825,400,218 381,895,444 44,044,774 2,251,340,436
Certificates of Deposit:
Less than1 Year
l- 5 Years
5 - 10 Years
Greater than 10 Years
29,350,230 29,350,230
4,379,945 96,000 4`475,945
33,730,175 96,000 33,826,175
Equities with no
scheduled
maturities
Mortgage backed
securities with
varying maturities
12,657,OOO 5,000,000 17,657,OOO
144,165,610 107,638,147 251,803,757
$2,015,953,003 $494,629,591 $44,044,774 $2,554,627,368
21
29
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTE3E FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST E'UNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
Maturities
Investnrnts with scheduled maturities at Septenihr 30, 1996, are as follows:
Fair Market Value
Government backed securities:
Tribal
Trust
Individual
Indian Other Special Combined
Monies Trustmnds Total
Less than1 Year $ 274,549,966 $ $ 8,318,125 $ 282,868,091
l- 5 Years 662,441,068 29,178,810 12,084,751 703,704,629
5- 10 Years 697,361,761 217,388,611 11,618,861 926,369,233
Greater than 10 Years 180,995,755 125,287,587 13,195,302 319,478,644
1,815,348,550 371,855,008 45,217,039 2,232,420,597
Certificates of Deposit:
Less than 1 Year
l- 5 Years
5 - 10 Years
Greater than 10 Years
29,350,228 29,350,228
4,379,945 96,000 4,475,945
33,730,173 96,000 33,826,173
Eqyities with no
scheduled
maturities
Mortgage backed
securities with
varying maturities
12,690,528 5,150,000 17,840,528
143,480,589 105,951,578 249,432,167
$2,005,249,840 $483,052,586 $4.5,217,039 $2,533,519,465
22
30
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FWNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FIANCIAL STATEMENTS
SEPTEMBER 30, 1996
The original cost, net ac cumulated amortization and accretion, amortized cost and market
value of the investments held at September 30, 1996, are as follows:
Tribal Net
Ac-lated
(Amortization)/ Amortized Market
Investment Class cost Accretion cost Value
Certificates of
deposit $ 33,730,175
Equity securities 12,657,OOO
Government backed
securities 1,794,117,538
Mortgaged backed
securities 142,812,710
s
S 33,730,175 S 33,730,x73
12,657,OOO 12,690,528
31,282,680 1,825,400,218 1,815,348,550
1,352,900 144,165,610 143,480,589
$ 32,635,580 $ 2,015,953,003 $ 2,005,249,840
$ 1,983,317,423 4
Market
Individual Indian Monies
Net
Accumulated
(Amortization)/
Accretion
Amortized
cost
Investment Class cost
Certificates of
deposit $ 96,000
Equity securities 5,000,000
Government backed
securities 373,165,878
Value
$ 96,000 $ 96,000
5,000,000 5,150,000
$
8,729,566 381,895,444 4 371,855,008
Mortgaged backed
securities
106,751,203
$ 485,013,081 e
886,944 107,638,147 105,951,578
$ 9,616,510 $ 494,629,591 $ 483,052,586
Net
Accumulated
(Amortization)/
Market
Other Special Trust Funds
Amortized
cost
Investment Class cost Accretion
Certificates of
deposit $ $
Equity securities
Gove rnment backed
securities 43,936,429 108,345
Mortgage backed
securities
$ 43,936,429 $ 108,345 e
Value
$
S
44,044,774
45,2x7,039
$ 44,044,774
23
31
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
The Secretary has been designated by U.S. 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 claim8
against the United States for failure to fulfill its fiduciary responsibilities and
for related charges. Neither the OTFM nor the Office of the Solicitox 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 statements for potential claims receivable from the U.S. Government.
NOTE 7 -- REALIGNMENT UNDER THE OFFICE OF THE SPECIAL TRUSTEE
On February 9, 1996, Secretarial Order 3197 ("the Order") implemented the OST, which
was established by the P.L. 103-412. The Order also transferred the OTFM, and
financial trust services performed at Bureau Area and Agency Offices, from the Bureau
to the OST.
NOTE 8 -- TRUST FUND RALANCEX
A number of the beneficiaries for whom the OTFM holds assets in trust do not receive
adequate information to determine whether their account balances reflected in the
OTF'Ws 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 OTFM
to not forward statements to minors and other IIM account holders with supenrised
accounts. The Secretary, DOI, or his authorized representative (typically, Agency
Superintendents) must approve withdrawals from these accounts. In addition, some IIM
account holders have not furnished the OTE'M their addresses which would allow the OTFM
to forward their account statements. Accordingly, certain account holders do not, or
are unable to, agree with the balances reflected in their accounts.
A portion of the monies held in the IIM Trust Fund have not been allocated and
distributed by the OTFM because the ultimate account holders are not known. Also,
included in the Tribal Trust Funds are balances not identified to specific Tribes
24
32
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
because judgment awards were granted to several Indian Tribes &n a particular
geographic area for settlement of claims related to certain lands. Because 8uch
amounts were not awarded to a specific Tribe or individual, there is no independent
party (independent of the OTFM) to determine the ownership of these account balances.
Unallocated Balances, Net
The net unallocated balances for the IIM Trust Fund balances, consisting of cumulatiw
differences between Omni and subsidiary detail of account holders' balances and
activity (YRMS System") totaled approximately $29,000,000 as of September 30, 1996.
NOTE 9 -- SIGNIFICANT TRANSACTIONS WITH OTHER U.S. GOVERNMENT
ORGANIZATIONS
Debt Arranaements
The Bureau is a party to various note payable agreements. These agreement8 are
primarily between the Indian Tribes and the U.S. Department of Agriculture Farmers
Home Administration (V3nHA") or the U.S. Department of Commerce Economic Development
Administration ("EDA"). The proceeds of the EhrHA 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
DeposiP 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 of
these loans.
Minerals Manaaement Services
The OTFM receives royalty payments from the U.S. Department of the Interior Minerals
Management Service (VMSr) on behalf of Indian Tribes and individuals holding mineral
rights. MMS generally transfers the royalty payments to the OTFM upon receipt. At
the time the royalty payments are received, MMS also provides the OTEM with a
breakdown of the Tribal royalties, thus permitting the OTFM to allocate the receipts
directly into Tribal accounts. However, MMS does not provide the OTFM with ownership
information for IIM account holders until several weeks after the related royalty
payments are received. Accordingly, the OTFM 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 from MMS, the royalty receipts are
distributed. 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 DO1 Bureau
25
33
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
of Land Management both perform verification and other monitoring procedures of
mineral royalties collected.
Overpayments are sometizms made by private companies to MM% These are first paid to
the OTFM on behalf of Indian Tribes and individuals, and then disbursed by the OTFM to
the beneficiaries. The overpayments generally result from payments being ma& basad
on estimated mineral production, in order to coyly with the Federal Oil and Gas
Royalty Management Act of 1982 which requires timely distribution of royalties.
Typically, such overpayments are recovered by the private companies by' adjusting
future payments. The amount of such overpayments as of September 30, 1996, 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 OTFM. As discussed in Note 6, the DO1 Office of the
Solicitor serves as legal counsel for the OST and OTF'M.
NOTE 10 -- IMPLEMEWTATION OF A NEW INVESTMENT ACCOUNTING SYSTEM
The OTFM began utilizing an additional trust investment accounting system (\\Bolt 11")
as of September 30, 1996. The existing OrnniTrust system is not capable of calculating
investment values based on the effective yield method that is required for mortgaged
backed securities by Statement of Financial Accounting Standards No. 91 (VFAS 91").
Bolt II performs this function by amortizing and/or accreting the investment portfolio
on a monthly basis. The OTF'M will continue to use OmniTrust for recording and
maintaining activity, as well as reporting to Tribal beneficiaries. Bolt II will bm
used for financial reporting purposes.
NOTE 11 -- TRANSFERS
The OTE'M receives monies into IIM special deposit accounts for both Tribal and IIM
beneficiaries. Tribal funds are subsequently transferred from the IIM system to the
appropriate Tribal account. The other receipts category of the Statement of Changes
in Trust Fund Balances reflects net transfers.
26
34
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL APPROPRIATION FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
SUPPLEMENTARY COMBINING SCHEDULES
SEPTEMBER 30, 1996
35
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
SUPPLEMENTARY COMBINING
SCHEDULE OF ASSETS AND TRUST FUND BALANCES
SEPTEMBER 30, 1996
Tribal
Trust
Individual
India Other Special conibined
Monies Trust Funds Total
ASSETS
Non-Entity assets :
Intragovernmen tal assets:
Fundbalance with
Treasury (Note 4):
Cash
Investments (Note 5):
Overnight investments
Gove-tbacked securities
Accrued interest receivable 24,166,128 4,917,761
Governmental assets:
Investments (Note 5):
Certificates of deposit
Equity securities
Mortgage backed securities
Accrued interest receivable 1,648,143 620,773 2,268,916
$ 883,709
209,694,282
1,825,400,218
$ 2,946,062 $ (52,875) $ 3,776,896
13,647,497
381,895,444
731,602 224,073,381
44,044,774 2,251,340,436
783,280 29,867,169
33,730,175 96,000 33,826,175
12,657,OOO 5,000,000 17,657,OOO
144,165,610 107,638,147 251,803,757
Total assets $2,252,345,265 $516`761.684 $45,506,781 $2,814,613,730
TRUST FUND BALANCES, held for Indian
Tribes, individual Indians and
Other Special Trust Funds (Note 8)
$2,252,345,265 $516,761,684 $45,506,781 $2,814,613,730
The accompanying notes are an integral part of this schedule.
27
36
RECEIPTS:
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDMDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
SUPPT,EMENTARY COMBINING
SCHEDULE OF CHANGES IN TRUST FUND BALANCES
FOR THE YEAR ENDED SEPTEMBER 30, 1996
Tribal.
Trust
Individual
Indian Other Special combined
Monies Trust Funds Total
Interest and dividends earned
on invested funds (Note 2):
Intragove- tal assets $ 138,782,074 $ 25,666,269 $ 3,139,824 $ 167,588,167
Governmental assets 15,239,342 10,796,905 26,036,247
Gains on disposition of investments: .
Intragovenmen tal assets
Governmental assets
Other Receipts (Note 2C)
DISBURSEMENTS:
Payments to and on behalf of
Indian Tribes, individual
Indians and Other Special Trust
Funds (Note 2D)
Withdrawal of trust fund
assets by Tribes
Receipts in excess of disbursements
TRUST FUND BAL?4NCES, beginning of year
Trust fundbalances
reclassified (Note 1)
TRUST FUND BAL?WCES, end of
year (Note 8)
15,971,870 765,762 7,343 16,744,97S
239,881 540,000 779,881
337,390,651 267,446,684 10,644 604,847,979
507,623,818 305,215,620 3,157,811 815,997,249
(334,711,283) (291,943,757) (148,904) (626,803,944)
(46,030,695) (46,030,695)
126,881,840 13,271,863 3,008,907 143,162,610
1,851,964,587 503,489,821 315,996,712 2,671,451,120
273,498,838 (273,498,838)
$2,252,345,265 $516,761,684 $ 45,506,781 $2,814,613,730
The accompanying notes are an integral part of these schedules.
28
37
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST FUNDS
MANAGED BY THE
OFFICE OF TRUST FUNDS MANAGEMENT
,
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON INTERN-
CONTROL STRUCTURE
SEPTEMBER 30, 1996
38
GRIFFIN & ASSOCIATES, I?C. '
CERTIFIED PUBLIC ACCOUNTANTS DANDGRWFIN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON INTERNAL CONTROL
s!mucTuRE
To the U.S. Department of the Interior
Office of the Special Trustee for American Indians:
We have audited the Statement of Assets and Trust Fund Balances and the related
Statement of Changes in Trust Fund Balances for the Tribal, Individual Indian Monies
(~~IIW) and Other Special Trust Funds managed by the U.S. Department of the Interior
Office of the Special Trustee for American Indians ("OST") Office of Trust Funds
Management ("OTFMU) as of and for the year ended September 30, 1996, and have issued
our report thereon dated January 17, 1997.
We conducted our audit in accordance with generally accepted auditing standards, the
standards for financial audits contained in Govrznment Auditing Standzurtjln (1994
Revision) issued by the Comptroller General of the United States and Office of
Management and Budget (\\OMBll) 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 the 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 of 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 and the related Statement of Changes in Trust Fund Balances for the Tribal,
IIM and Other Special Trust Funds managed by the OTF'M as of and for the year ended
September 30, 1996, 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 the related Statement of Changes in 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 Nuzciber 93-06, for
those significant internal control structure policies and procedures that were
properly designed and placed in operation, we performed tests to determine whether
such policies and procedures were operating effectively at September 30, 1996.
P30 TABLE ME54 DRIVE, SUl--E ClOO, BOVLDER, COLORADO 80303
PHONE (303) 543-8868 o FAX (303) 543-8869
Members of the Americu~ Institute of Certified Public Accountants
c
39
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 mattets coming to our attention relating to
significant deficiencies in the design or operation of internal control structuzet
that, in our judgment, could adversely affect OTFM's ability to record, process,
smrize and report financial data consistent with the assertions of managexnent in
the financial statements.
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 01: 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 eqloyees in the normal course of performing
their assigned functions. These matters are described in the %aterial Weakneusfl
section of this report.
We also noted other matters involving the internal control structure and its
operation as well as certain other advisory cozxments which we did not consider to be
reportable conditions. These comments are set forth in the "Other Advisory
Comments" section of this report.
In the Report of Independent Public Accountants on Internal Control Structure for
the year ended Septmiber 30, 1995, we noted matters involving the internal control
structure and its operation that we considered to be reportable conditions as well
as other advisory comments. The disposition of these matters is set forth in the
sections of this report denoted as "Prior Year."
Material Weaknesses
Inadequate Internal Financial Reporting (17)
In performing our tests related to the trust fund balances, we noted that the OTFM
could not produce a ready analysis of the changes in cumulative trust fund balances.
The resulting Statement of Changes in Trust md Balances is a compilation of
information derived from three different sources, including OmniTrust data, IIM
system data, and manually prepared-investnrnt amortization and accretion schedules.
The OTFM does not produce internal consolidated trust fund financial reports or
statements in accordance with OMB. Financial reporting prepared for management's
review contained no Statement of Assets and Trust Fund Balances or Statement of
Changes in Trust E'und Balances other than those produced as a part of the annual
audited financial statements.
The Statement of Changes in Trust E'und Balances is a generally accepted financial
report that provides an analysis of periodic receipt and disbursement activity by
source, and, in essence, represents a s umnrary reconciliation of beneficiary accounts
at the highest consolidated level.
30
40
Recommendation (17):
We recomnd the OTFM i38plement at least quarterly internal
financial reporting which includes a consolidated Statement of Assets and Trust Fund
Balances and a Statement of Changes in Trust Fund Balances. A8 part of an analysis
of systems requirements, the OTFM should consider implementation of a general ledger
and financial reporting package that provides a comprehensive, integrated process to
accumulate the financial data required for ease of comliance with federal reporting
requirements. Ideally, such a system would be integrated with trust system which
adequa tely address the needs of
behalf of both Tribes and Individu
act
,a1
.ounting
Indians
for
trust
assets
activi
tY
on
With the release of Federal Accounting Standards Advisory Board Interpretation
Number One, there is so- question whether reporting requirements under the CFO Act
and OMB 94-01 are applicable to the Indian Trust E'unds for years ending in 1997 and
thereafter.
Client Response (17): The OmniTrust system provides a consolidated Statement of
Condition on a daily basis that shows Asset and Liability balances. Asset balances
are reflected by type of securities held and cash. The liability balance shows the
total amount due to account holders.
OTEM plans to compile a Statement of Changes in Trust Fund Balance for fiscal year
1997.
Area and Agency Offices - Unauthorized Transactions (18)
As part of our receipts and disbursements testing, we reviewed disbursement
transactions for proper approvals, in accordance with 25 Code of Federal Regulations
("CFR") , Secretarial Order 3177, and Secretarial Order 3197 (for transactions
subsequent to February 9, 1996).
In our sample, we noted that three Tribal disbursement transactions from the IIM
subsidiary system totaling $850,000 were not approved by Bureau personnel. These
were disbursed prior to the February 9, 1996 Secretarial Order 3177 which changed
policies and procedures relating to disbursement approvals. Also, for two
transactions totaling $70,640, documentation supporting beneficiary approval of
disbursements to third parties was not provided.
OTEM and Bureau policies and procedures require an appropriate approval be obtained
prior to funding tribal disbursements. Without proper approvals, the OTFM may be
inappropriately disbursing trust assets. An approval signature indicates that a
disbursement has been reviewed and is appropriate based on supporting docume ntation.
Lack of documented approval indicates that these steps may or may not have occurred.
Inadequate documentation of approvals may also expose the OTFM to a potential breach
of fiduciary responsibility.
Recommendation (18): We recommend that the OTFM enforce policies and procedures
with regard to appropriate approval of disbursemmts as documented by proper
signatures for disbursement transactions and as directed by regulation and
secretarial order.
Client Response
(18):
The OTFM has
shared the ZLbOvle finding with the Bureau of
Indian Affairs.
31
41
Area and Agency Offices - Ineffective Implementation of Policies 6 Procedures (19)
AS part of our audit related to receipts and disbursements transactions, we reviewed
prior year internal control questionnaire responses, conducted telephone interviews
with Area and Agency staff, and visited Area and Agency offices. It was noted that
while authority to supervise financial trust accounting personnel was delegated to
the OTFM in February 1996, particular trust functions, i.e., collections, are
performed by non OTFM staff, over which, the OTFM has no control nor authority. As
a result, there is an inability to im@ement existing policies and procedures
pertaining to those functions. The following OTFM policies and procedures are
inadequately iqlemented, or are not implemented at Area and Agency offices.
Further, the OTFM and the Bureau continue to be h-red by a lack of adequate
information systems to support various trust related activities, including land
inventory systems, lease management systems, ownership systems, accounts receivable
and an adequate trust accounting system for IIM.
AREA AND AGENCY OFFICE INTERNAL CONTROL WEAKNESSES
Administrative
the last year.
review of the collection process have not been performed within
Collections are not processed by Authorized Collectors.
Incoming mail is opened and receipts are listed by a person having access to cash
receipts.
Cash receipts are entered in books of original entry by the same person who opens
mail and lists cash receipts.
Daily deposits are not reconciled to Schedules of Collection.
The BIAM 42, Illustration 15, Quarterly Collection Review Worksheets are not
completed.
The Collections Officer is the only individual with the combination to the safe
or the combination is not located in a sealed envelope with a third party.
The Authorized Collector does not have an alternate to perform the function in
their absence.
The Agency does not have and follow the BIAM 42.
The IIM teller does not have a Desk Operating Procedure Manual to follow.
Administrative review by the Area Accounting Officer or Trust Officer axe not
performed on the disbursing function.
Receipts are not mailed to the Area Office for deposit on a daily basis.
When an employee with knowledge of the combination to the safe leaves his/her
position, the combination to the safe is not changed.
32
42
a Effective control is not provided over miscellaneous receipts when received at
the Area office.
o
funds are disbursed via Journal Vouchers prior to the funds being deposited.
The key to the cabinet containing
safe as the signature plate.
the blank check stock is located in the same
The inventory of the blank check stock is not always performed by an individual
independent of the di sbursing function or is not performed at regular intervals.
o Collection and disbursing functions are performed by the same individual.
0 The II&l teller, Realty Officer, etc., do not have a trained backup to perform
their duties in their absence.
0 There is inadequate do cumentation to support IIM account holds.
a
There is inadequate control problems over cash received.
0 The PCIRMS system, also known as the Management Accounting Distribution (\'MAD")
system, does not have a built in control to stop duplicate disbursements.
While the OTFM continues to work towards providing improved regulatory guidance,
policies and procedures, consistent implementation of existing guidelines has not
been achieved due to the decentralized nature of OTFM operations, lack of personnel,
lack of authority over certain trust functions related to OTFM operations and
inadequate information systems.
Recommendation (19): We recomnd the OTFM consider alternatives, such as
restructuring trust accounting responsibilities at Agency offices which do not
maintain OTFM staff positions by centralizing and streamlining transaction
processing within Area or Agency offices with sufficient OTFM personnel. We do not
suggest that OTFM eliminate the presence of accounting technicians and support
personnel at Agency offices, since these individuals perform other valuable services
for account holders.
The use of either a centralized or decentralized lockbox would eliminate some of the
most serious control deficiencies by eliminating the handling of physical cash
receipts at Agency offices. However, the ability to maximize cash receipt
processing via a lockbox is also dependent upon the OTFM and Bureau's ability to
obtain updated information systems that would support an automated collections and
income allocation process. We recommend the OTE'M consider iqlementing lockbox
processing in a staged process, and consideration of these requirements be addressed
as part of a comprehensive automation review.
Client Response (19):
Since the signing of Secretarial Order 3197 the OTFM has been put into a position
where it can take an aggressive approach to addressing the issues of "Ineffective
33
43
Implementation of Policies and Procedures" and "Internal Control Weaknesses?
-
is evidenced by the following corrective actions already in progress.
This
The first corrective action was the signing of Secretarial Order 3197. This
-owered the OST with direct line authority over OTF'M central office staff and,
Area and Agency financial trust staff. The delegation of this authority over Area
and Agency financial
trust staff from the OST to the Director OTFM has
resulted in
the development of policies and procedures from a focal point that can provide
standardization and monitoring functions to insure coqliance. This is unlike the
oversight that was previously provided by 12 independent Area offices. It now is
possible to ensure that there is one program mission and not 12 different program
missions.
One corrective action was started during fiscal year 1996. This was the
establishment of lock boxes at the Palm Springs and Standing Rock Agencies. Since
these first two projects the OTF'M, Branch of Policies and Procedures has compiled
procedures outlining how lock boxes are to be setup. These procedures coupled with
the proper monitoring will ensure standardization and the implementation of the
proper controls to provide accountability.
The OTFM has initiated a plan for the implementation of a nation wide lock box
program for the collection of tribal and individual Indian trust funds. The plan
starts with the implementation of lock box's at the Area and Agency Offices where
the highest volume of tribal and individual Indian trust funds are collected. LOCk
boxes are planned to be established on a regional basis and in stages to ensure that
the lock boxes are established in accordance with policies, procedures, and that the
necessary controls are in place. The timely implementation of a nation wide lock
box program will be dependent upon the availability of appropriated funds to
implement the program. If appropriate funding is provided, it is projected that a
nation wide lock program would be fully operational by the end of fiscal year 1998.
Lock boxes will address the issue of lack of adequate financial trust personnel at
the Area and Agency level to provide for separation of duties. Lock boxes will also
provide better cash management controls.
Another corrective action, was the establishment of the Division of Field Operations
and the selection of a Division chief. This Division was established to provide
supervision, and direction to the (approximately 176) Area and Agency financial
trust personnel, and is responsible for coordinating the administrative and
technical execution of financial trust program8 conducted at Area and Agency
offices. AFebruary 25, 1997 DO1 Manual release moves the OTFM to the Office of the
Secretary, Part 110 DM 28 and recognizes the Division of Field Operations.
In accordance with the recommendations of the Special Trusteels strategic plan, the
OTFM will be implementing procedures and system changes that will ensure Area and
Agency financial trust staff are being utilized efficiently and effectively. One
consideration is the performance of accounting functions from one location. The
Special TNstee's strategic plan calls for one comprehensive system to account for
and manage all tribal and individual Indian trust resources. It is envisioned that
this coqrehensive trust system and the accounting functions will be performed and
controlled from one location. This will allow current Area and Agency financial
trust personnel to devote 100% of their time to account holder services. Area and
Agency personnel will no longer have to delay providing an account holder sewice,
in order to post accounting information to the trust system. The processing of
accounting information from one location provides management with the means to
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44
protect the integrity of the accounting information being generated by ensuring
separation of duties for accounting functions.
The Special Trustee's strategic plan also calls for the irqlementation of updated
policies and procedures. It must be noted that some of the policies and procedures
that currently dictate the management of trust funds are as old as thirty years.
Fiscal year 1996 is the first year that the OTFM has been provided funding to start
this mmmrnoth effort of developing new policies and procedures. The OTFM is
currently drafting a statement of work for a contract that seeks assistance of an
outside contractor to help with the development of policies and procedures. mis
contract will be awarded during fiscal year 1997. The conp>liance with new policies
and procedures will be routinely reviewed by the Branches of Field and Internal
Review. The implementation and routine monitoring of new policies and procedures
will go a long way in addressing the various internal control weaknesses outlined in
this report.
As you can see from the various initiatives under way the OTFM has taken a vigorous
and aggressive approach to addressing outdated policies and procedures, and internal
control weaknesses. It must be noted that these conditions did not develop
overnight and unfortunately they can not be corrected overnight.
The OTFM has shared the above finding with the Bureau of Indian Affairs.
Reportable Conditions
Cash
- Failure to Analvze Susnense Accounts (20)
An
analysis of the items which
comprise
several
U.S.
Treasury
("the
Treasury")
suspense and budget clearing accounts has not been comqpleted. Therefore, the OTFWs
current procedures for researching and proposing adjustments to the cash out of
balance condition do not consider whether an offset may already exist within one of
these account balances. Funds to cover the adjustments may be in a Treasury suspense
or budget clearing account because the original transaction may not have been
reported to Treasury, and a Statement of Difference was created. If the Statement
of Difference was not resolved, the transaction amount was transferred to one of the
Treasury suspense or budget clearing accounts. The Treasury suspense and budget
clearing account balances at September 30, 1996, are approximately $100,500;
($3,378,000); $5,957,000; and $3,310,000.
As a result, the resolution of reconciling items between the U.S. Treasury and the
OTFM may be incorrect without consideration given to the items which comprise prior
period suspense balances.
Recommendation (20): We recommend an analysis of Treasury suspense and budget
clearing accounts be undertaken to determine the specific items co-rising the
balances. The OTFM should consider adopting procedures which include a review of
the items which comprise these account balances prior to proposing and recording
prior period adjustments. Any adjustments currently identified as a reconciling
item could then be appropriately recorded. Implementing the recommendation would
identify the adjustment to the proper variance or out of balance condition and
eliminate any potential duplicating items.
Client Response (20): Reconciliations have been performed by OTFM Agency Location
Codes (AK) back to October 1992. Differences between the general ledger and
Treasury remaining in the suspense accounts are for the period September 1992 and
35
45
prior. Further research on IIM variances is being performed by the Branch of Past
Reconciliations.
IIM variance accounts and other balances are likely to remain out of balance until
the U.S. &vernment and the beneficiaries reach a resolution regarding past
activities and balances.
Cash - Lack of Suworting Documentation Prior to Recording Transactions (21)
Various prior period adjustments have been recorded to the IIM subsidiary system
without adequate documentation. Since the appropriate adjustmasnt has not been
researched and supported, the items have not been recorded to the OarniTNSt systanr
control account for IIM. The adjustments are recognized as new reconciling items in
the Daily Cash Reconciliation. A number of these items have existed for a lengthy
period of time, but, as yet, the items have not been sufficiently researched so that
they may be resolved. As of the end of field work, documents have not been received
for approximately 39 line items.
These items represent, in many cases, cash disbursement transactions that have
occurred at the IIM subsidiary system level. The potential to create cash
transactions without proper substantiation exposes the OTFM to the risk of creating
uncollectible overdrafts if the transaction was not properly supported and should be
reversed. Also, it is generally more difficult to resolve reconciling items as the
items age.
Recommendation (21): The OTF'M should follow-up on the results of the established
deadline for providing docume ntation. The OTFM should also supervise and monitor
progress to ensure timely completion of assigned tasks. If necessary, the OTFM
should evaluate and consider providing more resources to accomplish the task. We
have noted the OTFM has subsequently established procedures to ensure adjustmmts
are now appropriately documented prior to being recorded in the IIM or OmniTNSt
sys tern. By enforcing their new procedures, the OTFM will improve control over
posting of adjustments and reduce the risks of recording unsubstantiated adjusbents
to beneficiary accounts and the OmniTrust system.
Client Response (21): The OTFM has procedures in &aft form to ensure that
proposed adjustments are administratively reviewed and do cumented prior to being
recorded. Further, a directive has been issued to Field personnel not to post prior
period adjustments to the IIM subsidiary system.
Invesmnts - Lack of Reliable IIM Balance Available for Investins (22)
The amount invested on behalf of IIM account holders is based on the OmniTrust
system IIM control account balance. The balance per OmniTrust does not agree to the
balance per the IIM subsidiary ledger. The -iTrust control account for IIM
exceeds the IIM subsidiary ledger by approximately $29,000,000. At this point in
time, it can not be determined which system has an accurate balance. Consequently,
the OTFM may be over or under-investing, because the underlying balance is
unreliable.
36
46
should investigate the possibility of negotiations
Treasury and themselves to resolve the issue.
the account holders, the
Client Response (22): The OTFM is currently in the process of researching the
variance between the IIM control account and the IIM subsidiary accounts where
economically feasible. The iqact of the negative balances and variances on the IIM
pool earnings cannot be quantified until the research is coxs@ete and other
arrangements are made to resolve the matter. The OTFM is working on several IIM
reform initiatives. The initiatives include a massive IIM system review and data
clean up in preparation for a conversion to a new IIM system.
The balances are likely to remain out of balance until the U.S. Govemnt and the
beneficiaries reach a resolution regarding past activities and balances.
Invesbnents - Accountinq System Calculation Errors (23)
The OTFM contracted with SunGard Systems to utilize its Bolt II investment
accounting system to satisfy financial reporting requirements and appropriately
calculate and record amortization/accretion of investment discounts or premium8 in
accordance with generally accepted accounting principles. Several computational
errors and/or limitations of the Bolt II investment accounting system relating to
amortization/accretion of investment premiums and discounts were noted.
+ The Bolt II system did not calculate any accretion/amortization of premiums or
discounts for the accrual classes (V-tranche,f) of Collateralized Mortgage
Obligation (VMO") securities which were still in the accrual phase with the cash
flow table method. In discussion with Bolt II personnel, this problem was
attributed to a programmi ng error. Based upon calculations provided by OTFM, net
result of this error is an understatement of premium accretion in the amount of
$215,870.
+ Values for Z-tranche holdings were inaccurately converted to the Bolt II system
due to incorrect manual postings in the OmniTrust system. This issue, combined
with the accretion error, produced incorrect Bolt II system values.
+ The Bolt II system was unable to produce accurate amortization of C&IO's with par
values less than $100,000 due to a programming error. The Bolt II system fully
accreted these securities as of September 30, 1996, although these securities had
not yet been fully paid down, called or matured. The premiums associated with
these securities totaled $12,952.
+ The cash flow table assumptions for threa asset backed securities were not
accurate due to Bolt II system prograrming errors. When Bolt II system values
were compared to manually computed values, these investments were under-accreted
$476,734.
The cumulative effect of these errors is an under-accretion of $679,642. These
errors affect the accuracy of financial reporting to individual account holders.
Recommendation (23) : The OTFM contracted with SunGard Systems to utilize the Bolt
II system and personnel to perform services for the entire portfolio and should work
to correct the errors. Until these prograxmkng errors are resolved, any new
securities with these characteristics will not receive proper accounting treabnt.
37
47
The OTFM should continue to follow up with the Bolt II system personnel to resolvlcr
these errors. If the OTFM provides information to beneficiaries regarding their
individual portfolios at amortized value, these errors should be properly disclosed
and taken into consideration by OTFM personnel prior to distribution of such
information to account holders.
With the release of Federal Accounting Standards Advisory Board Interpretation
Number One, there is some question whether accounting and reporting requirements
under the CFO Act and OMB 94-U are applicable to the Indian Trust Funds for years
ending in 1997 and thereafter.
Client Response (23): The auditors utilized Bolt II reports that were generated by
the initial iqlementation run of OTFWs security inventory on the Bolt II system
(released early due to the time constraints of the audit). As errors were
identified, OTF'M corrected them, or routed them to Bolt II for programming changes.
Bolt II has agreed to make the programmi ng changes. In addition, the OTFM is in the
process qf reviewing all data in the Bolt II system to ensure that all securities
are properly setup, and that the Bolt II system is properly accounting .for the
different security types.
Special Deposit Accounts - Lack of Policies and Procedures and Inconsistent
Practices (24)
Per OTF'M management, "Special DeposiV, accounts are to be used as suspense accounts
to which funds are posted when the distribution is not immediately clear. These
accounts are held within the IIM subsidiary system. The funds are then transferred
to the account holder when the proper allocations are determined. For receipt and
disbursement transactions specifically related to Special Deposit accounts, we noted
a number of practices which may be inconsistent with managementfs defined use of
Special Deposit accounts, as well as inadequate policies and procedures governing
the use of these accounts.
Among the issues noted were:
+ Special deposit account balances are incompletely allocated (less than 100% of
the balance is allocated, leaving a residual Special Deposit account balance) or
allocated on an "as-needed" basis (similar to a checking account) to the
beneficiary as opposed to being allocated in full.
+ Loan payments to third party financial institutions accumulate in a Special
Deposit account, and lump sum payments are made on behalf of beneficiaries. The
amounts paid do not equal the amounts contributed by beneficiaries, and it is not
known how the payments by individuals were reconciled to the lump sum payments.
Ebrther, we were unable to obtain domntation to support approval by the
beneficiaries of these payments made to third parties.
These practices noted above may expose the OTFM to unnecessary risk, as in the
case of receipt and disbursement of loan payments or payments to third parties
without documented beneficiary approval
+ A Tribal credit program using a Special Deposit account to withdraw funds as
necessary to make loans to Tribal members. The source of the &posits to this
38
48
partiwlar Special Deposit account may be loan repayments, which are not
considered proper receipts from trust activities.
+ Past errors which had not been resolved offset to Special Deposit accounts.
These include canceled check claims, payments to an incorrect individual for per
capita distribution, and historical conversion errors (from manual to automated
system in 1977).
of disbursements to third parties.
+ Disbursements are made directly to beneficiaries from Special Deposit accounts
without first being transferred to a beneficiary's IIM or Tribal account. These
transactions were not reported on the account holder's statement.
Direct disbursements from Special Deposit accounts pose problems in providing a
coqlete and accurate accounting. Statements of Special Deposit accounts are not
routinely sent to beneficiaries, and none of the Special Deposit activity is
consolidated with the beneficiary's account statements. Based on our analysis,
only 12% of Special Deposit accounts receiver statements, and none of the Tribal
Special Deposit accounts in our saqle received such statements. Approximately
$33,000,000 was directly disbursed from Special Deposit accounts to third parties
(beneficiaries and unrelated third parties combined).
The American Indian Trust Fund Management Reform Act of 1994 (The Reform AcF)
requires periodic statements be provided to account holders and that accounts be
reconciled. As a result of these practices, the OTFM may be unable to conp>ly
with The Reform Act, and incomplete and inaccurate reporting is being provided to
account holders.
4 For receipt and disbursement activity, various attributes of specific Special
Deposit accounts were tested. These attributes included proper authorization and
support for establishing the initial account in the IIM subsidiary system. The
OTF'M was unable to provide docume ntation for two of the eleven Special Deposit
accounts that were selected for testing. The accounts have been in existence
since 1985 and 1993, respectively, and both accounts have negative, overdraft
balances.
Lack of standardized procedures and adequate resources to identify and allocate
these monies is the primary cause of aged Special Deposit account balances.
Further, management lacks financial reports to sufficiently monitor the progress
of Area and Agency offices in clearing Special Deposit account balances.
Recommendation (24): We recorrnnend the OTFM establish policies and procedures which
clearly define proper sources of trust receipts and disbursements to and on behalf
of trust beneficiaries. The OTF'M also needs to establish standard policies and
procedures for Special Deposit transactions. The procedures should include under
which circumstances the use of a Special Deposit account is acceptable,
reconciliation and reporting procedures for monitoring and clearing Special Deposit
balances and the manner in which transfers are to occur. Further, the OTFM should
initiate management reporting which includes the ability to report &tail aged
transactions categorically and consolidated at various levels (Agency, Area and
39
49
OTFM) t to assist management in &fining accountability for these balances and to
monitor progress made toward resolution of these balances. Finally , the OTFM needs
to develop and implement a plan for clearing Special Deposit balances.
Client Response (24): The OTFM is working on several IIM reform initiatives. The
in ,itiatives include a massive IIM
a conversion to a new IIM system.
IIM account
on
the system in
system review and data clean up in preparation for
The data clean up will
to a8certain that the account war established
include a review of each
properly I and that adequate do cumentation is contained in the jacket file to enable
proper fiduciary managp-nrnt of each account. Throughout this effort, OTFM will be
implementing revised policies and procedures which will clearly define the proper
management of
laws, etc.,
affected will also be revised.
accounts.
As policies and procedures are updated,
all
regulationr,
Compliance with the new policie8 and
procedures will be enforced through OTFM monitoring/review mechanisms.
The OTm has shared the above finding with the Bureau of Indian Affairs.
IIM Interest Earnings - Inadequate System, Policies and Procedures (25)
The distribution of interest earnings to IIM accounts is not performed in a
consistent manner. For example, some accounts closed during the month using the
Closed Accounts Program ("CAPS") receive interest based on the Overnighter
investment only. However, due to limitations of the IIM system, other accounts
closed during the month do not use the CAPS program, but receive interest based on
the interest factor from the previous month. Other accounts open throughout the
month receive interest based upon a calculation which contiders the entire IIM
investment portfolio earnings. The above inconsistencies may lead to an inequitable
distribution between account holders.
The CAPS program was instituted to eliminate overdistributions when closing accounts
and to provide an automated calculation reducing errors in manual calculations.
However, the CAPS program cannot be used for all accounts. Therefore, some accounts
continue to receive incorrect interest allocations.
Written policies and procedures for the various methods of determining the IIM
interest earnings calculation and distribution have not been completed. Policy and
procedures should address both the CAPS program and monthly processes for
assimilating information from the various sources, calculation methodology, due date
for completion, and a review checklist. Without a rtandarrd to follow, changes or
errors in the methodology of the calculation can occur without management's
knowledge or approval. An informal review process without formal approval does not
properly document that a review was performed, particularly if changes or
recalculations were recommended. In addition, the lack of adherence to set
deadlines may lead to untimely distributions.
Recommendation (25): Polices and procedures should be updated to include proper
distributions calculation ethods, an in-depth explanation of how the calculation is
performed, a deadline for completion and process for review.
The current systems cannot perform the distributions in an equitable, consistent
manner. The OTF'M should consider addressing IIM system requirements as part of a
comprehensive systems review. Inrplementing a new system in conjunction with an
effort to address some outstanding IIM accounting issues, such as negative balances
and Special Deposit accounts may provide the OTFM with the means to distribute
income in a more equitable manner.
40
50
Client Response (25): The OTFM is working on several IIM reform initiatives. The
initiatives include a massive IIM system review and data clean up in preparation for
a conversion to a new IIM system. The new IIM system will calculate and distribute
the IIM pool earnings in line with private industry mutual fund practices. In the
interim, several IIM interest calculation and distribution system enhanceme nts have
been or will be placed into production. Once in production, the enhancements will
result in the elimination of manual interest calculations. Throughout this effort,
OTFM has and will continue to implement new/revised policies and procedures. The
IIM pool is valued monthly. Consistently allowing for the use of the IIM factor on
all distributions would require the OTFM to value the pool daily which is not
attainable at this time due to system constraints. The inability to value the IIM
pool daily is the reason why the Closed Account Program (CAP) is using the daily
Treasury overnight investnrent rate when the monthly factor is not available. The
OTFM funds what is earned; the Treasury overnight rate can be confirmed daily as
earned.
Negative IIM Account Balances Included in Invested Balance(26)
The IIM subsidiary ledger contains negative account balances approximating
$44,000,000. The OmniTrust control account for IIM is supposed to represent the
aggregate net balance of the IIM subsidiary system. However, thi8 is difficult to
determine because of the $29,000,000 out of balance condition between OmniTrust and
the IIM subsidiary ledger which is noted in a separate reportable condition. The
invested balance for IIM account holders is equal to the OmniTrust balance. If the
negative balances are included in both ledgers, IIM account holders with positive
balances are being penalized by lower earnings due to the IIM investment pool being
reduced by the amount of the negative balances.
In addition to individual overdraft accounts, a large portion of the negative
balances are due to negative undistributed interest account balances. These
accounts have continued to grow over the past year due to a lack of reconciliation.
IIM account holders with positive balances are potentially penalized as a result of
investing the net IIM holdings as a pool.
Recommendation (26): The OTFM should undertake a reconciliation of the out of
balance condition between the IIM system and the OmniTrust system in conjunction
with an analysis of the negative IIM account balances. The resolution of negative
account balances, particularly negative interest distribution account balances, may
positively iqact the resolution of the out of balance condition.
Client Response (26): The OTFM is currently in the process of researching the
variance between the IIM control account and the IIM subsidiary. This research is
expected to affect the negative balances in the IIM subsidiary. The impact of the
negative balances and variances on the IIM pool earnings cannot be quantified until
the research is complete and other arrangemmts are made to resolve the matter. The
OTFM is working on several IIM reform initiatives. The initiative8 include a
massive IIM system review and data clean up in preparation for a conversion to a new
IIM system. In the interim, several IIM interest calculation and distribution
system enhancements will be placed into production. The OTFM believes that the bulk
of the overdrafts may be related to inadequate accounting for the interest
calculations and distributions.
IIM Amortization/Accretion of Mortgage Backed Securities (27)
41
51
The monthly calculation of IIM investment earnings for distribution to the IIM
account holders is a manual process which attempts to calculate earnings on an
accrued basis for the IIM invesknmt pool. For securities purchased at premiums oz
discounts other than mortgage backed securities, the amortization or accretion is
calculated on a straight line basis, and added to the pool earnings for the period.
However, amortization/accretion of mortgage backed securities held on behalf of IIM
account holders is not calculated in the monthly IIM earnings calculation of the
interest distribution.
Without the amortization/accretion calculation, investment income for mortgage
backed securities is recognized on a cash, rather than accrual basis. As a result,
the IIM account holders receive monies at a different point in time than they would
if the mortgage backed securities were being properly amortized or accreted. This
method is inconsistent with the treatmbnt of the balance of the IIM investment
earnings calculation.
Recommendation (27) : We recommend the OTFM consider implementing appropriate
amortization/accretion methods in accordance with FASB 91 for the IIM earnings
calculation and distribution.
With the release of Federal Accounting Standards Advisory Board Interpretation
Number One, there is some question whether amortization/accretion requirements under
the CFO Act and OMB 94-01 are applicable to the Indian Trust Funds for years ending
in 1997 and thereafter.
Client Response (27): The OTFM has placed into production the Bolt II portfo
management and reporting system. The system will calculate accruals on
securities held and report earnings on the accrual basis. The system will amort
and accrete mortgage backed securities in compliance with FASB 91 and GAAP.
addition, the system will amortize and accrete non-mortgage backed securities us
the effective interest method. The Bolt II system accounting assuqtions
methods were selected based on conservatism and consistency in order to be FASB
and GASP compliant.
Trust Fund Balance Transfers Recorded Inconsistently (28)
llio
all
Aze
In
ing
and
91
There is a lack of policies and procedures in recording transfer transactions, which
has resulted in transfer transactions being recorded in an inconsistent manner. To
record transactions which represent transfers between and within appropriations, a
\\Bp transaction type should be utilized within the OmniTrust system and specific
codes should be set up to denote these transactions. The net effect to the
aggregate fund balance should be zero. However, in some instances we noted that
incoaLe is being recorded twice as a result of transfer transactions. When trust
income is received, it is coded to a specific type (e.g., royalties, lease payrmnts,
etc.). At a later date, if the money is transferred to another account, an income
type code is again used, rather than a transfer code. This condition resulted in a
net inaccurate recording of trust activity of approximately $4,000,000.
Recommendation (28): The OTFM should review policies and procedures related to
transfer transactions and ensure that OTF'M staff are properly trained to account for
these transactions. A supervisory review and approval of the transaction prior to
posting to the OmniTrust system should be included in these procedures.
Client Response (28): The OTFM acknowledges problems with the way BIA-4285 (BB)
transfers are processed creating the condition addressed by the auditors. The
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52
Branches of IIM, Tribal Trust Funds and Field Staff will work together to develop
new policies and procedures which will address the problem.
Other Mvisorv Comments
Earnings on Overniqht Investments (29)
The OTF'M has no formal written policies and procedures to docume nt the method of
OTFM personnel performed limited, informal testing as part of its assessment of
the Bolt II system to determine if Bolt II would be adequate to meet the OTFWs
needs. OTFM personnel suhxnitted seven securities for testing, including FICO
strips (principal only securities, with conversion features at various call
dates), deep discounts (zero coupon), and mortgage backed securities. However,
other security types were not tested, nor was the dollar size of the securities
tested in relationship to the entire portfolio considered. Complete and thorough
testing may have helped identify potential system weaknesses, limitations or
incorrrpatibilities.
+ The OTFM did not utilize outside consultants in order to assess alternative
systems, nor was a consultant utilized during the implementation process. OTFM
personnel could not allocate sufficient time and resources to the system
conversion process.
+ A conqprehensive plan to convert data to the Bolt II system should have documented
which individuals were to be involved in the process and identified each person's
43
53
specif,k responsibilities and deliverables. Implementation phases and time
framers for completion should have been docume nted to gauge progress and timely
delivery. A plan would most likely include system testing as an integral phase
of the process. The system testing would also be thoroughly documented in
computer generated reports, analytical memoranda and data run scenarios.
+ After converting data to the Bolt II system, OTFM personnel did not agree the
market values of securities reported by OmniTrust to those which were reported by
the new Bolt II system reports. Also, security descriptions were not verified or
coxzpared to those recorded in OnmiTN8t. We noted several discrepancies in
security descriptions and market values between the -iTrust and Bolt II
systems.
+ Bolt II reports transactions based on a calendar year, while the OTFM operates on
a 'fiscal' year basis. As a result, the OTFM has to develop alternative
procedures to accumu late fiscal year to date activity.
+ The OTFM did not adequately consider system and information requirements for its
September 30, 1996, financial statement reporting, including reporting the
changes in trust fund balances. Considerable time and manual effort was required
to produce the needed information.
Recommendation (30): We recomxmnd that before another system implementation or
conversion is undertaken, the OTE'M should complete a &tailed plan noting who will
be involved, what each individual's responsibilities will be and their corresponding
deliverables. Consideration should be given to the use of outside expert
consultants to assist in assessing alternative systems, implezmntation and training.
We also suggest that OTFM personnel should coqlete a reconciliation and
confirmation of critical data fields, such as security descriptions, CUSIP nuxcibers,
maturity dates, rates, units, carrying values, and market values as part of the
conversion process to ensure that the transference of all data is complete and
reliable. Any corrections to data recorded should also be verified by OTFM
personnel.
Client Response (30): OTFM concurs that there was not a formalized conversion plan
prior to the Bolt II conversion.
OTFWs initial need for the Bolt II portfolio management system was to calculate
earnings on the accrual basis (FASB 91 compliant) for a handful of OmniTrust
accounts.
Additionally, OTFM intended to use the Bolt II to calculate year-end
amortized/accreted book values (FASB 91 compliant) for the September 30, 1996,
financial statements.
The OTFM did not prepare or audit the Statement of Changes in Trust Fund balanues
for fiscal year 1995. As a result, OTFM selected a portfolio management system
without the benefit of experiencing an audit on the statemmt of changes in assets
and trust fund balances. If the 1995 audit had included this statement, then the
OTFM would have known before the selection process what reports/schedules/data would
be needed in the audit.
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54
Before the Bolt II selection, OTFM explored several systems like SunGard - Cmoga
Park Series II system, SunGard - Charlotte trust accounting system, SunGard -
Minneapolis Bolt II system, CMS Bondedge system and CAMEUL
Seven securities were selected for testing in Bolt II and Series 2 as the other
sys temn explored were either cost/installation time prohibitive or not FASB 91
compliant. The seven securities were selected because they require special handling
in order to amortize/accrete them in compliance with FASB 91. Documentation for the
seven securities tested is available for auditor review in the Branch of Investment
Accounting.
After considering installation time, cost and FASB 91 compliance, the SunGard Bolt
II system was selected.
Due to audit time requirements, the conversion to the Bolt II system was coqleted
as quickly as possible. During the Bolt II izqlementation, the Branch of Investarnt
Accounting was also struggling to comply with audit documentation and calculation
requests, and convert to a centralized custodian. In spite of extremely limited
human resources and time, a reconciliation between Bolt 11 reports and ChUliTN8t
trust reports was performed for the following data elements: CUSIP, maturity date,
units, carry value, and coupon rate. All discrepancies discovered were corrected.
The market value discrepancy discovered later was due to a data field formatting
difference for the preferred stocks. This problem has also been corrected.
It is OTE'M's understanding that the auditors did rely on and incorporate Bolt II
balances in the 1996 financial statements. In the future, all data elements in Bolt
II will be reconciled to OrrmiTNSt with differences corrected timely. OTFM will
element a work around in order to capture fiscal year to date activity from the
Bolt II system.
OTFM concurs that as a result of our staff in the Branch of Investnrent Accounting
being heavily involved in daily operations to be able to devote the time and
resources necessary to sufficiently spearhead a conversion. Upon adoption of the
proposed DM 130, the Division of Trust Funds Systems will have adequate resources to
offer in house support for system conversions. In the interim, the use of outside
consultants will be determined by the complexity of the conversion and the
availability of funding.
The following sections
Internal Controls.
contain the comments from
September 30, 1995,
Material Weaknesses - Prior Year - September 30,
1995
Report on
Cash balances converted from the prior general ledger to OmniTrust were
approximately $27,000,000 higher than the balance per the Treasury. Cash
reconciliation procedures only reconcile current activity from 0mniTrust 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.
45
55
This condition was concurred but not resolved during the year en&d September 30,
1996. Further, the $27,000,000 difference is now reflected at approximately
$35,000,000 as of September 30, 1996. The out of balance condition changes as
reconciling items are identified and cleared.
Investments
(2)
The OmniTrust 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,
The amortization and accretion calculations must be computed separately and recorded
as an adjusknent at year end.
This results in interim financial reporting which does not reflect the investment
portfolio's true yield.
OmniTNSt can calculate amortization and accretion only on the straight line method
with FASB 91.
At September 30, 1996, the OTFM had contracted with SunGard Securities, Inc. (which
also provides the OxnniTrust system services to the OTF'M), to perform investmmt
accounting and reporting utilizing their Bolt II system. The Bolt II system, in
most cases, can amortize premiums and accrete discounts on investment purchases
utilizing the effective interest method.
This condition was concurred and resolved during the fiscal year en&d September 30,
1996.
Trust Fund Balances (3)
The Bureau Suspense Account #6875 with Treasury has a balance of approximately
$11,700,000, of which only approximately $168,000 is reflected on OmniTrust. This
was a shared account with the Division of Accounting Management, and it was not
determined at the time to whom the balances belonged. As of Septrrmher 30, 1996, the
Division of Accounting Management and OTFM completed an analysis of this account and
segregated their respective balances. The account balance per Treasury now agrees
to the account balance per OnrniTNSt. This issue was concurred and has been
resolved.
An YJndistributed Interest Account from TAMS" (the prior general ledger system)
exists on -iTrust with a balance of approximately $1,800,000 at September 30,
1995. As of September 30, 1996, the balance of this account is approximately
$1,900,000, due to interest being accrued to the balance. This condition was
concurred; however, the balance remains unresolved.
There was a difference between the general ledger summary account of III4 on
OmniTrust and the total of the balances per the IIM subsidiary ledger &tail. The
difference was approximately $30,000,000 at September 30, 1995, with the general
ledger carrying the higher balance. There were also negative cash balances on the
IIM subsidiary system aggregating approximately $46,000,000.
At September 30, 1996, the out of balance condition between the general ledger
summary account on OmniTrust and the total balances of the I= subsidiary ledger
46
56
detail approximated $29,000,000, with the general ledger maintaining the higher
balance. The negative cash balances on the IIM subsidiary system aggregated
approximately $44,000,000. This condition was concurred, but remains unresolved at
Septe&er 30, 1996.
Area and Acrencv Offices (4)
there is no consistency in the application of accounting policies and procedures.
There were also inconsistencies reported in duties performed by certain key
personnel as well as inadequate segregation of duties.
During fiscal year ended September 30, 1995, staff in the Area and Agency offices
were supervised by the Bureau, and did not report to the OTFM.
During 1994, the OTF'M prepared and distributed to Area and Agency offices a desktop
operating manual which do cuments 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 of investment related transactions, transactions
affecting the IIM system originate in the Area and Agency offices.
This condition was concurred and remains unresolved at September 30, 1996.
General
The accounting systems and internal control procedures used by the OTF'M 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 covuterized 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 funds entrusted to the OTFM.
In an effort to effectively address these pervasive issues, the OTFM was placed
under the direction of the OST, effective February 9, 1996. The OST has developed
the conceptual framework for a comprehensive strategic plan to address the issues
set forth herein. However, given the recency of the OST involvement, it is not
possible at this t* to provide any meaningful feedback on the viability of the
strategic plan or to assess progress on its iqlcrrYntation.
This condition remains unresolved at Septdr 30, 1996.
Reportable Conditions - Prior Year - September 30, 1995
Cash (5)
Negative Cash BaZanccs
47
57
mere are thirteen (13) cash accounts on OmniTrust with negative balances totaling
approxhtely $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 r-in out of balance until the U.S. Go-mnt and the beneficiaries
reach a resolution regarding past activities and balances.
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 goes not agree to the actual axnount of interest earnings.
This condition was concurred but unresolved at September 30, 1996.
Investments Records Manaaement (6)
As part of the invesmnts testwork, specific investments were selected and the par
value per -iTrust was agreed to third party docume ntation. The third party
documentation consisted of brokers' advices confirming the purchase amount, par,
interest rate and other information. Of a swle of 73 securities, 14 (19 percent)
were not supported by purchase confirnrations. Three securities, or 4 percent of the
missing docume ntation, related to securities purchased during fiscal year 1995. All
of the do cuments were later obtained by contacting brokers directly and having the
information faxed to the OTFM or were verified in the custodial reconciliation
process.
For fiscal year ending September 30, 1996, similar testing revealed that, of a
swle of 74 securities, 1 (1 percent) was not supported by broker's confirmation.
The missing do cumentation was related to a security purchased prior to 1996.
This condition was concurred and has been resolved. Iqlementation is in progress
at September 30, 1996.
IIM Special Deposit Accounts (7)
Through the Area and Agency offices, the Bureau &posits 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 emntually cleared.
These mOnies, which may belong to a trust beneficiary, remnin unposted to the
beneficiary's account and subsequent investment or disburswnt of the funds is
delayed.
This condition was concurred yet continues unresolved at Septeziber 30, 1996.
However, clean up efforts have began.
58
Ownership records at the Area and Agency offices are not updated in a timely aannex.
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.
This condition was concurred, but
However, this issue was addressed by
General
remains
the Speci
unresolved at September
.l TNStee's Strategic Plan.
30,
1996.
Policies and Proccdxare*
(9)
In reviewing the internal control structure for the OTF'M, other than the 1184 desktop
manual, we were unable to locate current written policies and procedures. No formal
written procedures were located to do cument the investment process, accounting for
investmnents and accounting for Tribal Trust Funds.
This condition was concurred and resolution is underway at Septe&er 30, 1996,
Accounts Receivable Systarz (10)
The Bureau does not have an accounts receivable system in place. The GAO, in its
report &ted April 25, 1994, (GAO/A-MD-94011OR) 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.
This condition was concurred but remains unresolved at September
this issue was addressed by the Special Trustee's Strategic Plan.
30,
1996.
Other Advisory Comments - Prior Year - Septe&ber 30, 1995
Cash Reconciliation Process (11)
However,
The daily cash reconciliation was not presented in a traditional bank reconciliation
format with the adjusted bank balance agreed to the adjusted book balance. The
reconciliation ignored the differences between OILmiTNSt'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 VmniTzust adjustments
and prior period" with all the item 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.
The OTFM revised its presentation of the daily cash reconciliation during the
current fiscal year; therefore, this condition was concurred and has been resolved
and implemented.
Electronic Data Processincr
49
59
Disaster Recovery (12)
Disaster recovery planning over the ChmniTrust application is adequate. Our review
noted there currently is no formal agreement for disaster recovery pertaining to the
Unisys A-17 or the IBM 3090. The physical location of the two mainframes is at the
Albuquerque Federal Court Building, a high risk location. Informal arrangenmnts
have been made with other gove rnmental agencies to provide recovery services in the
event of a disaster.
This condition was concurred and resolution is in process at September 30, 1996.
However, limitations to the current planning should be noted. Our review noted a
disaster recovery agreement was implemented and a test of the plan has been
successfully coqleted. Our review also noted the disaster recovery tapes for the
Unisys A-17 are not rotated offsite in a tkly manner. The cuxrent rotation
procedure could potentially result in a loss of information.
Password Controls (13)
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. E'urthermore, our discu8sion
noted that "Help Desk" personnel have the ability to reinstate or reset passwordrr
which have been revoked. This condition was concurred but remains unresolved at
September 30, 1996.
elication Change Controls (14)
our review noted that changes to the ITIM application are not performed in a test
environrmnt on the Unisys A-17 mainfrm. There are also no procedures in place for
subsequent review after changes have been implemented by the prograxumr. Review is
limited to verification of the output by the requesting party.
This condition was concurred but remains unresolved at Septezciber 30, 1996.
Conversion to -Trust (15)
We noted that the OTFM did not retain an outside consultant to assist in the 1996
computer conversion. Although an OTFM employee was responsible for the conversion,
they also had daily tasks to perform and could not &vote 100% of their: tinw to the
conversion process.
This issue was concurred and resolved.
1099 Interest Reporting (16)
Currently, there are individuals with no known social security number receiving
interest income on trust investments. Because the social security number is
unknown, the OTF'M reports the interest earnings to the Internal Revenue Service
(YRS') 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.
50
60
This condition was concurred but has not been resolved at September 30, 1996.
our consideration of the internal control structure would not necessarily disclose
all matters in the internal control structure that might be reportable conditions
accordingly,
would not necessarily disclose all reportable conditions that are
also considered to be material weaknesses as &fined above.
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. Depar+mPnt of Interior and management of OTFM and is not intended for any
other purpose. Howe-r, this report is a matter of public record and its
distribution is not limited.
Certified Public Accountants
Boulder, Colorado
January 17, 1997
51
61
U.S. DEPARTMENT OF THE INTERIOR
OFFICE OF THE SPECIAL TRUSTEE FOR AMERICAN INDIANS
TRIBAL, INDIVIDUAL INDIAN MONIES AND
OTHER SPECIAL TRUST EWNDS
MANAGED BY THE
OFFICE OF TRUST EWNDS MANAGEMENT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON COMPLIANCE WITH
LAWS AND REGULATIONS
SEPTEMBER 30, 1996
62
GRIFFIN & ASSOCIATES, I?C.
CERTIFIED PUBLIC ACCOUNTANTS DANDGRIF'FIN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON COMPLIANCE WITH LAWS
AND REGULATIONS
To the U.S. Department of the Interior
Office of the Special Trustee for American Indians:
We have audited the Statement of Assets and Trust Fund Balances and the related
Statement of Changes in Trust Fund Balances for the Tribal, Individual Indian Monies
and Other Special Trust Funds managed by the U.S. Department of the Interior: Office
of the Special Trustee for American Indians ("OSTN) Office of Trust E'unds Management
("the OTFW') as of and for the year ended September 30, 1996, and have issued OUT
report thereon dated January 17, 1997.
we conducted our audit in accordance with generally accepted auditing standards, the
standards for financial audits contained in Gove mt Auditing Standads (1994
Revision) issued by the Colclptroller General of the United States and Office of
Management and Budget mm) 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 statermnts 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 statements referred to above are 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 MIanagers' Financial Integrity Act (FMFIA) and compared the material
weaknesses reported in the Office of the Special Trustee for American Indians,
Office of Trust E'unds Management's EXFIA 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 OTF'M's internal control structure.
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 E'und Balances and the
Statement of Changes in Trust Fund Balances, or that the sensitivity warrants
disclosure thereof. The results of our tests disclosed material instances of
noncompliance that are required to be reported under Govcrzmexz t Auditing Stadxrds.
As comnun icated 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 noted a material instance of noncompliance as a result of our receipts and
disbursements testing which is described below.
4730 TABLE MESA DRIVE, SCTTE ClOO, BOULDERCOLORADO 80303
PHONE (303)543-8868 o ??? (303) 543-8869
Members of the American Institute of Certified Public Accountants
63
The OTF'M and Bureau have not reached an operating agreement or executed a Memorandum
of Underktanding that would define the authorities and responsibilities of various
OTFM and Bureau personnel in performing financial trust services on behalf of Tribes
and individual Indians. As a result, lines of authority are unclear and
transactions are improperly authorized or, in some cases, processed without
authorization.
We reviewed disbursement transactions for proper approvals, in accordance with 25
Code of Federal Regulations (VFR") and Secretarial Order 3177 or Secretarial
Or&r 3197 (for transactions subsequent to February 9, 1996). According to
numerous sections of 25 CFR, and Secretarial Or&r 3177, disbursrmrnts from
tribal trust accounts require the approval of the Secretary of the Interior ox
his &legate. This authority wa8 subsequently re-delegated to Age-Y
Superintendents for transactions prior to February 9, 1996.
On February 9, 1996, Secretarial Order 3197 established the Office of the Special
Trustee for American Indians within the Department of the Interior and moved the
Office of Trust Funds Management from the Bureau to the OST. The Secretarial
Order issued all delegations of authority for financial trust services to the
Special Trustee for American Indians, and rescinded all such delegations to the
Assistant Secretary - Indian Affairs. Pursuant to that Or&r, on February 9,
1996, the Special Trustee for American Indians delegated all program and
administrative authorities necessary to perform financial trust Lie-ices to the
Director, OTFM, with the exception to approve withdrawals of tribal funds from
trust. This delegation was published as 210 DM 14, Release 3053.
The Director, OTFM, attempted to re-cielegate administrative authority within the
jurisdiction set forth in 210 DM 14, Release 3053, to OTFM field accounting
personnel and Bureau Agency Superintendents. This re-delegation was not
approved. Therefore, all delegations of authority continue to reside with the
Director, OTFM, only.
Client Response : In our agreement with the noted conditions found, OTFM is
currently working with the Bureau of Indian Affairs to enter into a Memorandum of
Understanding (MOU) between both entities. The various trust accounting events and
definitive lines of authority are vague today but assistance from the Departnrcnt of
Interiors Office of the Solicitor in the negotiation process will evolve into a
fiscal year 1997 solution. The agreed upon MOU will be the catalyst for producing
sound OTF'M policies and procedure that emphasize lines of authority at all levels of
operations.
o We also noted certain immaterial instances of noncompliance.
+ Instances of noncompliance with 25 CFR were noted during visits to Agency offices
as follows:
+ Noncompliance with 25 CFR, Part 114.4 was noted during the receipts and
disbursements testing that was conducted for all Agencies. The Agencies
have instances where they must calculate interest at an interim period
prior to the month-end interest distributions. The Agencies calculated
interest on Special Deposit Accounts using an average daily balance rather
than using the month-end balance since the last interest period, as stated
in the 25 CFR.
53
64
+ Instances of noncompliance with 25 CFR, Part 161 were noted during visits
to the Collville, Washington, Agency offices. Gaming funds were &posited
into special deposit accounts which are trust accounts and are invested. A
Notice of Retraction was issued by the OST which stated gaming funds axe
not to be accepted into trust accounts8 in accordance with the Department
of Interior's policy.
+ It was noted that Agency offices are in violation of the Treasury Fiscal
Requirements whereby funds had been accumu lated in excess of $1,000 and a
timely deposit was not made.
Client Response - The OTFM is in the process of an extensive IIM system review and
clean up effort. This effort will include a review of each IIM account of record
in or&r to ascertain that the account is being used properly, and that adequate
documentation is filed in the jacket folder. Throughout this effort, OTFM will be
implementing revised policies and procedures which will clearly &fine the uses fat
accounts, etc. As policies and procedures are updated, all regulations, laws etc.,
affected will also be revised. In addition, a conversion to a new IIM system is in
the planning stages. Compliance with the new policies and procedures will be
enforced through central office tracking mechanisms as well as compliance reviews
performed by the Branch of Field Review.
Development of policies, procedures and regulations that govern the Division of
Field operations will be established and placed into effect. These procedures will
be in compliance with the DM 130 as approved and other laws and regulations.
The following sections contain comment8 from the September 30, 1995, Report on
Compliance with Laws and Regulations.
+ Instances of noncompliance with 25 CFR, Part 162 were noted during visits to
Agency offices as follows:
4
The Pima Agency had one lease with the following exceptions:
+ The lease was not advertised nor put out for bid prior to letting the
lease.
4 A surety bond guaranteeing the contractual obligation was not obtained.
4 The January 1, 1995, payment was received June 2, 1995. No interest was
charged nor received on the late payment.
9 The Uinta and Ouray Agency had two leases with the following exceptions:
4
4
The Pima Agency had one violation of the Treasury Fiscal Requirements whereby
Two leases had
market rental.
leases
obligation.
no documentation indicating that the lease8 were let at fair
contained
no
surety
bond
guaranteeing
the
contractual
funds had been ac cumulated in excess of $1,000 and a timely &posit was not made.
54
65
+ The OTFM is not in compliance with the policy statcmrnt rtquircmrnts of the CFO
Act.
4
4
4
The OTFM
127.
is not in compliance
with
certain
requirements of
We are aware that the Solicitor for the Department of the Interior is aware of
certain possible violations of various laws and regulations which may affect the
OTFM.
Circular 123
The OTFM has not complied with certain requi
Accounting Office Accounting Series pronouncement.
remen
ts
of
the
U.S.
General
The prior instances of noncompliance were concurred but remain unresolved at
September 30, 1996.
Except as described above, the results of our tests of compliance indicate that,
with respect to the items tested, the OTEM complied with the provisions referred to
in the third paragraph of this report, and with respect to items not tested, nothing
CaIr.E to our attention to cause us to believe
material respects, with those provisions.
the OTFM had not co-lied,
in
all
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 OTFM and is not intended for any
other purpose. However, this report is a matter of public record and its
distribution is not limited.
GRIFFIN 6 ASSOCIATES, P.C.
Certified Public Accountants
Boulder, Colorado
January 17, 1997
55
66
APPENDIX 1
STATUS OF RECOMMENDATIONS IN AUDIT REPORT 97-1-196
Recommendation
Reference
Status Action Required
1; 3-5, 7-10, 12-14, and 16
Resolved; not
implemented.
No response to the Office of
Inspector General is
required. The recommendations
have been referred to the
Assistant Secretary for Policy,
Management and Budget for
tracking of implementation.
2,6, 11,and 15
Implemented.
No further action is required.
67
Memorandum
United States Department of the Interior
OFFICE OF THE SECRETARE
Wd-kgton. DC. 20140
To: Assistant Inspector General for *4udits
From:
.4da E. Deer-
sC~\~G Assistant Secretary - Indian Affairs
Subject:
-Audit Report on the Financial Statements for Fiscal Year 1996 of the Tribal,
Individual Indian Monies, and Other Special Trust Funds Managed bv the
Office of the Special Trustee for ,LZlnerican Indians (Assi~nment%!o. bN-BIA
00l-97)
We appreciate the opportunitv to review the draft audit report prior to its issuance bv the Office
w
of Inspector General. While ail of the current vear recommendations are directed to the Ofice of
Trust Funds Management, OST, we have noted findings in the report from prior vears for which
BIA is responsible for corrective actions. These are addressed further below. *
We also recognize that a joint cooperative effort with the Office of the Special Trustee is a step
toward resolving the long u-standin" problems in trust funds and natural resource management.
2?
In that respect, we are working with the Special Trustee to finalize the memorandum of
understanding between the OST and the BIA also mentioned in your report. Of significance in
this regard. is the fact that we are working with the Special Trustee and other entities within the
Department to implement the Secretary's Trust Improvements Project defined in his `4ugust 22,
1997 memorandum as the approach for improving Indian trust management. In this effort, we
are working jointly with the Special Trustee and various Bureaus as a participant in the newly
established Trust Improvement Management Team to develop a high level implementation plan
for resolution of trust management issues.
Specifically, with respect to the findings noted in your report, the following is noted:
o Ownership records at the Area and Agency offices are not updated in a timely
manner.
The BIA is addressing land records backlog problems as one of the vital elements the
Secretar-v's Trust Improvements Project. We have proposed two actions to improve the land
-
records: ( 1) teams will be sent to the locations having the largest backlog in order to bring the
6cS c
records current: and (2) the land records svstem will be upgraded in order to automate the
chain oftitle process, which will significantlv reduce the t&e required to record new ownership
information.
Land records have also been identified as a mission critical material weakness. Follow-up
reporting on progress to correct this deficiencv will be accomplished as part of the
Department's procedures to complv with the provisions of the FL&W/ .Mrrrc~gus Firrcr~~d
Z~tegri~ Act. For that reason. we ask that it not be tracked under this audit.
J
o There was no formal agreement for disaster recover-v pertaining to the UNISYS
A-17 or the IBM 3090.
This was also a finding in the OIG Audit Report, "General Controls Over Automated
Information Systems," (Report No. 97-I-771 ). As reported by a memorandum to vour office
dated June 23, 1997, a contract is in place for back up of the LJNISYS A-17 computer. We
do not plan to execute a similar contract for the IBM 3090 due to the pending transfer of
BIA's data processing work to USGS.
o Security Controls over the UNISYS A- 17 are inadequate.
o Changes to the IIM svstem are not performed in a test environment on the
UNISYS A-17 mainframe.
These findings were also identified in the above-referenced report under "Access Controls"
and "Software Development and Change Control." Implementation of corrective actions is
not yet complete, however, since we are reporting to the Department under the audit of
automated information systems, we request that these findings not be tracked as part of the
financial statement audit.
6S
APPENDIX 3
STATUS OF AUDIT REPORT RECOMMENDATIONS
Finding/Recommendation
Reference
Status Action Required
17026,28, and 29
Resolved; not
implemented.
No response to the Office of
Inspector General is
required. The recommendations
will be referred to the Assistant
Secretary for Policy,
Management and Budget for
tracking of implementation.
.27 and 30
Implemented.
No further action is required.
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
Office of Inspector General
1849 C Street, N.W.
Mail Stop 5341
Washington, D.C. 20240
Our 24.hour
Telephone HOTLINE
l-800-424-5081 or
(202) 208-5300
TDD for hearing impaired
(202) 208-2420 or
l-800-354-0996
Outside the Continental United States
Caribbean Region
U.S. Department of the Interior
Office of Inspector General
Eastern Division - Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209
North Pacific Retion
(703) 235-9221
U.S. Department of the Interior
Office of Inspector General
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910
(700) 550-7428 or
COMM 9-011-671-472-7279
Toll Free Numbers:
l-800-424-5081
TDD l-800-354-0996
5
5
1849 C Street, N.W.
Mail stop 5341
Washington, D.C. 20240