Examination oft Army’ Financial s Statements for Fiscal Year 1991_part2 doc

B-249197 Real Property Accounts Are Not Accurately Reported The Army reported $61 billion of real property in its September 30,19!41, report on financial position. Of this amount, the Corps of Engineers reported almost $28 billion in real property, but records were not maintained to show the cost of its real property assets, accordingly, we were unable to substantiate this amount. For the balance of $33 billion, we found discrepancies between the amounts reported on the Army installations’ general ledgers and the subsidiary property records, as well as other weaknesses in recording real property transactions. For example, at six installations, the general ledger property accounts were approximately $461 million less than the subsidiary property records. Some of the costs of completed military construction projects were included in both the Corps of Engineers’ construction-in-progress accounts and Army installations’ property records, thus causing the financial statements to double count the value of this property. The Corps was unable to determine the extent of the overstatement in the construction-in-progress account balance of $34 billion as of September 30,19!X. Not All Liabilities Reported ’ Contrary to established policy, the Army did not record all estimable liabilities or disclose in the footnotes to the financial statements billions of dollars of potential liabilities for chemical weapons destruction, environmental pollution claims, and cleanup of hazardous waste sites. Internal Controls Are NOt Satisfactory . . . Our tests of the internal controls affecting or potentially affecting the Army’s Principal Statements showed they could not be relied upon to achieve their intended objectives. The internal controls we evaluated were those designed to safeguard assets against loss from unauthorized use or disposition; assure the execution of transactions in accordance with budgetary authority and applicable laws and regulations; and properly record, process, and s ummarize transactions to permit the preparation of financial statements and to maintain accountability for assets. Our work disclosed material weaknesses in internal controls that, in our opinion, result in more than a relatively low risk that (1) unauthorized use or disposition of assets could lead to losses considered to be material in relation to the Principal Statements and (2) instances of noncompliance PAgc B GAOUF’MD-92-83 Army’r 1991 F’hncid Statementa This is trial version www.adultpdf.com B-248197 and misstatements material in-relation to the Principal Statements could occur and not be detected within a timely period. A number of these weaknesses are root causes preventing us from expressing an overall opinion on the Principal Statements. Some specific weaknesses in internal controls not already mentioned are discussed below. Inventory Systems Do Not Serious problems were noted in the manner in which the Army manages Provide Financial and controls its inventories. Accountability and Control l The Army has unrequired inventories of $2 billion, or 12 percent of its reported total inventory. An additional $2 billion in unrequired inventory had been written down to a $60 million scrap value. l Obvious errors in inventory reports and records, such as negative inventory account balances, were not investigated. . Large amounti of military equipment and related Inventories awaiting repair were unsecured and unprotected, and security over depot warehouses was lax. As a result of these and other deficiencies, the Army’s inventories are highly susceptible to mismanagement and loss. Unsupported A~ustments The Defense F’inance and Accounting Service initiated and processed Made to Financial aQiustments and corrections valued at $260 billion after the end of fiscal Statements year 1031. However, offMals were unable to provide records or documentation to support many of the adjustments and, in those cases where documentation did exist, there was no evidence of supervisory review or approval of the adjustments. Controls Over Contractor-Held Property Are Not in Place & The Army does not have a system or procedure to track and monitor property owned by the Army but held by contractors. Once property is given to contractors, it is dropped from the Army’s records, leaving the contractor to account for the property in its possession. As of September 30,1991, contractors reported that they had almost $11.3 billion of inventory, equipment, and real property that was owned by the government. Aqny Did Not”Report All The additional material internal control and systems weaknesses noted in M&wial Control our audit and our evaluation of the overall magnitude of other known Weaknesses weaknesses lead us to disagree with the Army’s fiscal year 1991 report to Page10 This is trial version www.adultpdf.com B-249197 the Secretary of Defense on internal controls. The Army reports annually to the Secretary of Defense as part of DOD'S evaluation of controls under the Federal Managers’ Financial Integrity Act of 1982 (FMFIA) (31 U.S.C. 3612). In the 1991 report, the Secretary stated that the Army’s internal control structure, except for 12 material weaknesses, provided reasonable assurance that control objectives were achieved. Compliance With Certain Laws and Regulations We tested the Army’s compliance with the provisions of selected laws and regulations listed on page 13. We are continuing to address the legal implications of the following two matters and, if necessary, we will report separately on them: - . The Corps of Engineers awards its Civil Works Revolving Fund equipment contracts if it is estimated that the required payments can be made out of the Fund’s projected revenue. However, the Corps does not record these contracts as obligations when the contracts are awarded. This practice raises the issue of whether the Corps is violating the general requirements to record contracts as obligations and ensure that contracts are supported by available budget authority. l The Aviation Systems Command made unsupported adjustments of its recorded obligations. This action raises the issue of whether the adjustments obscured potential violations of the Anti-Deficiency Act and whether the Command violated an Army regulation that requires reports and follow-up on potential violations. Subject to the resolution of these two matters, our tests disclosed no specific instances of material noncompliance with the selected laws and regulations. However, as discussed above, we disagree with the Army’s 1991 report to the Secretary of Defense on internal controls. Offrce of Management and Budget (OMB) Bulletin 91-14 (September 10,lQQl) b characterizes a conflict between an agency’s FMFLA report and the auditor’s evaluation of the agency’s internal control system as a condition of noncompliance with Fn4r+k Reported information by program and activity, and other supplemental information contain a wide range of data, some of which are not directly related to the Principal Statements. Our limited tests of this information and the other problems identified in our audit prevent us from expressing an opinion on Page 11 GAOAFMD-82-88 Army% 1991 Financial Statementa This is trial version www.adultpdf.com B-248187 this information. We have expressed concerns to DOD and Army officials about how the Overview and Combining Statements are presented. The Overview does not adequately describe the Army’s mission and goals and its progress in attaming its goals. It discusses several programs that are relatively minor in comparison to the Army’s overall mission and goals and that represent a small percent of its appropriations and assets. These programs include counternarcotics, disaster relief and emergency assistance, and security assistance. Likewise, the performance measures presented do not address the Army’s primary mission and goals and do not show the costs of the various programs. A discussion of the Army’s overall mission and major programs, such as new weapons procurement and inventory management, would be much more informative and useful. The Combining Statements do not consist of like functions for which meaningful performance measures could be identified. For example, the Conventional Ammunition Working Capital Fund, which fInancea the production of conventional ammunition, was consolidated with the Corps of Engineers’ Revolving Fund, which finances Corps activities and equipment. Objectives, Scope, Army’s management is responsible for and Methodology 9 preparing the annual financial statements in conformity with applicable accounting principles, l establishing and maintaining internal controls and systems to provide reasonable assurance that the broad control objectives of FMFIA are met, and l complying with applicable laws and regulations. b Our responsibility is to perform tests to obtain reasonable assurance about whether the Principal Statements are reliable and whether relevant internal controls are in place and operating effectively. We are also responsible for testing compliance with provisions of selected laws and regulations and for performing limited procedures with respect to certain other information appearing in these annual financial statements. In carrying.out these responsibilities, we l examined, on a test basis, evidence supporting the amounts and disclosures in the Principal Statements; Page 12 This is trial version www.adultpdf.com B-24197 . . . . . . . . . . . . . . . . . . Our work was also limited in the following respeds: sssessed the accounting standards used and significant estimates made by management; and evaluated the overall presentation of the Principal Statements. We also evaluated and tested relevant internal controls which encompassed the following areas: financial reporting, stock fund inventories, ammunition inventory, facilities, military equipment, civilian pay, military Pay, depot maintenance, equipment, construction, and treasury. We tested compliance with selected provisions of the following laws and regulations: Prompt Payment Act (31 U.S.C. 39913906) and Office of Management and Budget implementing regulations (OMB Circular A-126); Anti-Deficiency Act (31 U.S.C. 1341,1342, and 1611-1619); Federal Managers’ F’inancial Integrity Act of 1982 (31 U.S.C. 3612(b) and (cl>; Chief Financial Officers Act of 1999 (Public Law 101-676) and OMB implementing regulations (OMB Bulletins 91-14 and 91-16); and Department of Defense appropriation acts. We also considered compliance with the process required by FMFIA for evaluating and reporting on internal control and accounting systems. We did not evaluate all internal controls relevant to operating objectives as broadly defined by FMFIA and implementing guidance, such as those controls relevant to preparing statistical reports and ensuring’ efficient operations. We limited our work to accounting and other controls necessary to support amounts and disclosures in the Principal Statements and to achieve the objectives outlined in our opinion on internal controls. Page18 This is trial version www.adultpdf.com B2491B7 Classified Programs Not Audited, The Army directs certain programs and maintains assets which are classified for national security reasons. According to an Army official, the consolidated statement of financial position does not contain information about classified assets. While at other times we have reviewed specific aspects of classified programs at the request of the Congress, we performed no auditing procedures related to classified programs and assets during this audit. Certain Disbursements of Army Funds Not Audited. During fiscal year 1991, approximately $12.6 billion of disbursements were made from Army fimds by non-Army entities. These entities-primarily the Defense Logistics Agency; the General Services Administration; and the Departments of State, Air Force, and Navy-are responsible through interservice and interagency agreements for administering contracts for the Army. We did not perform auditing procedures at non-Army entities concerning disbursements of Army funds; however, we did review the Army’s procedures related to these disbursements. Army National Guard and Army Reserves Not Audited. The consolidated statement of financial position includes assets for which the Army National Guard or Army Reserves are accountable. These entities are operating units of the Army and receive their funding through Army appropriations. As of September 30,1991, the Army National Guard and Army Reserves reported assets of $24.4 billion and $6 billion and expenses of $6 billion and $3 billion, respectively. Together, Army National Guard and Army Reserve assets comprise 8 percent of total Army assets, while their expenses comprise 8 percent of total Army expenses for fiscal year 1991. We did not audit these entities. Rage 14 GAOIAFMD-92-88 Army’r 1991 FIxuncial Statuments This is trial version www.adultpdf.com B448187 ln all other respects, our work was done in accordance with Government Auditing Standards and OMB Bulletin 91-14, “Audit Requirements for Federal Financial Statements.” Other Reports Our audit work has enabled us to make important and comprehensive recommendations for improving financial management and accounting for both the Army and DOD. These recommendations will be included in separate detailed reports. Charles A. Bowsher Comptroller General of the United States June 24,1992 Page16 This is trial version www.adultpdf.com Principal Statements Finnnelal Dnnitlnn IU of September 30. 1991 Identlllcatlon: Department/Agency: Department of the Army Bureau/Organ&atlonal Unit: principal Statements OMB Identlficatton Code: Basis Used: I ASSETS I I Total 1. Fund Balance with Treasury (Note 1.C) and Cash a. Fund Balance b. Cash c. Foreign Currency, Net d. Subtotal 2. Accounts Receivable (Note l.E) a. Federal Agencies 1. Current 2. Noncurrent b. Public 1. Current 2. Noncurrent c. Less: AIIowances d. Subtotal 3. Advances and Prepayments Mote 1.F) a. Federal Agencies b. Public c. Subtotal 4. Inventories Mote l.G) a. Operating consumables b. Product or Service Components c. StockplIed materials d. Other e. Subtotal 5. Investments. Net a. Federal Securltles b. Non-Federal Securities c. Other-Public Securities d, Subtotal 6. Loans Recetvables a. Federal Agencies 1. Current 2. Noncurrent b. Public 1. Current 2. Noncurrent c. Less: Allowances d. Subtotal - I/ - 47999675569 9 * . I I 550.000 Page 16 GAO/APMD-92432 Army*o 1991 Phuncial Statementi This is trial version www.adultpdf.com Principal Stdemente as of September 30, 1991 EZxp from Cap Lease es-Other hnmunltlon) 9. TwrALAssm LIABILITIES 10. Accounts Payable (Note 1.4 a. Federal Agencies b. Public c. Subtotal 11. Interest Payable a. Federal Agencies b. Public c. Subtotal 12. Accrued Payroll and &m&s (Note lp 13. Ac&cd unhnded Annual Leave @Jots 1.x.J 14. Unearned F&venue (Advances) a. Federal Agenctes b. Public c. Subtotal 15. Deposit Funds 16. Debt Issued Under Borrowing a. Gross Federal Debt b. lntragovemmental Debt c. Other Debt d. Subtotal 17. ActuartaJ Llablllttes a. Pension Plans b. insurance and Annulty Programs c. Subtotal 30.636.272.374 345,806,394.071 5.566.822.250 5.092.374.731 10.659.196.981 2.510,862.214 I .500.689.575 416.019.540 / 6 7 8 0.3 8 1.916,709,115 26,034,520 662,560 662,560 Page 17 GAO/AF’MD-92-88 Army’e 1991 Financial Statements This is trial version www.adultpdf.com Prindpal Statementa U of September 30, 1991 lAabIutIel Continued 18. Other Ltabtlttler, (Note 1.M) a. Property Fumlshed by Others b. lnsuranct Reserve. Civil Works c. Capttal Lease. Clvii Works d. Unearned income e. Other I Total I t Subtotal 19. ‘TOTAL LIABILITIES E$UITY 20. Unexpended Financed Budget Authority a. Unexpended Approprtatlons b. Less: Unftlled Customer Orders c. Subtotal 2 1. Invested Capital 22. Revolving Fund Balance(s) a. Appropriated Capital b. Cumulative Results c. DonatIons d. Subtotal I 624.966.679 r 38,087.369,827 23. Trust Fund Balances 24. ‘IWML EQUlTf (Note l.lQ 1 1.857.115.941 25. ‘l-OWL LIABILlTIES AND EQUMY ,328,450,121.654 345,806.394.071 7?$?E%j 20,230,326,635 Page 18 WAFMD-92-88 Armfe 1991 Fhanchl Itatemenb ‘. 1~ :< This is trial version www.adultpdf.com . counternarcotics, disaster relief and emergency assistance, and security assistance. Likewise, the performance measures presented do not address the Army s primary mission and goals and do not show. officials about how the Overview and Combining Statements are presented. The Overview does not adequately describe the Army s mission and goals and its progress in attaming its goals. It discusses. these weaknesses are root causes preventing us from expressing an overall opinion on the Principal Statements. Some specific weaknesses in internal controls not already mentioned are discussed