ENCLOSURE II ENCLOSURE II

— Inquire whether the agency has a process/system for maintaining detailed records of
unreconciled Statements of Differences (FMS Form 6652) that are less than 6 months
old and monitoring subsequent resolution of these differences.

~ Inquire whether the agency has a process/system for maintaining detailed records of
large unreconciled differences (i.e., differences greater than $5 million that are never
posted to the BCA) and monitoring subsequent resolution of these differences.

— Inquire whether the agency has a process/system for maintaining detailed records of
unreconciled Budget Clearing Account (BCA) differences and monitoring subsequent
resolution of these differences.

— Inquire whether the agency has a process/system for evaluating the age of
unreconciled items and determine the average time it takes to clear BCA items.

- Based on auditor's judgment, assess the adequacy of the above processes/systems in
place. .

ear- unt Balance

To determine if agency and Treasury records agree for collections and disbursements
made throughout the year, perform the following procedures:

— Use the Year-End Undistributed Appropriation Account Trial Balance (FMS Form
6654) and Receipt Account Trial Balance (FMS Form 6655) obtained from Treasury
and,

— trace appropriation, fund, receipt, and BCA balances on these account ledgers to
the balances in the agency's general ledger;

— verify that the balances reported by Treasury have been recorded in the agency's
General Ledger; and :

— verify that any differences between the balances reported on FMS Form 6654 and
FMS Form 6655 and in the agency's general ledger were properly reconciled by the
agency and verify that the necessary accrual adjustments were recorded.

Unreconciled Differences at ~

To determine the extent of unreconciled differences at year-end and the impact on the
agency Fund Balances with Treasury accounts, perform the following procedures:

20 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE II ENCLOSURE II
A UID.

Because most assets, liabilities, revenues, and expenses stem from or result in cash
transactions, misstatements in the receipt or disbursement data affect the accuracy of
various U.S. government financial reports, such as the Monthly Treasury Statement,
individual federal agencies' financial statements, the consolidated governmentwide
financial statements, and agency budget execution reports. Therefore, audits of agencies’
financial statements should determine if the agencies are properly reporting cash
transactions to Treasury and properly reconciling Fund Balances with Treasury accounts
to ensure the accuracy of the transactions recorded in their accounting records and
reported to Treasury.

Based on our previous audits and the preliminary results of our work on the overall
reconciliation process, we have identified objectives and approaches that we believe
should be included in an audit plan for testing individual agency reconciliation processes.
We believe that addressing the following objectives will enable auditors to gather
sufficient evidence to test an agency's Fund Balances with Treasury accounts. Therefore,
we suggest that auditors determine whether agencies adequately

- prepare the monthly Statements of Transactions (Standard Form 224) or Statements of
Accountability (Standard Form 1218 or 1219) using the same detailed accounting
records of collection and disbursement transactions that are used to prepare the
agencies' financial statements;

~ research and resolve the underlying causes of differences reported by Treasury on the
"Statement of Differences" (FMS Form 6652) each month and make proper
adjustments to monthly Treasury reports and agency accounting records;

— research the cause and make proper adjustments for the unreconciled differences
older than 6 months which were transferred to BCAs and reported by Treasury on
"Adjustment of Agency Deposit/Debit Vouchers for Adjustment of Agency
Undistributed Differences Report" (FMS Form 5901);

~ determine that pre-closing fund balances reported by Treasury on the Year-End
Closing Statement (FMS Form 2108) agree with their detailed accounting records; and

— monitor their BCA activity, including maintaining records of unreconciled differences,
maintaining records that age the differences charged to the BCA, and developing plans
to clear the account.

In addition to the above objectives, we believe agency auditors should establish audit
approaches which will ensure that they (1) determine the magnitude of the agencies

14 GAO/AIMD-97-104R Reconciliation of Fund Balances


B-275951

The Honorable Valerie Lau
Inspector General
Department of the Treasury

William T. Merriman

Deputy Inspector General
Department of Veterans Affairs

5 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE II ENCLOSURE II

— Obtain and review unreconciled Statement of Differences (FMS forms 6652) and BCA
differences (FMS Form 6658) at year-end (Note: Differences charged to the BCAs are
reported on the monthly Undisbursed Appropriation Account Ledgers—FMS Form 6653,
accounts F3878 and F3879), and .

— identify differences that were resolved subsequent to year-end and verify that the
appropriate accrual adjustments were made to the agency Fund Balances with
Treasury accounts and properly reported to Treasury as of the end of the fiscal
year;

— assess the materiality of unreconciled Statements of Differences and BCA amounts
outstanding at year-end (at absolute value) and determine the impact on the ending
Fund Balances with Treasury and other account balances; and
— propose appropriate adjustments, if necessary.
-End
To determine that pre-closing balances reported by Treasury on the Year-End Closing
Statement (FMS Form 2108) agree to the amounts recorded in the agency Fund Balances
with Treasury accounts, perform the following procedures:

— Trace appropriation and fund balances reported by Treasury on FMS Form 2108 to
agency general ledger account balances at year-end.

inancial it Disclo:
To determine whether agencies are properly disclosing Fund Balances with Treasury
accounts in accordance with applicable accounting standards and OMB reporting
requirements, perform the following procedures:

~- Verify that material unreconciled differences and Budget Clearing Account differences
are disclosed and explained in the notes. to the agency's financial statements.

~— Verify that unreconciled differences that were written off by the agency during the
fiscal year are disclosed in the notes to the financial statements.

21 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE II ENCLOSURE II
I. TESTING
Beginni ropriation id salanc:

To verify that beginning appropriation and fund balances accounts are recorded properly
in the general ledger, perform the following procedures:

— For the first year of an appropriation, trace amounts reported on appropriation
warrants (FMS 6200) received from Treasury to beginning appropriation balances
recorded in the General Ledger Fund Balances with Treasury appropriation accounts.
Also, determine that the warrant is valid by tracing it to the appropriation legislation
that supports it. (Note: Generally warrants are only issued in the first year of the
appropriation.)

- For other than the first year of an appropriation, trace beginning balances recorded in
the general ledger Fund Balances with Treasury accounts to audited ending balances
of the prior fiscal year.

M eporti

To determine the adequacy of the controls over collection, disbursement, and adjustment
amounts reported monthly to Treasury by agency ALCs, perform the following
procedures:

- Using the universe of Statements of Transactions obtained in Section II -
Documentation, select a sample of Statements of Transactions (Standard Form 224) or
Statements of Accountability/Transactions (Standard Form 1219/1220, or 1218/1221) for
the fiscal year being audited and perform the following procedures for each sample
item.

Trace monthly collection and disbursement amounts reported on these statements
to amounts recorded in the agency's general ledger.

— Trace any prior period adjustment amounts reported on these statements to
supporting documentation and verify the validity of the adjustment.

~ Trace Budget Clearing Account (BCA) adjustment amounts (identified by account
symbols F3878 & F3879) to supporting documentation and verify the validity of the

adjustment..

~ Trace Check Issued Discrepancy adjustments, if applicable, to supporting
documentation and verify the validity of the adjustment. (Note: Applicable only to

18 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE I

Table 1 (continued)

Reports.submitted by
agencies

Verification.

Reports/data
submitted by other
sources

of Non-Treasury Disbursing

B. VERIFICATION OF DISBURSEMENT DATA

Treasury FMS action Resulting reports to

Office (NTDO) Agency Disbursements

ENCLOSURE I

‘agencies

Verification of Interagency Transactions:

NTDO agencies report
net interagency
transactions on SF
1218/1221 or SF
1219/1220

On-Line Payment and
Collection system data

FMS compares monthly
disbursement totals
reported on agency SF
1218/1221s, or SF
1219/1220s to
disbursement data in
OPAC

FMS contacts agencies
immediately by
telephone for large
differences (over $5
million) in an attempt
to clear these items

quickly

FMS charges agency
BCAs for differences

Monthly Statements of
Differences (FMS 6652) |
for each month until
the difference is
cleared or transferred
to the BCA

Monthly detailed
support listings of
transactions reported
by OPAC

3-month letters
notifying agencies of
outstanding differences
greater than $1 million

5-month letters

outstanding after 6 notifying agencies of
months (except those outstanding differences
greater than $5 million) | greater than $100,000.
Notifications of
individual charges to
agency BCAs (FMS
5901)
Monthly appropriation
and receipt account
ledgers (FMS 6653 and
6655) showing account
activity and net
balances for each
appropriation, fund,
receipt, and budget
clearing account
Verification of Checks Paid:
NTDOs submit tapes Federal Reserve Banks | Check Payment and Advice of Check Issue
detailing checks issued | submit tapes detailing Reconciliation (CP&R): | Discrepancies (FMS
and Month-end Checks | checks paid FMS performs a check 5206)
Issued Summary by check comparison of
reports (SF 1179) checks issued to checks
paid by the banking
system

10

GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE I ENCLOSURE I

Form 224 or Standard Form 1218 or 1219. Treasury sends a reminder letter to an agency
if it has not reconciled a difference of over $1 million within 3 months. Treasury also
sends a reminder letter if an agency has not reconciled a difference of over $100,000

within 5 months.

In most cases, if agencies still have not reconciled differences within 6 months, Treasury
transfers the differences to clearing accounts—called Budget Clearing Accounts (BCAs).”
After this transfer, Treasury reports the net BCA balances to the agencies monthly on an
Undisbursed Appropriation Account Ledger (FMS Form 6653), but no longer reports
individual differences outstanding, or sends reminder letters to the agencies. Treasury's
procedures differ when it identifies individual differences of over $5 million (called "large
differences”). Treasury attempts to clear these large differences quickly by contacting the
agency by telephone. However, if an agency still has a large difference outstanding after
6 months, Treasury continues to report the difference to the agency on a monthly
"Statement of Differences" report and does not transfer it to the agency's BCA.

Table 1 identifies the steps Treasury takes to verify collection and disbursement data
reported by agencies and the reports Treasury sends to agencies on the results of its
verification activities.

2BCAs are one of several clearing accounts used to hold collections and disbursements
until they can be properly classified in applicable receipt and expenditure budget
accounts. The BCA for collections is F3878, and the BCA for disbursements is F3879.

7 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE I ENCLOSURE I

'Y PROCESSES AND PROCEDURES USED IN RECONCILIATIONS
F FUND B. CES EASURY_ ACCOUN'

Most federal agencies use the central banking services provided by Treasury's Financial
Management Service (FMS) and do not maintain cash in separate bank accounts.’ Each
agency records its budget spending authority in an-asset account within its own general
ledger called Fund Balances with Treasury, and increases or decreases this account
balance during the year as FMS collects or disburses money on the agency's behalf. Also,
some agencies have authority to disburse funds on their own behalf. These agencies still
must maintain a Fund Balances with Treasury account and follow Treasury's reporting
and reconciling requirements.

Even though Treasury serves as the central banker for most federal agencies, unlike
commercial banking institutions, it does not maintain independent accounting records of
each agency's Fund Balances with Treasury accounts. Instead, Treasury relies on
monthly data reported by agencies for its record of agencies' Fund Balances with
Treasury account balances.

Treasury policies require each agency to either submit monthly Statements of
Transactions (Standard Form 224) or Statements of Accountability (Standard Form 1218
or 1219) to report its collection and disbursement activity along with other financial
information. Also, Treasury requires each agency to submit a Year-End Closing Statement
(FMS Form 2108) showing the funds unobligated under each of its appropriation and fund
accounts. However, these statements do not reflect unreconciled differences. Thus, the
accuracy of the appropriation and fund account balances reported on these year-end
statements depends on whether an agency has properly reconciled differences reported
by Treasury during the year.

Treasury has designed various internal controls to ensure the reliability of financial data
reported by agencies. For instance, Treasury compares monthly cash receipts and
disbursements transactions reported by agencies to those reported by other sources of
financial data, such as the Federal Reserve, commercial banks, and FMS Regional Finance
Centers. When Treasury identifies discrepancies, it notifies agencies in a monthly
"Statement of Differences" report (FMS Form 6652).

Agencies are responsible for investigating the differences shown in the monthly
"Statement of Differences" reports and reporting to Treasury any necessary adjustments to
their Fund Balances with Treasury accounts. Agencies report adjustments on Standard

For ease of discussion, we use the generic term agency in the enclosures to denote
governmental entities.

6 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE II ENCLOSURE II

agencies that report collections and disbursements on Statements of
Accountability/Transactions (Standard Form 1219/1220, or 1218/1221).

Re iliation of Balances wi eas

To determine that the agency is properly reconciling its Fund Balances with Treasury
accounts, perform the following procedures:

— From the universe of Statement of Differences (FMS Form 6652) obtained in Section I
- Documentation, select a sample and obtain the documentation supporting the
reconciliations for each sample item, and,

— review the supporting documentation to determine if differences were adequately
researched and resolved (i.e. underlying causes at transaction level were
determined); and

— for adjustments, if any, resulting from the reconciliation, (a) trace the total amount
of adjustments to the subsequent month Treasury reports (Standard Form 224,
1219/1220, or 1218/1221) to verify that the adjustments were properly reported, and
(b) trace adjustments to the agency general ledger accounts to verify that the
adjustments were properly recorded.

— For agencies which use Statements of Accountability/Transactions (Standard Form
1219/1220, or 1218/1221), select a sample of Advice of Check Issued Discrepancy
reports from the universe obtained in Section II - Documentation, and obtain
documentation supporting the reconciliation for each sample item, and,

— review the supporting documentation to determine if differences were adequately
researched and resolved (i.e. underlying causes at transaction level were
determined); and

— for any adjustments resulting from the reconciliation, (a) trace the adjustments to
the subsequent month Treasury reports (Standard Form 224, 1219/1220, or
1218/1221) to verify that the adjustments were properly reported, and (b) trace
adjustments to the agency general ledger accounts to verify that the adjustments
were properly recorded.

Unreconciled Differences

To determine whether agencies are adequately tracking and monitoring unreconciled
differences reported by Treasury, perform the following procedures:

19 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE I

Table 1 (continued)

Reports submitted by
agencies

B. VERIFICATION OF DISBURSEMENT DATA

Reports/data
submitted by other.
sources

Treasury FMS action

Verification of Treasury Disbursement Office (TDO) Agency Disbursements

ENCLOSURE I

Resulting reports to
agencies

Agencies for which
FMS Regional Finance
Centers (RFCs)
disburse money submit
monthly Statements of
Transactions (SF 224)

FMS RFC Agency
Confirmation Reports
(These reports include
checks issued and
electronic
disbursements
accomplished on behalf
of the agency)

Agencies for which
FMS RFCs disburse
money report net
interagency
transactions monthly
on SF 224

On-Line Payment and
Collection system data
(OPAC is used by
agencies to accomplish
interagency
transactions)

Agencies which
disburse money via
Letter of Credit (LOC)
submit separate
monthly Statements of
Transactions (SF 224)

Richmond Federal
Reserve Bank (RFRB)
daily transcripts
detailing LOC "draw-
downs" .

FMS compares monthly
disbursement totals
reported on agency SF
224s to disbursement
data on RFC reports,
OPAC, or RFRB
transcripts

FMS contacts agencies
immediately by
telephone for large
differences (over $5
million) in an attempt
to clear these items
quickly

FMS charges agency
BCAs for differences
outstanding after 6
months (except those
greater than $5 million)

Monthly Statements of
Differences (FMS 6652)
for each month until
the difference is
cleared or transferred
to the BCA

Monthly detailed
support listings of
transactions reported
by RFCs, OPAC, and
FRB

3-month letters
notifying agencies of
outstanding differences
greater than $1 million

5-month letters
notifying agencies of
outstanding differences
greater than $100,000.

Notifications of
individual charges to
agency BCAs (FMS
5901)

Monthly appropriation
and receipt account
ledgers (FMS 6653 and
6655) showing account
activity and net
balances for each
appropriation, fund,
receipt, and budget
clearing account

__|

GAO/AIMD-97-104R Reconciliation of Fund Balances


GAO

United States
General Accounting Office
Washington, D.C. 20548

Accounting and Information
Management Division

B-275951

June 24, 1997

Inspectors General

Subject: Financial Audit: Reconciliation of Fund Balances with Treasury

As you know, under the Government Management Reform Act of 1994 (Public
Law 103-356), GAO will audit, starting with fiscal year 1997, the Consolidated
Financial Statements of the U.S. Government prepared by the Department of the
Treasury. The monthly process used by federal departments and agencies, and
Treasury, in reconciling the Fund Balances with Treasury accounts is a key
internal control over federal receipts and disbursements. As such, a major
focus of our audit will be to evaluate the overall effectiveness of this
reconciliation process.

The purpose of this letter is to (1) provide information on key Treasury and
agency processes and procedures for reconciliations of Fund Balances with
Treasury accounts and alert you to our concems and certain issues related to
these reconciliations that have emerged in our work to date (see enclosure I),
and (2) provide guidance and suggested audit procedures for Fund Balances
with Treasury accounts to assist you in developing audit plans for your audits
of fiscal year 1997 financial statements. (See enclosure II.)

We worked with the Federal Audit Executive Council and representatives of the
Council's Financial Statement Network Group, as well as Treasury's Financial
Management Service, to obtain their input in developing the two enclosures.

We appreciate the assistance these groups provided.

We expect that other audit issues will surface during the performance of our
audit of the Consolidated Financial Statements of the U.S. Government. As they
do, we plan to follow the same approach as we used for this issue for obtaining
input from the Inspector General community before finalizing any material.

We are sending copies of this letter to the Office of Management and Budget
and the Chief Financial Officers of the 24 federal executive agencies covered by
the Chief Financial Officers Act of 1990. If you have any questions regarding
the information in this letter, please call me at (202) 512-2600, or Gary Engel,

GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE I ENCLOSURE I

CONCERNS AND ISSUES RELATED TO RECONCILIATION OF
FUND BALANCES WITH TREASURY ACCOUNTS*

Agencies generally are not reconciling their Fund Balances with Treasury accounts in a
timely manner. For instance, as of March 31, 1997, Treasury reports showed that about
64 percent of the federal entities that report financial data to Treasury had unreconciled
differences in their collection and disbursement BCAs.° This indicates that agencies had
not implemented effective internal controls to ensure timely reconciliation of differences
because they had not reconciled the individual differences of less than $5 million
identified by Treasury at least 6 months earlier.

BCA activity is an indicator of timeliness problems, but it does not reflect what may be a
larger problem. For March 1997, federal agencies had billions of dollars of individual
differences greater than $5 million reported on Statements of Differences to be
reconciled. Unless agencies implement effective internal controls to reconcile on a
month-to-month basis, there is an increased risk that these large differences will not be
reconciled prior to the required reporting date for departmentwide financial statements.
As such, these year-end statements may not be accurate. Also, agency managers run the
risk of over spending or over obligating if they do not have current and accurate
information on amounts in their Fund Balances with Treasury accounts.

Treasury has acknowledged the problem about untimely agency reconciliations and acted
to encourage agencies to resolve their clearing accounts. Specifically, during the months
of July through September 1996, Treasury sent letters to agencies notifying them of the
balances in their BCAs and clearing accounts containing large differences and asked them
to develop plans for clearing these balances.° It is too early to know what impact these
letters will have on future timeliness of reconciliations, but-it is important for agency
auditors to monitor the results of such efforts.

‘The results of the analyses included in enclosures I and II were based on data we
obtained from FMS on agency BCA balances and large differences. Our analyses relied on
the FMS data and we did not attempt to verify the accuracy of the data.

>The agency reporting entities we refer to in this enclosure represent Treasury's groupings
of Agency Location Codes (ALCs). Because there are over 2,000 ALCs, Treasury combines
agency ALCs into broader reporting groups for ease of reporting. As of March 31, 1997,
Treasury reports identified 190 of these groups.

5FMS sent these letters to a total of 49 Chief Financial Officers, Deputy Chief Financial
Officers, or other high-level agency officials in order to achieve wide coverage of the
numerous federal entities that report financial data to Treasury.

12 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE I

Table 1 (continued)

Reports submitted by

Verification of Checks Issued:

)
B. VERIFICATION OF DISBURSEMENT DATA

Reports/data.
submitted by other
sources

‘Treasury FMS action

ENCLOSURE I

Resulting reports to
agencies

NTDOs submit monthly
Statements of
Accountability/Trans-
actions (SF 1218/1221
or SF 1219/1220)

SF 1179, Month-end
Checks Issued
Summary report, and
FMS form 5206, Advice
of Check Issue
Discrepancies, from the
CP&R system

FMS compares SF 1179
data (plus any
adjustments made on
FMS 5206 in CP&R's
verification of checks

paid) to the agency data

reported on SF
1218/1221 or SF
1219/1220

C. YEAR-END TREASURY REPORTS TO AGENCIES

Reports submitted by | ‘Reports/data: Treasury'FMS action. | Resulting reports to

submitted by other
sources

agencies

Agencies report
collections and
disbursements monthly
on Statements of
Transactions (SF 224)
or Statements of
Accountability/Transact
ions (SF 1218/1221 or
SF 1219/1220)

ll

Does not apply

Treasury prepares

and FMS records
agencies’ spending
authority by
appropriation and fund
account in its central
accounting system

FMS updates
appropriation and fund

account balances based

on collections,
disbursements, and

adjustments reported by
agencies on monthly SF

224s, SF 1218/1221s,
and SF 1219/1220

appropriation warrants,

4-,6-, & &month
letters notifying
agencies of any
outstanding
discrepancies over $50

agencies

Appropriation Warrant
MS 6200)

Year-end Closing
Statement (FMS 2108 -
Column 2) showing
pre-closing unexpended.
balances in agency’
appropriation and fund
accounts

Note: FMS 2108
balances do not reflect
unreconciled
differences, thus their
accuracy depends on
whether an agency has
properly reconciled

differences reported by
Treasury that year

GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE I

Table 1:
Accounts®

A, VERIFICATION OF COLLECTION DATA

IR Reports submitted by. Reports/data Treasury ] FMS ‘action | | Resulting
agencies submitted by:other reports to agencies
‘sources:

| Agencies report
collections monthly on
Statements of
Transactions (SF 224)
or Statements of
Accountability/Trans-
actions (SF 1218/1221
or SF 1219/1220)

Note: For agencies
which report on SF
1218 or 1219, electronic
disbursements are
netted against
collections

to Veri a

CA$HLINK system data
(CA$HLINK is used by
the banking system to
report collections
received from and on
behalf of government
agencies)

Note: In CASHLINK,
electronic
disbursements are
reported as "negative.
collections", or debit

vouchers

FMS compares monthly
collection totals
reported on agency SF
224s, SF 1218/1221s, or
SF 1219/1220s tc to
transaction

available in Snunx

FMS contacts agencies
by telephone for large
differences (over $5
million) in an attempt
to clear these items
quickly

FMS charges agency
Budget Clearing
Accounts (BCAs) for
any differences
outstanding after 6
months (except those
greater than $5 million

or less than $50)

ENCLOSURE I

easi

Monthly Statements of
Differences (FMS 6652)
for each month until
the difference is
cleared or transferred
to the BCA

Monthly detailed

support list of

transactions reported
HLINK

in CAS)

3-month letters
notifying agencies of
outstanding differences
greater than $1 million

5-month letters
notifying agencies of
outstanding differences
greater than $100,000

Notifications of
individual charges to
agency BCAs (FMS
5901)

Monthly appropriation
and receipt account
ledgers (FMS 6653 and
6655) showing the
account activity and
net balances for each
month's appropriation,
fund, receipt, and
budget clearing
account

‘The primary source for the information shown in Table 1 is the Treasury Financial
Manual, sections 2-3100, 2-3300, 2-3900, 24200, 4-6000, 6-2000, and 6-4000.

8

GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE III ENCLOSURE II

OR RS TO PORT
Al NTING AND INFOR: IN MANAGEMENT DIVISION, WASHINGTON, D.C.

Christine A. Robertson, Assistant Director, Governmentwide Audits

ATLANTA REGIONAL OFFICE

Suzanne Murphy, Auditor-in-Charge

Jerry K. Marvin, Senior Auditor

Linda S. Standau, Senior Evaluator

Carolyn McClary-Voltz, Auditor

Patrick H. Sevon, Computer Programmer Analyst

(919015)

22 GAO/AIMD-97-104R Reconciliation of Fund Balances


B-275951

The Honorable Wilma A. Lewis
Inspector General
Department of the Interior

The Honorable Michael R. Bromwich
Inspector General
Department of Justice

The Honorable Charles C. Masten
Inspector General
Department of Labor

The Honorable Roberta L. Gross

Inspector General
National Aeronautics and Space Administration

Linda G. Sundro
Inspector General
Nationa) Science Foundation

The Honorable Hubert T. Bell
Inspector General
Nuclear Regulatory Commission

The Honorable Patrick E. McFarland
Inspector General
Office of Personnel Management

The Honorable James F. Hoobler
Inspector General
Small Business Administration

The Honorable David C. Williams
Inspector General
Social Security Administration

The Honorable Jacquelyn Williams-Bridgers
Inspector General
Department of State

The Honorable Kenneth M. Mead

Inspector General
Department of Transportation

4 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE II ENCLOSURE II

unreconciled differences in absolute rather than net values in order to determine the
effect of unreconciled differences on the agency's financial statements, and (2) assess the
validity of support for adjustments that agencies make to their Fund Balances with
Treasury accounts.

When assessing the effect of unreconciled differences on Fund Balances with Treasury
accounts, auditors should determine the magnitude of unreconciled differences by
analyzing the "Statement of Differences" and BCAs in terms of their aggregate absolute
values. Treasury's summary reports of agency Statement of Differences and BCAs show
net amounts rolled up for all the separate Agency Location Codes, which can be
numerous for large agencies. The roll-up and netting of the charges and credits can
significantly understate the total differences in these accounts and the resulting potential
misstatements of agency Fund Balances with Treasury accounts. For example, the
governmentwide BCA activity, reported for the 12 months ending March 31, 1997,
calculated in aggregate absolute values was about 20 times greater than the reported net
values.

To assess the validity of the adjustments agencies make to reconcile the Fund Balances
with Treasury accounts, we believe auditors must sufficiently test adjustments by
examining the underlying documents supporting the adjustments. Each unreconciled
difference or unsupported adjustment represents a potential misstatement of collection or
disbursement data, which, as previously mentioned, could materially affect the accuracy
of various U.S. government financial reports, individual federal agencies' financial
statements, and the consolidated governmentwide financial statements.

In conjunction with the suggested objectives and approaches presented above, following
are suggested detailed audit procedures for agency auditors to consider in planning their
audits of agency reconciliations of Fund Balances with Treasury accounts.

SUGGESTED AUDIT PROCEDURES FOR
FUND BALANCES WITH TREASURY ACCOUNTS

The overall objectives of testing Fund Balances with Treasury accounts are to determine
whether (1) agency internal controls are adequate to ensure that monthly collection and
disbursement activity is reported accurately to the U.S. Treasury Financial Management
Service (FMS), (2) agency Fund Balances with Treasury accounts are materially correct,
and (3) agencies are complying with existing Treasury and Office of Management and
Budget (OMB) requirements related to Fund Balances with Treasury accounts.

The following are suggested procedures for testing the Fund Balances with Treasury

accounts. Auditor's should not consider these procedures all inclusive. Specifically,
these procedures do not include tests of Cash on Hand/Imprest, Undeposited Receipts,

15 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE I ENCLOSURE II

Copy of the appropriation legislation and U.S. Treasury Appropriation Warrants (FMS
Form 6200) for the fiscal year being audited.

List of active Agency Locations Codes (ALCs) used by the agency.

Agency monthly Statements of Transactions (Standard Form 224) or Statements of
Accountability/Transactions (Standard Form 1219/1220 or 1218/1221) for the fiscal year
for each ALC.

Statements of Differences (FMS Form 6652) for each ALC for each month of the fiscal
year being audited. (Note: To obtain the universe of Statement of Differences, request
the initial Statements of Differences issued by Treasury. Treasury issues monthly
Statements of Differences for each accounting month (when differences are identified)
and continues to send a statement for that month until the difference is cleared or
transferred to the BCA. In order to identify the universe of initial differences reported
by Treasury for each month of the fiscal year, obtain the Statement of Differences
reports that have the same accounting date and audit date.)

Advice of Check Issued Discrepancy reports (FMS Form 5206) for each ALC for each
month of the fiscal year being audited. (Note: This step applies only for agencies that
submit Statements of Accountability/Transactions, Standard Form 1219/1220, or

1218/1221.)

Undisbursed Appropriation Account Ledgers (FMS Form 6653) for the Budget Clearing
Account (accounts F3878 & F3879) for each month of the fiscal year.

Year-end Closing Statement (FMS Form 2108).

Obtain the following document from the U.S. Treasury Financial Management Service:

17

Undisbursed Appropriation Account Trial Balance (FMS Form 6654) and Receipt
Account Trial Balance (FMS Form 6655) for the last month of the fiscal year. (Note:
The number of Undisbursed Appropriation and Receipt Account Ledgers will vary by
agency. In some cases, Treasury reports at the "sub account" level, which is a roll-up
of ALCs. An agency may be divided into more than one "sub account" and receive
several account ledgers.)

GAO/AIMD-97-104R Reconciliation of Fund Balances


B-275951

ADDRESSEES

The Honorable Jeffrey Rush, Jr.
Inspector General
Agency for International Development

The Honorable Roger C. Viadero
Inspector General
Department of Agriculture

The Honorable Frank D. DeGeorge
Inspector General
Department of Commerce

The Honorable Eleanor Hill
Inspector General
Department of Defense

The Honorable Thomas R. Bloom
Inspector General
Department of Education

The Honorable John C. Layton
Inspector General
Department of Energy

Nikki L. Tinsley
Acting Inspector General
Environmental Protection Agency

The Honorable George J. Opfer
Inspector General
Federal Emergency Management Agency

The Honorable William R. Barton
Inspector General
General Services Administration

The Honorable June Gibbs Brown
Inspector General
Department of Health and Human Services

The Honorable Susan Gaffney

Inspector General
Department of Housing and Urban Development

3 GAO/AIMD-97-104R Reconciliation of Fund Balances


B-275951

Associate Director, at (202) 512-8815. Other major contributors are listed in
enclosure II.

Sincerely yours,

Gene L. Dodaro
Assistant Comptroller General

Enclosures

2 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE I ENCLOSURE I

Also, to ensure the accuracy of its financial statements, an agency must thoroughly
research the cause of differences reported by Treasury. Only after adequately researching
its accounting records and reports can an agency determine the cause of the problem and
make the proper adjustment to its Fund Balances with Treasury accounts, or advise
Treasury to correct its records. Our previous audits of individual agency financial
statements have often identified instances, involving billions of dollars, where agencies
were adjusting their accounts to reflect the amounts reported by Treasury without
adequately researching the causes of the differences. Accordingly, there was no
assurance that the agency financial records reflected the correct balances. Unless
agencies implement effective internal controls to ensure that differences are being timely
and thoroughly researched, there is a risk that agencies will make unsupported
adjustments.

13 GAO/AIMD-97-104R Reconciliation of Fund Balances


ENCLOSURE II ENCLOSURE II

Other Cash on Deposit accounts, and other agency related cash accounts that may be
affected. It should also be noted that year- end confirmation of Fund Balances with
Treasury accounts is not included as a suggested procedure. For these accounts,
Treasury confirmations do not provide independent audit evidence because Treasury does
not maintain independent accounting records of each agency's Fund Balances with
Treasury accounts.

These guidelines are intended to provide the auditor with a framework for designing
comprehensive tests of Fund Balances with Treasury accounts. Auditors should use
professional judgment in designing work programs for their particular agencies after
considering the planned levels of materiality for the audit and the auditor's judgment of
the most effective and efficient method to achieve the specific audit objectives listed
above.

Procedures should be performed, when possible, in conjunction with other audit tests.
For example, many procedures may be performed in conjunction with agency cash
collections and cash disbursement tests: Others may be included as part of compliance
testing. Although a sampling audit approach is suggested, the method of sampling and
the sample size used should be determined based on the auditor's judgment.

L_BACKGROUND INFORMATION

To obtain an understanding of agency accounting and reporting requirements for the Fund
Balances with Treasury accounts, obtain and read the following documents:

— Treasury Financial Manual, Volume I.

— OMB/TFM Bulletin 96-03, Year-End Closing (and fiscal year 1997 update).

OMB Bulletin 94-01, Form and Content of Agency Financial Statements.

OMB Bulletin 97-01, Formats and Instructions for the Form and Content of Agency
Financial Statements (effective for FY 1998).

1

Agency accounting policies and procedures for the Fund Balances with Treasury
accounts.

IL_DO TIO)

To obtain the documents and financial reports necessary for testing the Fund Balances
with Treasury accounts, request the following documents from the agency:

16 GAO/AIMD-97-104R Reconciliation of Fund Balances