United States General Accounting Office

GAO Testimony

Before the Subcommittee on Government Management,

Information and Technology, Committee on Government

Reform and Oversight, House of Representatives

For Release on Delivery

Expected at

11 a.m.

Thursday,

July 9, 1998

FOREST SERVICE

Financial Management

Issues

Statement of Linda M. Calbom

Director, Resources, Community, and Economic

Development Accounting and Financial Management

Issues

Accounting and Information Management Division

GAO/T-AIMD-98-231

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the results of our work examining

weaknesses in the Forest Service’s financial accounting and reporting

systems reported by the United States Department of Agriculture’s (USDA)

Office of Inspector General (IG). The Forest Service has been plagued by

continuing financial management problems as evidenced by the IG’s

adverse opinion on the Forest Service’s fiscal year 1995 financial

statements. Due to the severity of these problems, the Forest Service did

not prepare financial statements for fiscal year 1996, but chose instead to

focus its efforts on problem resolution. Financial statements were

prepared for fiscal year 1997, and the audit of those statements is near

completion; as of July 1, 1998, the USDA IG was finalizing its report. Today, I

will focus primarily on the fiscal year 1995 audit results, which disclosed a

number of serious weaknesses, most of which still exist today. I will also

briefly discuss the Forest Service’s plans to address these weaknesses.

While some progress has been made, many hurdles still exist before the

Forest Service will be able to achieve financial accountability.

History of Financial

Shortcomings

In July 1996, the USDA IG issued an adverse audit opinion, thereby

concluding that the Forest Service’s financial statements for fiscal year

1995 were unreliable overall. The IG’s findings represented a continuing

pattern of unfavorable conclusions about the Forest Service’s financial

statements. For fiscal year 1992, the IG also issued an adverse opinion due

to the overall unreliability of the statements. For fiscal years 1993 and

1994, the IG issued qualified audit opinions and reported that the Forest

Service’s financial statements were unreliable due to pervasive errors in

the field level data supporting the land, buildings, equipment, accounts

receivable, and accounts payable accounts. Thus, many of the

shortcomings in the Forest Service’s accounting and financial data and

information systems that continue to plague the agency today are largely

attributable to long-standing problems.

Among the more serious shortcomings cited by the IG in its report on the

fiscal year 1995 financial statements were that the Forest Service

• had significant reporting errors in its financial statements and the records

that support those statements;

• could not demonstrate that its policies and procedures adequately

safeguarded assets against unauthorized acquisition, use, or disposition;

and

Page 1 GAO/T-AIMD-98-231
• lacked financial systems that could accurately track revenues and costs.

These shortcomings are discussed in greater detail below.

Errors in Financial

Statements

The IG’s report on the fiscal year 1995 financial statements and the notes to

the financial statements identified numerous financial reporting errors.

For example:

• An estimated $45 million due to the Forest Service from other federal

agencies (accounts receivable) for reimbursable services provided was

double counted on the Forest Service’s financial records. This type of

error called into question the validity of receivables and reimbursement

activity reported by the Forest Service and potentially impaired

meaningful analysis of such activity. Additionally, since these data were

drawn from the same database used to produce budgetary information,

misstatement of reimbursable services could have resulted in

misstatement of budgetary resources available to carry out program

activities.

• The Forest Service did not have a system that allowed it to accurately

track amounts it owed to others (accounts payable) for contracted

services. While the system could determine the amount the Forest Service

obligated, it could not readily determine the percentage of work

completed or the amount owed to the contractor. As a result, Forest

Service managers had to resort to estimating these amounts based on

statistical sampling and testing of year-end obligations incurred. Based on

this testing, the Forest Service concluded that accounts payable were

understated by approximately $38 million, and it adjusted its records

accordingly. While the Forest Service’s weaknesses in accounting for

payables were not indicative of whether the Forest Service overobligated

funds, they precluded the Forest Service from readily knowing costs it had

incurred and amounts it owed on projects at any given point.

These errors in basic financial records demonstrated that the Forest

Service was not always able to determine the amount of funds spent,

reimbursements it should have received, or the validity of recorded assets

and liabilities. Some of these financial reporting errors also indicated

potential errors in budgetary data, particularly with regard to improperly

reported reimbursements, which directly affect the amount of budgetary

resources available. These errors also hampered Forest Service managers’

ability to accurately report program performance measures as well as

monitor income and spending levels for various programs and activities.

Page 2 GAO/T-AIMD-98-231
Lack of Policies and

Procedures to Safeguard

Assets

The IG report disclosed that the $7.8 billion in property, plant, and

equipment reported by the Forest Service was erroneous because records

for these assets were not consistently prepared, regularly updated, or

supported by adequate documentation. Therefore, the correct quantities

and costs of these assets were not determinable. Without systems in place

to accurately track these assets, the Congress had no assurance that

Forest Service requests for additional funds to construct new roads and

buildings and acquire new equipment were warranted.

For example, the Forest Service lacked a reliable system for tracking its

reported 378,000 miles of roads,1

 which we determined exceeds the

mileage of the national highway system. The Forest Service started

performing inventory counts in fiscal year 1995 in an effort to capture the

amount invested in roads it owns. These initial counts identified

$1.3 billion of roads in one region alone that had not been previously

recorded. At that time, Forest Service officials estimated that this process

would take several years to complete nationwide.

The IG also reported inadequate safeguarding policies and procedures for

equipment. Equipment is susceptible to theft or misplacement because

generally it can readily be moved from one location to another. The lack of

adequate procedures to account for equipment substantially increased the

risk that items could be stolen without detection or be misplaced and,

consequently, not available when needed. Also, the Forest Service’s

inability to identify and locate certain equipment it owned could have

hampered activities of the Forest Service that utilized that equipment. This

situation could also have resulted in the Forest Service requesting

additional appropriations to replace stolen or misplaced equipment.

Lack of Systems to Track

Revenues and Costs

The IG also concluded that the Forest Service did not have adequate

systems to track revenues and total program and operating costs

agencywide. For example, the IG reported that the Forest Service could not

calculate the costs of large fires without manually adjusting the accounting

systems. Additionally, our prior work disclosed the Forest Service’s

inability to capture the revenues and related costs of various programs and

activities.2

 This capability is especially important because the Forest

Service should have accurate historical revenue and cost data that can be

used as the basis for determining the amount of money to request from the

1

The miles of roads are reported in the Forest Service’s 1995 Report of the Forest Service.

2

Letter dated June 19, 1996, from GAO to the Chairmen of the House Committee on the Budget and the

House Committee on Resources.

Page 3 GAO/T-AIMD-98-231
Congress to fund future projects and operations. The ability to track costs

and revenue is also important for the Forest Service given its (1) relatively

unique role in collecting revenues from timber sales and fees from

activities, such as grazing and national forest use, and (2) authority and

flexibility in using a portion of those revenues to carry out certain

missions.

Corrective Actions Forest Service officials determined that planned corrective actions could

not be completed in time to improve the Forest Service’s fiscal year 1996

financial data. As a result, the agency did not prepare financial statements

for fiscal year 1996. Instead, the Forest Service, USDA’s Office of the Chief

Financial Officer , and the IG agreed to work together to address the

problems identified in the fiscal year 1995 IG audit report.

The Forest Service’s goal was to correct some of the deficiencies during

fiscal year 1997 and to achieve financial accountability by the end of fiscal

year 1999. In August 1997, we reported3

 that it was doubtful that the Forest

Service could achieve financial accountability by the end of fiscal year

1999 if management and staff commitment wavered, planned tasks were

not accomplished, and sufficient resources were not provided. Our most

recent report in February 19984

 concluded that while corrective measures

were under way, few of the problems reported by the IG in the fiscal year

1995 audit report had been fully resolved. Thus, we reported that it was

not yet clear whether the Forest Service would be successful in its efforts

to resolve these problems by the end of fiscal year 1999.

The IG recently concluded its audit of the Forest Service’s fiscal year 1997

financial statements and was preparing its report as of July 1, 1998.

However, we understand that because of the continuing financial

accounting and reporting shortcomings, the IG will issue an unfavorable

report on the fiscal year 1997 statements.

Mr. Chairman, this concludes my statement. I would be glad to answer any

questions that you or the Members of the Subcommittee may have.

(913830)

3

Financial Management: Forest Service’s Progress Toward Financial Accountability

(GAO/AIMD-97-151R, August 29, 1997).

4

Forest Service: Status of Progress Toward Financial Accountability (GAO/AIMD-98-84, February 27,

1998).

Page 4 GAO/T-AIMD-98-231
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