U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                                
 
                                
                                
                                
                                
               REPORT ON MATTERS IDENTIFIED AT THE
                    ROCKY FLATS FIELD OFFICE
        DURING THE AUDIT OF THE DEPARTMENTmS CONSOLIDATED
              FISCAL YEAR 1996 FINANCIAL STATEMENTS
                                
                                
                                
                                
                                
                                
                                
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Report Number: WR-FS-97-03       Western Regional Audit Office
Date of Issue: April 23, 1997    Albuquerque, New Mexico 87185
 
               
               REPORT ON MATTERS IDENTIFIED AT THE
                    ROCKY FLATS FIELD OFFICE
        DURING THE AUDIT OF THE DEPARTMENTmS CONSOLIDATED
              FISCAL YEAR 1996 FINANCIAL STATEMENTS
                                
 
 
                        TABLE OF CONTENTS
 
 
                                                                 
                                                             Page
                                                                 
SUMMARY ................................................      1
 
PART I  - APPROACH AND OVERVIEW ........................      2
 
          Introduction .................................      2
 
          Scope and Methodology ........................      2
 
          Background  ...................................     3
 
          Observations ..................................     3
 
PART II - AUDIT RESULTS ..................................    5
 
          1.  Completeness of Capital Asset Accounts .....    5
 
          2.  Valuation Contra Account 2312 ...............   7
 
          3.  Reconciliation of Accounts Payable/Accrued 
              Expenses ....................................   8
 
          Other Matters ...................................   9
                    
                    
                    U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                    OFFICE OF AUDIT SERVICES
                  WESTERN REGIONAL AUDIT OFFICE
 
 
               REPORT ON MATTERS IDENTIFIED AT THE
                    ROCKY FLATS FIELD OFFICE
        DURING THE AUDIT OF THE DEPARTMENTmS CONSOLIDATED
              FISCAL YEAR 1996 FINANCIAL STATEMENTS
                                
                                
Audit Report Number:  WR-FS-97-03
 
 
                             SUMMARY
 
 
   The Government Management Reform Act of 1994 requires that the
Department of Energy submit audited financial statements to the
Office of Management and Budget annually, beginning with the
statements as of September 30, 1996.  A Departmentwide audit was
conducted to determine whether there was reasonable assurance
that the Department's consolidated Fiscal Year 1996 financial
statements were free of material misstatements.  We conducted a
portion of the Departmentwide audit at the Rocky Flats Field
Office and its integrating contractor, Kaiser-Hill Company, LLC.
 
   The audit at Rocky Flats and Kaiser-Hill disclosed errors, as
of September 30, 1996, in the balances maintained in three
Department accounts: Completed Property, Plant and Equipment;
Accumulated Depreciation; and Construction Work-in-Progress.  In
addition, we found that Rocky Flats was not periodically
reconciling the accounts payable/accrued expenses general ledger
accounts to the supporting documentation.
 
   We recommended adjustments and reconciliations for these
accounts.  Management generally concurred with the findings and
recommendations and agreed to take corrective action.
 
                                                                 
                                                                 
                          _______________(SIGNED)________________
                          Office of Inspector General
                             
                             
                             PART I
                                
                      APPROACH AND OVERVIEW
 
INTRODUCTION
 
   The Government Management Reform Act of 1994 significantly
expanded the provisions of the Chief Financial Officers Act of
1990 and required that audited financial statements covering all
accounts and associated activities of the Department be submitted
to the Office of Management and Budget (OMB) annually.  The first
submission involves financial statements as of September 30,
1996.  A Departmentwide audit of consolidated Fiscal Year 1996
financial statements was conducted by examining internal
controls, assessing compliance with laws and regulations,
evaluating accounting transaction cycles, and testing selected
account balances at various Department facilities.
 
   The objective of the Departmentwide audit was to determine
whether the Departmentms Consolidated Statement of Financial
Position as of September 30, 1996, and Statement of Operations
and Changes in Net Position for Fiscal Year 1996 presented
fairly, in all material respects, its financial position and
results of operations in conformity with applicable accounting
standards.  Departmentwide issues are addressed in Audit Report
No. IG-FS-97-01.
 
   The purpose of this report is to inform management of Rocky
Flats of matters that came to the attention of the Office of
Inspector General during the audit at Rocky Flats and Kaiser-
Hill.  Rocky Flats is responsible for the account balances
entered into the Departmentms core accounting system.
 
SCOPE AND METHODOLOGY
 
   The audit was conducted from June through December 1996 at
Rocky Flats and Kaiser-Hill in Golden, Colorado.  Specifically,
we examined internal controls, assessed compliance with laws and
regulations, and selectively tested account balances reported to
Departmental Headquarters as necessary to achieve the
Departmentwide audit objective.
 
   The audit was performed in accordance with generally accepted
Government auditing standards for financial audits.  Since we
relied on computer-generated data, we evaluated the general
control environment of certain financial systems and evaluated
the reliability of the data on a test basis.
 
   Because audit work was limited, it would not necessarily
disclose all of the internal control weaknesses that may exist.
Furthermore, because of inherent limitations in any internal
control structure, errors or irregularities may nevertheless
occur and not be detected.  The issues addressed in this report
represent our observations of activities through the end of
fieldwork on December 27, 1996.  Projection of any evaluation of
the 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 addition to the audit work conducted by the Office of
Inspector General, certain cycles were reviewed by an independent
accounting firm or internal audit personnel.  The independent
accounting firm reviewed Environmental, Pension, and Other Post-
Retirement Liabilities; Fixed Assets; and Disbursements.  Kaiser-
Hill's internal audit personnel reviewed the Payroll Cycle and
made recommendations to their own management.
 
   The Office of Inspector General considered all findings,
generated as a result of these reviews, when preparing the audit
report on the Departmentms Consolidated Fiscal Year 1996
Financial Statements (Audit Report No. IG-FS-97-01) and the
management report referred to in that report.  Furthermore, the
Office of Inspector General is also addressing issues requiring
local management attention in this report.
 
   An exit conference was held with Rocky Flats management on
February 3, 1997.
 
BACKGROUND
 
   Our prior audit report (Report on Matters Identified at the
Rocky Flats Field Office During the Audit of the Department's
Consolidated Statement of Financial Position as of September 30,
1995, Report No. WR-FS-96-03, March 22, 1996), disclosed
weaknesses in the property accountability system that made it
impractical to rely on the system.  For example, Rocky Flats
could not assure that property was correctly recorded in the
accounts until Kaiser-Hill completed a wall-to-wall inventory in
Fiscal Year 1996.  Also, Rocky Flats had not completed its review
of surplus facilities to determine the amount of the write-down.
These and other errors at Rocky Flats, when combined with
weaknesses at the Idaho National Engineering Laboratory, were one
reason that the Office of Inspector General disclaimed an opinion
on the Consolidated Statement of Financial Position of the
Department as of September 30, 1995, in Audit Report No. IG-FS-96-
01 (February 29, 1996).
 
   Kaiser-Hill became the integrating contractor at the Rocky
Flats Site on July 1, 1995.  A 1994 audit had shown that the
prior contractor at the Rocky Flats Site could not accurately
determine how much property was at the Site.  The contract with
Kaiser-Hill, as amended, gave Kaiser-Hill two years from the
effective date of the contract to complete a property inventory.
 
OBSERVATIONS
 
   The weaknesses described in the preceding paragraph had been
substantially reduced by September 30, 1996.  During Fiscal Year
1996, the personal property inventory was completed at the Rocky
Flats Site and Kaiser-Hill accepted the Rocky Flats personal
property allocable to its contract.  (Kaiser-Hill had not
accepted, as of September 30, 1996, the Rocky Flats Site real
property inventory, which had a net book value of about $51
million, excluding land.)  In May and August 1996, surplus assets
with net book values of $198 million and $134 million,
respectively, were written off.  Accordingly, we concluded that
Rocky Flats had made significant progress toward rectifying the
weaknesses that had existed at September 30, 1995.
 
   However, we observed errors in account balances and certain
weaknesses at Rocky Flats and Kaiser-Hill during the course of
our current review.  The Completed Property, Plant and Equipment
account and the Accumulated Depreciation account had errors
because they did not include all property physically inventoried.
The personal property physical inventory disclosed that over
2,000 items were not in the accounting records.  As a result, the
Completed Property, Plant and Equipment account and the
Accumulated Depreciation account were understated as of September
30, 1996.  According to Rocky Flats, preliminary estimates
indicated that the amount to be capitalized for the over 2,000
items was about $12.6 million.
 
   In addition, there were errors in the net book value of
property, plant and equipment because Rocky Flats had not
established the 2312 contra account to Construction Work-in-
Progress for legacy waste projects.  By not crediting the costs
of legacy waste projects to the 2312 account, net property, plant
and equipment was in error by at least $15.1 million.
 
   We also observed a control weakness.  Specifically, Rocky
Flats was not periodically reconciling the accounts
payable/accrued expenses general ledger accounts to the
supporting documentation.
 
   Management generally concurred with the findings and
recommendations and agreed to take corrective action.
 
   Part II of this report provides additional details concerning
the audit results and management's comments.
                             
                             
                             PART II
                                
                          AUDIT RESULTS
                                
 
1.   Completeness of Capital Asset Accounts
 
   The Department's Accounting Handbook requires field elements
to maintain accurate and up-to-date accounting records in order
to provide the proper accountability for the Department's
investment in property.  However, the Completed Property, Plant
and Equipment account and the Accumulated Depreciation account
did not include all property physically inventoried and therefore
were inaccurate.  The personal property physical inventory
completed during 1996 disclosed over 2,000 items that were not in
the accounting records.  As a result, the Completed Property,
Plant and Equipment account and the Accumulated Depreciation
account were understated, as of September 30, 1996.  According to
Rocky Flats management, preliminary estimates indicated that only
about 700 of the 2,000 plus items of personal property exceeded
the $5,000 capitalization criteria, with an estimated total value
of $12.6 million.
 
Recommendations
 
   We recommend that the Chief Financial Officer, Rocky Flats:
 
      Direct Kaiser-Hill to adjust, as of September 30, 1996, the
      capital asset subsidiary ledgers for unrecorded assets and
      reconcile the subsidiary ledgers to the property management
      database; and,
   
      Reconcile, as of September 30, 1996, the Completed Property,
      Plant and Equipment and Accumulated Depreciation general ledger
      accounts to the subsidiary ledgers.
 
Management Comments
 
   Management concurred with the finding and recommendations.
According to Rocky Flats, Kaiser-Hill was working with its
subcontractor, Dyncorp, to complete the reconciliation of the
property database maintained by Dyncorp to the property
accounting records maintained by Kaiser-Hill.  Preliminary
estimates indicated that of the 2,380 items missing from the
accounting records, 729 were above the $5,000 capitalization
criteria for a total of $12.6 million.  The remaining 1,651 items
were below the capitalization criteria and were estimated to be
valued at $3.6 million.  The items in question were added to the
property management system at the end of Fiscal Year 1996 as a
result of the personal property inventory and did not represent a
material amount to the Rocky Flats property accounts.  As of the
date of this report, Recommendations 1 and 2 have been fully
implemented.
 
Auditor Comments
 
   Management's actions are responsive to the finding and
recommendations.
 
2.   Valuation Contra Account 2312
 
   In April 1996, the Department's Office of Departmental
Accounting and Financial Systems Development provided guidance to
the field Chief Financial Officers about a new contra account,
Account 2312, Fixed Assets--Construction Work-in-Progress,
Accumulated Legacy Costs Incurred.  This account was to be used
to value projects being constructed to treat, store, or dispose
of the Department's legacy waste.  As environmental processing
facilities were being constructed and capitalized in Account
2311, Construction Work-in-Progress, the costs of any portion of
the facilities that were attributable to legacy waste activities
were to be credited to Account 2312.
 
   However, Rocky Flats had not established the 2312 contra
account for valuing its legacy waste projects.  Rocky Flats had
such projects.  For example, the Construction Work-in-Progress
account included costs for Project Authorizations 368400, 368410,
368420, and 368430.  These projects were for facilities that
would store or stabilize various residues.  Therefore, as the
construction costs for these projects were capitalized in Account
2311, offsetting credits should have been recorded in Account
2312.  By not establishing Account 2312, Rocky Flats overstated
the net book value of its property, plant and equipment by at
least $15.1 million.
 
Recommendation
 
   We recommend that the Chief Financial Officer, Rocky Flats,
establish the 2312 contra account and record the costs of legacy
waste Construction Work-in-Progress projects, as of September 30,
1996, in the account.
 
Management Comments
 
   Management concurred with the finding and recommendation.
Rocky Flats management responded that although Headquarters
originally created account 2312 in April 1996, implementing
instructions on entries to be used were not provided to the field
until July 1996.  Entries have now been developed at Rocky Flats
to establish the account and all associated entries.  Rocky Flats
management targeted April 30, 1997, as the date that this account
would be fully utilized for all Construction Work-in-Progress
projects associated with legacy waste.
 
Auditor Comments
 
   Management's planned actions are responsive to the finding and
recommendation.
 
3.   Reconciliation of Accounts Payable/Accrued Expenses
 
   Department Order 534.1, Accounting, requires Field Element
Chief Financial Officers to establish and maintain the official
accounting records, which must be supported with valid documents
and periodically reconciled to detect and correct recording
errors.  However, Rocky Flats did not periodically reconcile the
general ledger accounts used for accounts payable and accrued
expenses to the supporting documentation.  During the audit, we
issued a recommendation to Rocky Flats that it periodically
perform such reconciliations.  When Rocky Flats made the
reconciliation at yearend, some errors were found, principally
involving a misclassification within accrued expense accounts
3212 and 3215.  Unless periodic reconciliations are performed,
Rocky Flats will have an increased risk that other errors will
occur in the future and not be detected.
 
Recommendation
 
   We recommend that the Chief Financial Officer, Rocky Flats,
periodically reconcile the accounts payable/accrued expense
general ledger accounts to the supporting detail.
 
Management Comments
 
   Management concurred with the recommendation.  The
reconciliation was performed as part of the yearend procedures
for 1996.  Based on the reconciliation, there were no material
errors discovered that distorted the account balance.  Quarterly
reviews are scheduled for Fiscal Year 1997.
 
Auditor Comments
 
   Management's actions are responsive to the finding and
recommendation.
 
OTHER MATTERS
 
   Conditions similar to those raised in the Valuation Contra
Account 2312 finding and recommendation were identified at other
locations included in the overall audit.  These conditions,
therefore, were addressed in the audit report on the Department's
Consolidated Fiscal Year 1996 Financial Statements (Audit Report
No. IG-FS-97-01).
 
   During our review, we identified additional errors in the
Completed Property, Plant and Equipment and Construction Work-in-
Progress accounts.  Specifically, in August 1996, we issued a
finding to Rocky Flats that stated that the Construction Work-in-
Progress account contained 21 projects, costing about $22
million, that were completed and, therefore, should have been
transferred to Completed Property, Plant and Equipment.  Rocky
Flats took prompt action and made the appropriate adjustments
during our review.
                                      
                                      Report No. WR-FS-97-03
 
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