U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                                
 
                                
                                
                                
                                
               REPORT ON MATTERS IDENTIFIED AT THE
                   RICHLAND OPERATIONS OFFICE
        DURING THE AUDIT OF THE DEPARTMENTS CONSOLIDATED
              FISCAL YEAR 1996 FINANCIAL STATEMENTS
                                
                                
                                
                                
                                
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Report Number: WR-FS-97-04
Western Regional Audit Office
Date of Issue: April 25, 1997
Albuquerque, New Mexico 87185
               
               
               REPORT ON MATTERS IDENTIFIED AT THE
                   RICHLAND OPERATIONS OFFICE
        DURING THE AUDIT OF THE DEPARTMENT'S 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
  
         Westinghouse Hanford Company ..................... 5
  
         Battelle-Pacific Northwest National Laboratory ... 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
                   RICHLAND OPERATIONS OFFICE
        DURING THE AUDIT OF THE DEPARTMENT'S CONSOLIDATED
              FISCAL YEAR 1996 FINANCIAL STATEMENTS
                                
                                
Audit Report Number: WR-FS-97-04
  
  
                             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 issued 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 Richland
Operations Office (Richland) and two of its integrated management
and operating contractors, Westinghouse Hanford Company
(Westinghouse) and Battelle-Pacific Northwest National Laboratory
(Battelle).
  
  The audit at Westinghouse disclosed errors, as of September
30, 1996, in the balances of three Department accounts: Completed
Property, Plant and Equipment; Accumulated Depreciation; and
Unfunded Liabilities.  The audit also disclosed possible
unallowable costs in Battelle's Fiscal Year 1996 costs.
  
  We recommended that adjustments be made to the accounts to
correct deficiencies noted and that unallowable costs be
identified and reimbursed to the Department.  Management agreed
to our recommendations and plans to implement 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
annually to the Office of Management and Budget.  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 Department's 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 at Richland
of matters that came to the attention of the Office of Inspector
General during the audit at Richland, Westinghouse, and Battelle.
Richland is responsible for the account balances entered into the
Department's core accounting system.
  
SCOPE AND METHODOLOGY
  
  The audit was conducted from April through December 1996 at
the Richland Operations Office in Richland, Washington, and
Westinghouse and Battelle at the Hanford Site, Washington.
Specifically, we examined internal controls, assessed compliance
with applicable 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 the audit 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, internal audit personnel and an independent
accounting firm reviewed certain cycles.  Westinghouse internal
audit personnel reviewed the Payroll and Disbursements cycles and
Battelle internal audit personnel reviewed the Payroll cycle at
their respective locations.  Internal Audit made recommendations
for corrective actions to their own management in separate
reports.
  
  An independent public accounting firm reviewed Nuclear
Materials and Environmental Liabilities at Richland and Pension
and Other Post-Retirement Liabilities at Westinghouse.
  
  The Office of Inspector General considered all findings,
generated as a result of the reviews, when preparing the audit
report on the Department's Consolidated Fiscal Year 1996
Financial Statements (Audit Report No. IG-FS-97-01; February 24,
1997) and the management report referred to in that report.
Furthermore, the Office of Inspector General is also addressing
issues requiring local management's attention in this report.
  
  Richland waived an exit conference on April 24, 1997.
  
BACKGROUND
  
  Fluor Daniel Hanford, Inc., an integrating contractor,
replaced Westinghouse effective October 1, 1996, as the
contractor operating the Hanford Site.  Therefore, while
conditions noted in this report were the responsibility of
Westinghouse, corrective action will be the responsibility of
Richland and Fluor Daniel.
  
OBSERVATIONS
  
  We observed errors in account balances at Westinghouse.  We
previously reported that Westinghouse had not capitalized a
telecommunications system and had not used the Department's
standard service lives for all assets.  (See Report on Matters
Identified at the Richland Operations Office During the Audit of
the Department's Consolidated Statement of Financial Position as
of September 30, 1995, Report No. WR-FS-96-01; March 18, 1996).
In the current review, we observed that although Westinghouse had
capitalized the telecommunications system, it had not followed
the methology prescribed by the Department for establishing the
book value.  Also, we observed that Westinghouse had not used the
Department's standard service lives for all assets.  In addition,
Westinghouse improperly wrote down capital assets that should not
have been written down, and did not write down legacy waste
assets that should have been written down.
  
  We also noted possible unallowable costs and an internal
control weakness at Battelle.  Eight part-time employees were
paid hourly rates greater than the equivalent full-time salaries
authorized by Battelle's contract.  Additionally, Battelle
employees did not always submit timecards in a timely manner.
  
  Management concurred with our recommendations and planned to
implement corrective action.
  
  Part II of this report provides additional details concerning
the audit results and management's comments.
  
  
                             PART II
                                
                          AUDIT RESULTS
                                
                  Westinghouse Hanford Company
  
1.   Legacy Waste Related Assets
  
  On October 25, 1995, the Department's Deputy Controller issued
a memorandum instructing field offices to evaluate each of their
facilities and determine if the facility's primary purpose was
for legacy wastes or ongoing activities.  On April 18, 1996, the
Director, Office of Departmental Accounting, directed all field
offices to write down capital assets associated with the
treatment, storage, and disposal of the Department's legacy
waste.
  
  Although Westinghouse identified and wrote down legacy waste
facilities at Richland's direction, some facilities that should
have been written down were not, while others that should not
have been written down were written down.  Specifically, we
identified assets associated with six legacy waste facilities
that were not written down.  Conversely, Westinghouse incorrectly
wrote down seven other facilities used for storing and handling
special nuclear materials but not used for legacy waste.  These
errors understated the net book value of Completed Property,
Plant and Equipment by $2,775,040.
  
Recommendations:
  
  We recommend that the Chief Financial Officer, Richland
Operations Office, direct Fluor Daniel to:
            
  1. Review each facility and its related property units in the
     property records and write down those units which are
     primarily used for the treatment, storage, or disposal of
     legacy waste; and,
  
  2. Identify the facilities previously written down that are not
     primarily involved with the treatment, storage, or disposal
     of legacy waste and reverse the accounting entries.
  
Management Comments
  
  Management concurred with our recommendations and plans to
complete corrective action by July 31, 1997.
  
Auditor Comments
  
  Management's planned actions are responsive to the
recommendations.
 
2.   Asset Valuation
  
  There are several accounting practices that the Department
intends be used when valuing capital assets.  One of those
practices, found in the Department's Accounting Handbook,
specifies that a capital lease shall be recorded at the lower of
the property's fair value or the present value of the minimum
lease payments.  The accounting entry includes a nonfund debit to
the Completed Property, Plant and Equipment Account and an
offsetting nonfund credit to a liability account.  Another
practice is the use of the standard service lives found in
Department of Energy Order 2200.6A, Attachment VI-1, for
determining the depreciation of Department-owned capital assets.
  
  Capital Lease
  
  Westinghouse had not properly valued an asset acquired through
a capital lease.  Our prior audit report (Report on Matters
Identified at the Richland Operations Office During the Audit of
the Department's Consolidated Statement of Financial Position as
of September 30, 1995, Report No. WR-FS-96-01, March 18, 1996),
disclosed that Westinghouse had acquired an integrated voice/data
telecommunications system through a lease-to-own agreement but
had not capitalized the system.  The report recommended that the
system be capitalized.  Although Westinghouse capitalized this
system in Fiscal Year 1996, it determined neither the property's
fair value nor the present value of the minimum lease payments.
Instead, Westinghouse relied upon information provided by the
lessor to determine the asset value.  By not properly
capitalizing the system,  Westinghouse understated its Completed
Property, Plant and Equipment Account by $1,312,225.
  
  Our review also determined that when Battelle paid its share
of the lease liability ahead of schedule, Westinghouse did not
prepare an adjusted amortization schedule that would show the
reduced amount of monthly payments to be made in the future.  By
not adjusting the liability amount for the prepayment, the
Unfunded Liability Account was in error by an undetermined
amount.
  
  Service Lives
  
  Westinghouse did not consistently use the Department's
standard service lives for depreciating capital assets.  Our
review of 18 property unit additions disclosed two assets with
service lives different from the Department's standard service
lives.  The two assets with nonstandard service lives were part
of Subaccount 902501 (Buildings) where we identified an
additional 17 assets (for a total of 19 assets) that had
different service lives than those established by the Department.
Nonstandard service lives were used because Westinghouse's
Construction and Property Accounting used an outdated list to
determine service lives for some assets.  For most assets,
Westinghouse correctly used a list of the Department's standard
service lives from DOE Order 2200.6A.  For some assets, however,
Westinghouse used a list of service lives developed in February
1963 that differs from the current standard service lives.  As a
result of using improper service lives to compute depreciation on
assets, the Accumulated Depreciation Account contained errors.
  
 
Recommendations
  
  We recommend that the Chief Financial Officer, Richland
Operations Office, direct Fluor Daniel to:
      
       Determine the proper value of the Telecommunications System
     as of the beginning of the lease period.  This should be the
     lower of either the fair value of the system or the present value
     of the minimum lease payments;
  
       Adjust the Completed Property, Plant and Equipment;
     Accumulated Depreciation; and Unfunded Liabilities accounts to
     reflect the proper value of the lease.  Additionally, Fluor
     Daniel should reduce the unfunded liability by the amount of the
     principal portion of the lease payments to date;
  
       Determine the effect of Battelle's early payment on the
     Unfunded Liabilities Account and the lease payments and adjust
     them accordingly; and,
  
       Review the recorded service lives of all capital assets and
     ensure that they are consistent with the Department's established
     service lives.
       
Management Comments
  
  Management concurred with all four recommendations.  Richland
will direct Fluor Daniel to perform a complete review to
determine the proper asset value for the telecommunications
system.  The review should also address validation of principal
and interest to date and the effects of the early payment by
Battelle.  Richland will record any necessary changes to the
associated accounting records.  These actions are scheduled to be
completed by the end of June 1997.
  
  Richland will also direct Fluor Daniel to perform a complete
review of capital assets under their responsibility to ensure
that all service lives are based on the Department's standard
service lives.  Planned completion of this review is also the end
of June 1997.
  
Auditor Comments
 
  Management's planned actions are responsive to the
recommendations.
  
         Battelle-Pacific Northwest National Laboratory
  
  Battelles contract requires Department approval for any
salary in excess of the maximum for an established salary range.
If excess salary is paid without Department approval, the excess
amount is potentionally an unallowable cost.  Additionally,
Battelle's internal policies and procedures establish certain
requirements for reporting and processing payroll.  For non-
exempt staff, Battelle's policy requires that each employee
submit a timecard in order to receive payment for that time
period.
  
  A review by Battelle's Internal Audit of all Battelle part-
time employees' rates of pay revealed that 8 part-time employees
had hourly rates that, if multiplied by 40 hours a week, exceeded
the maximum full-time salaries for their respective job codes.
These excess amounts ranged from $12.65 ($40.00 minus the
established rate of $27.35) to $0.47 ($14.05 minus $13.58).  As
of August 23, 1996, these excess salaries resulted in potential
unallowable costs of $34,900.
  
  Battelle's Internal Audit also determined that employees were
not always submitting timecards in a timely manner.  As of August
23, 1996, Internal Audit found 58 instances where timecards had
not been submitted.  Twenty-seven of these delinquent timecards
involved time periods greater than a month, with two going back
to January 1996.  Without the timecards, Battelle has no
assurance the employees actually worked.  If there is no
timecard, Battelle inputs default hours.  Because Battelle is not
recording actual time worked for the delinquent timecards, there
could be effects on individual projects if the actual hours
differ from the default hours.  To correct the problem, Battelle
proposed to initiate a time card follow-up procedure to inform
supervisors of missing time cards.  Battelle also planned changes
to its information system which would allow supervisors to review
the status of staff time cards.
  
Recommendations
  
  We recommend that the Chief Financial Officer, Richland
Operations Office:
  
       Determine the total payroll costs that exceeded the contract
     limits and direct Battelle to reimburse the Department for
     unallowable amounts; and,
  
       Monitor Battelle to ensure its proposed corrective actions
     regarding time cards are taken.
     
Management Comments
  
  Management concurred with the recommendations.  By June 1997,
Richland planned to determine the allowability of the excess
salary costs and verify that Battelle is receiving timecards in a
timely manner.
 
Auditor Comments
  
  Management's planned actions are responsive to the
recommendations.
 
OTHER MATTERS
 
      Conditions similar to those raised in the Legacy Waste
Related Assets finding 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).
                                 
                                 IG Report No. WR-FS-97-04
 
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