38720 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1773

RIN 0572–AA93

Policy on Audits of RUS Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

SUMMARY: The Rural Utilities Service

(RUS) hereby amends its regulations on

audits of RUS borrowers. This final rule

incorporates changes to the audit

regulations necessitated by the Single

Audit Act Amendments of 1996 and by

Office of Management and Budget

(OMB) Circular A–133, Audits of States,

Local Governments, and Non-Profit

Organizations effective for audits of

fiscal years beginning after June 30,

1996. This rule also clarifies the peer

review requirements in the interim final

rule for certified public accountants

(CPA) performing audits of RUS

borrowers, adopts individual

management letters for electric and

telecommunications borrowers, and

revises the language of the auditor’s

report and management letter to

conform with technical guidance

provided by the American Institute of

Certified Public Accountants (AICPA).

EFFECTIVE DATE: July 17, 1998.

FOR FURTHER INFORMATION CONTACT: Mr.

Richard C. Annan, Chief, Technical

Accounting and Auditing Staff, Program

Accounting Services Division, Rural

Utilities Service, Stop 1523, room 2221,

South Building, U.S. Department of

Agriculture, 1400 Independence

Avenue, SW, Washington, DC 20250–

1523, telephone number (202) 720–

5227.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This final rule has been determined to

be not significant for the purposes of

Executive Order 12866 and therefore

has not been reviewed by OMB.

Civil Justice Reform

This final rule has been reviewed

under Executive Order 12998, Civil

Justice Reform. RUS has determined

that this final rule meets the applicable

standards provided in section 3 of the

Executive Order.

Regulatory Flexibility Act Certification

The Administrator of RUS has

determined that this rule will not have

significant impact on a substantial

number of small entities defined in the

Regulatory Flexibility Act (5 U.S.C. 601

et seq.), and therefore, the Regulatory

Flexibility Act does not apply to this

rule.

Information Collection and

Recordkeeping Requirements

The reporting and recordkeeping

requirements contained in this final rule

will be submitted for approval to the

Office of Management and Budget

(OMB) pursuant to the Paperwork

Reduction Act of 1995 (44 U.S.C.

Chapter 34, as amended) under control

number 0572–0095. The paperwork

contained in this rule will not be

effective until approved by OMB.

Send questions or comments

regarding this burden or any aspect of

this collection, including suggestions for

reducing the burden to Mr. F. Lamont

Heppe, Jr., Director, Program

Development and Regulatory Analysis,

Rural Utilities Service, Stop 1522, 1400

Independence Avenue SW, Washington,

DC 20250–1522.

National Environmental Policy Act

Certification

The RUS Administrator has

determined that this final rule will not

significantly affect the quality of the

human environment as defined by the

National Environmental Policy Act of

1969(42 U.S.C. 4321 et seq.). Therefore,

this action does not require an

environmental impact statement or

assessment.

Catalog of Federal Domestic Assistance

The program described by this final

rule is listed in the Catalog of Federal

Domestic Assistance Programs under

numbers 10.850—Rural Electrification

Loans and Loan Guarantees, 10.851—

Rural Telephone Loans and Loan

Guarantees, and 10.852—Rural

Telephone Bank Loans. This catalog is

available on a subscription basis from

the Superintendent of Documents, the

United States Government Printing

Office, Washington, DC 20402.

Executive Order 12372

This final rule is excluded from the

scope of Executive Order 12372,

Intergovernmental Consultation. A

notice of final rule entitled Department

Programs and Activities Excluded from

Executive Order 12372 (50 FR. 47034)

exempts RUS electric loans and loan

guarantees from coverage under this

order.

National Performance Review

This regulatory action is being taken

as part of the National Performance

Review program to eliminate

unnecessary regulations and improve

those that remain in force.

Unfunded Mandates

This rule contains no Federal

Mandates (under the regulatory

provision of Title II of the Unfunded

Mandate Reform Act) for State, local,

and tribal governments or the private

sector. Thus this rule is not subject to

the requirements of section 202 and 205

of the Unfunded Mandate Reform Act.

Background

This final rule implements the

changes required by the Single Audit

Act Amendments of 1996 (31 U.S.C.

7501 et seq.) and the revised OMB

Circular A–133, Audits of States, Local

Governments, and Non-Profit

Organizations (31 U.S.C. 7501 et seq.).

The purposes of the Single Audit Act

Amendments of 1996 were to promote

sound financial management with

respect to Federal awards administered

by non-Federal entities, establish

uniform requirements for audits of

Federal awards, promote the efficient

and effective use of audit resources, and

reduce the burden on State and local

governments, Indian tribes, and nonprofit organizations. OMB Circular A–

128, Audits of States and Local

Governments, was merged with the

former OMB Circular A–133, Audits of

Institutions of Higher Education and

Other Non-Profit Institutions, to form

the revised OMB Circular A–133. The

revised Circular implements the Single

Audit Act Amendments of 1996 and

raises the expenditure threshold. The

Circular requires auditors to issue a

report on compliance and on internal

control over financial reporting and a

report on compliance with requirements

applicable to each major program and

internal control over compliance in

accordance with OMB Circular A–133.

Previously, separate reports were

issued on compliance and internal

controls. With the issuance of the

revised Circular A–133, the AICPA

developed illustrative report examples

that merged the two reports into one

report on compliance and on internal

control over financial reporting.

On January 3, 1996, RUS published 61

FR 104 an interim final rule with

request for comments amending part

1773 to comply with the 1994 revision

of Generally Accepted Government

Auditing Standards (GAGAS) and

Statement on Auditing Standards (SAS)

No. 74, Compliance Auditing

Considerations in Audits of

Governmental Entities and Recipients of

Governmental Financial Assistance. The

January 3, 1996, interim final rule also

amended RUS’ peer review

requirements to reflect the merger of the

Private Companies Practice Section of
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations 38721

the AICPA and the AICPA quality

review program and to extend the time

period for peer reviews to 42 months.

This final rule amends part 1773 in

response to the comments filed on the

interim final rule.

Section 1773.34, Management Letter,

specifies the minimum requirements for

the CPA’s management letter. Among

these is the requirement for the CPA to

state whether the information submitted

to RUS in its most recent December 31

RUS Form 7, Financial and Statistical

Report; Form 12, Operating Report—

Financial; or Form 479, Financial and

Statistical Report for Telephone

Borrowers, is in agreement with the

borrower’s records. This final rule

clarifies that section to require the

CPA’s statement to indicate whether the

most recent December 31 RUS Form 7,

12, or 479, agrees with the borrower’s

‘‘audited’’ records if a borrower has a

December 31 year end. For borrowers

with a year end other than December 31,

the CPA must state whether the

information provided appears

reasonable based upon the audit

procedures performed.

The management letter for electric

borrowers was also modified to conform

with changes in § 1717.612, which

states that funds are cash proceeds from

loans made or guaranteed by RUS;

§ 1717.618 to redefine ‘‘substantially

all’’ in management, operation, or

maintenance contracts covering the

borrower’s system as being 90 percent;

and § 1717.609 to delete the provision

requiring the CPA to determine whether

RUS approval was obtained for

contracts between the borrower and its

manager.

The management letter for

telecommunications borrowers was

changed to include additional

requirements for compliance with RUS

telecommunications loan and security

instrument provisions. The rule clarifies

that section to require the CPA to

determine whether the borrower is in

compliance with the provisions

pertaining to the funded reserve

requirements and net plant to secured

debt ratio requirements for RUS loans

approved after June 10, 1991, and before

October 7, 1997, and the funded reserve

requirement for RTB loans approved

after June 10, 1991.

Both the management letters for

electric and telecommunications

borrowers were modified to remove the

negative assurance language pertaining

to items not tested in conformance with

GAGAS.

The January 3, 1996, interim final rule

also amended Sections 1773.5,

Qualifications of CPA, and 1773.6,

Audit Agreement, to include changes

necessitated by the 1994 revision of

GAGAS. In that amendment, the

abbreviation OIG (Office of Inspector

General, United States Department of

Agriculture) was inadvertently replaced

by OGC (Office of General Counsel) in

paragraph 1773.5(c)(6)(iii) and

paragraph 1773.6(a)(6). This final rule

corrects that error.

The renaming of the Borrower

Accounting Division (BAD) to the

Program Accounting Services Division

(PASD) was not incorporated into the

interim final rule. This final rule serves

to incorporate the name change by

deleting all references to BAD and

replacing them with PASD.

This final rule also adds a definition

of the term ‘‘borrower’’ to mean all

entities which receive financial

assistance in the form of loans, loan

guarantees, or grants from RUS.

Comments

An interim final rule entitled ‘‘Policy

on Audits of RUS Borrowers,’’

published January 3, 1996, at 61 FR 104,

invited interested parties to submit

comments on or before March 4, 1996.

Comments were received from three

accounting firms, the Assistant

Administrator, Telecommunications

Program, the Deputy Assistant

Administrator, Electric Program, and

from OIG. The following paragraphs

address the topics that were discussed

by the two commenters.

Comment. The revisions to §§ 1773.33

(e)(1)(iii) and 1773.33(e)(2)(iii) require

the CPA to state whether the

information submitted by a borrower to

RUS in its most recent December 31

RUS Form 7, Financial and Statistical

Report; Form 12, Operating ReportFinancial; or Form 479, Financial and

Statistical Report for Telephone

Borrowers, is in agreement with the

borrower’s ‘‘audited’’ records.

Commenters expressed concern that this

requirement did not properly consider

borrowers with fiscal year ends other

than December 31. One commenter

asked if this requirement necessitated a

calendar year audit or alternate audit

procedures to comply.

Response. The intent of this section

was to require CPAs to state whether the

information submitted by a borrower to

RUS in its most recent December 31

RUS Form 7, 12, or 479 was in

agreement with the borrower’s audited

records if the borrower has a December

31 year end. For borrowers with year

ends other than December 31, the

section was intended to require the CPA

to state whether the information

provided appeared reasonable based

upon the procedures performed during

the audit. The final rule has been

amended to clarify this requirement.

Comment. When 7 CFR part 1717 was

revised by the electric program, certain

modifications affected part 1773. In

§ 1717.608, RUS approval of contracts

between the borrower and its manager

are no longer required. Additionally, the

electric program determined that the

quantification of ‘‘substantial part’’ was

too low and raised it to 90 percent.

Section 1717.612 defined funds as cash

proceeds from loans made or guaranteed

by RUS. These changes should to be

incorporated into part 1773.

Response. This final rule has been

amended to incorporate the changes

necessitated by revisions made to part

1717.

Comment. The revisions to § 1773.33

(e)(2) excluded a requirement for

compliance with RUS loan and security

instrument provision for

telecommunications borrowers. Under

existing regulations, if the loan maturity

period selected by the borrower exceeds

the expected composite economic life of

the facilities financed by a period of

more than three years, the loan is

conditioned upon the borrower electing

to maintain a net plant to secured debt

ratio of at least 1.2, or a funded reserve

in such amount that the balance of the

reserve plus the value of the facilities

less depreciation be at least equal to the

remaining principal payments on the

loan.

Response. It was not our intent to

omit this requirement for compliance

with the RUS loan and security

instrument from the management letter.

The final rule has been amended to

include this requirement.

Comment. One commenter noted that

the management letter in part 1773

included a sentence that was in conflict

with GAGAS. It was his opinion that the

sentence concerning negative assurance

should be eliminated from the

management letter.

Response. We agree with the

comment and we have deleted this

sentence from the management letter.

Comment. The revision to § 1773.5

(c)(4)(C) set forth in the January 3, 1996,

interim final rule extended the

timeframe for submission of peer

reviews to 42 months. Commenters

expressed concern that the 42 months

timeframe did not meet the

requirements of GAGAS.

Response. The intent of this section

was to provide a 6-month period for

CPAs to submit their peer review

reports to RUS. Upon further review of

the interim final rule, we have revised

the language in the final rule to require

completion of peer reviews within 36
38722 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations

months of the issuance of the prior

review in accordance with GAGAS.

List of Subjects in 7 CFR Part 1773

Accounting, Electric power, Loan

programs—communications, Loan

programs—energy, Reporting and

recordkeeping requirements, Rural

areas, Telecommunications.

For reasons set forth in the preamble,

RUS hereby amends 7 CFR part 1773

chapter XVII as follows:

PART 1773—POLICY ON AUDITS OF

RUS BORROWERS

1. The authority citation for part 1773

continues to read as follows:

Authority: 7 U.S.C. 901 et seq.; 7 U.S.C.

1921 et seq.; Pub. L. 103–354, 108 Stat. 3178

(7 U.S.C. 6941 et seq.).

2. In part 1773 all references to items

indicated in the left column are revised

to read as stated in the right column:

Remove

BAD—Borrower Accounting Division

Add PASD—Program Accounting Services

Division

Director, BAD ............................................................................................ Assistant Administrator, Program Accounting and Regulatory Analysis.

Telephone Program report on compliance ............................................... Telecommunications Program report on compliance and on internal

controls over financial reporting.

Report on internal controls ....................................................................... Report on compliance and on internal controls over financial reporting.

Report on compliance and internal controls ............................................. Report on compliance and on internal controls over financial reporting.

3. Section 1773.2 is amended by

adding the definition for Borrower.

§ 1773.2 Definitions.

* * * * *

Borrower means an entity that has an

outstanding RUS, RTB, or FFB loan or

loan guarantee, or that has received a

grant for electric, telecommunications,

distance learning, or telemedicine

purposes under the act.

* * * * *

4. Section 1773.3 is amended by

removing paragraph (d)(2),

redesignating paragraphs (d)(3) and

(d)(4) to (d)(2) and (d)(3) and revising

paragraphs (d) introductory text, (d)(1)

through (d)(3) introductory text,

(d)(3)(ii) and (e).

§ 1773.3 Annual audit.

* * * * *

(d) A borrower that qualifies as a unit

of state or local government or Indian

tribe as such terms are defined in the

Single Audit Act of 1984 (31 U.S.C.

7501 et seq.), the Single Audit Act

Amendments of 1996 (31 U.S.C. 7505 et

seq.) and OMB Circular A–133, Audits

of States, Local Governments, and NonProfit Organizations (copy available

from the Executive Office of the

President, Publication Services, 725

17th St., NW., Suite 2200, Washington,

DC 20502; 202–395–7332), must comply

with this part as follows:

(1) A borrower that expends $300,000

or more in a year in Federal awards

must have an audit performed and

submit an auditor’s report meeting the

requirements of the Single Audit Act of

1984 and the Single Audit Act

Amendments of 1996.

(2) A borrower that expends less than

$300,000 in Federal awards during the

year must have an audit performed in

accordance with the requirements of

this part.

(3) A borrower must notify RUS, in

writing, within 30 days of the as of audit

date, of the total Federal awards

expended during the year and must

state whether it will have an audit

performed in accordance with the

Single Audit Act of 1984 and the Single

Audit Act Amendments of 1996, or this

part.

* * * * *

(ii) If an audit is performed in

accordance with the Single Audit Act of

1984 and the Single Audit Act

Amendments of 1996, an auditor’s

report that meets the requirements of

the Single Audit Act of 1984, and the

Single Audit Act Amendments of 1996,

will be sufficient to satisfy that

borrower’s obligations under this part.

(e) OMB Circular A–133, Audits of

States, Local Governments, and NonProfit Organizations does not apply to

audits of RUS electric and

telecommunications cooperatives and

commercial telecommunications

borrowers.

* * * * *

5. Section 1773.5 is amended by

revising paragraphs (c) introductory text

and (c)(6) (iii) to read as follows:

§ 1773.5 Qualifications of CPA.

* * * * *

(c) Peer review requirement. The CPA

must belong to and participate in a peer

review program, and must have

undergone a satisfactory peer review of

the accounting and audit practice

conducted by an approved peer review

program under paragraph (c)(4) of this

section, unless a waiver is granted

under paragraph (c)(7) of this section.

The reviewing organization must not be

affiliated with or have had its most

recent peer review conducted by the

organization currently being reviewed

(reciprocal reviews). After the initial

peer review has been performed, the

CPA must undergo a peer review of the

accounting and audit practice within 36

months of the issuance of the previous

peer review or at such additional times

as designated by the peer review

executive committee.

* * * * *

(6) * * *

(iii) A copy of the peer review report,

accompanying letter of comment, and

the partners’ inspections must be made

available to OIG, upon request.

* * * * *

6. Section 1773.6 is amended by

revising paragraph (a)(6) to read as

follows:

§ 1773.6 Audit agreement.

(a) * * *

(6) The CPA will make all auditrelated documents, including auditor’s

reports, workpapers, and management

letters available to RUS or its

representatives (OIG and GAO), upon

request, and will permit the

photocopying of all audit-related

documents; and

* * * * *

7. Section 1773.30 is amended by

removing paragraph (a)(3), and

redesignating paragraph (a)(4) to (a)(3)

and revising paragraphs (a)(2) and (a)(3)

to read as follows:

§ 1773.30 General.

(a) * * *

(2) A report on compliance and on

internal control over financial reporting,

examples of which are set forth in

appendices A, exhibits 2 and 3 (Electric)

and B, exhibits 4 and 5

(Telecommunications) of this part 1773;

and

(3) A management letter, an example

of which is set forth in appendix C of

this part 1773.

* * * * *

8a. Section 1773.31 is amended by

revising the last sentence to read as

follows:
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations 38723

§ 1773.31 Auditor’s Report.

* * * This report must be signed by

the CPA, cover all statements presented,

and refer to the separate report on

compliance and on internal control over

financial reporting issued in

conjunction with the auditor’s report.

8b. Section 1773.32 is revised to read

as follows:

§ 1773.32 Report on compliance and on

internal control over financial reporting.

As required by GAGAS, the CPA must

prepare a written report on the tests

performed for compliance with

applicable laws, regulations, contracts,

and grants, and on the borrower’s

internal control structure and on the

assessment of control risk made as part

of the financial statement audit. This

report must be signed by the CPA and

must include, as a minimum:

(a) The scope of the CPA’s work to

obtain an understanding of the

borrower’s internal control structure

and in assessing the control risk;

(b) A description of the reportable

conditions noted which include

material weaknesses identified as a

result of the CPA’s work in

understanding and assessing control

risk;

(c) If no reportable instances of

noncompliance and no reportable

conditions were found, the CPA must

issue a report as illustrated in appendix

A, exhibit 2 (Electric), and appendix B,

exhibit 4 (Telecommunications) of this

part 1773;

(d) If material instances of

noncompliance and reportable

conditions are identified, the CPA must

issue a report as illustrated in appendix

A, exhibit 3 (Electric), and appendix B,

exhibit 5 (Telecommunications) of this

part 1773;

(e) Other nonmaterial instances of

noncompliance should not be disclosed

in the report on compliance and on

internal control over financial reporting,

but should be reported in a separate

communication to the board of

directors, preferably in writing. All such

communications must be documented

in the workpapers and submitted to

RUS in compliance with § 1773.21.

(f) If the CPA has issued a separate

letter detailing immaterial instances of

noncompliance, the report on

compliance and on internal control over

financial reporting must be modified to

include a statement such as:

We noted certain immaterial instances of

noncompliance that we have reported to the

management of (borrower’s name) in a

separate letter dated (month, day, year).

(g) If the CPA has issued a separate

letter to management to communicate

other matters involving the design and

operation of the internal control over

financial reporting, the report on

compliance and on internal control over

financial reporting must be modified to

include a statement such as:

However, we noted other matters involving

the internal control over financial reporting

that we have reported to the management of

(borrower’s name) in a separate letter dated

(month, day, year).

(h) The report must contain the status

of known but uncorrected significant or

material findings and recommendations

from prior audits that affect the current

audit objective.

9. Section 1773.33 is removed.

10. Section 1773.34 is redesignated to

§ 1773.33 and amended by removing

paragraph (e)(1)(ii)(E), revising

paragraphs (e)(1)(i), (e)(1)(ii)

introductory text, (e)(1)(ii)(C) and

(e)(1)(iii) and (e)(2)(iii) and adding

(e)(2)(iv) to read as follows:

§ 1773.33 Management letter.

* * * * *

(e) * * *

(1) * * *

(i) The requirement for funds to be

deposited in banks or other depositories

designated in the loan documents or

approved by RUS. For purposes of this

part, funds shall be defined as cash

proceeds from loans made or guaranteed

by RUS in accordance with 7 CFR

1717.612.

(ii) The requirement for a borrower to

obtain written approval of mortgagees to

enter into any contract for the

management, operation, or maintenance

of the borrower’s system if the contract

covers all or substantially all (90

percent) of the electric system. For

purposes of this part, the following

contracts shall be deemed as requiring

RUS approval:

* * * * *

(C) Operations and maintenance

contracts in which the borrower has

contracted to have another borrower or

other entity operate and/or maintain all

or substantially all (90 percent) of the

physical plant facilities of the plant.

* * * * *

(iii) The requirement for a borrower to

prepare and furnish mortgagees annual

financial and statistical reports on the

borrower’s financial condition and

operations. For borrowers with a

December 31 year end, the CPA must

state whether the information

represented by the borrower as having

been submitted to RUS in its most

recent December 31 RUS Form 7 or

Form 12 is in agreement with the

borrower’s audited records. For

borrowers with a year end other than

December 31, the CPA must state

whether the information appears

reasonable based upon the audit

procedures performed. If the borrower

represents that an amended report has

been filed as of December 31, the

comments must relate to the amended

report.

(2) * * *

(iii) The requirement for a borrower to

prepare and furnish mortgagees annual

financial and statistical reports on the

borrower’s financial condition and

operations. For borrowers with a

December 31 year end, the CPA must

state whether the information

represented by the borrower as having

been submitted to RUS in its most

recent December 31 RUS Form 479 is in

agreement with the borrower’s audited

records. For borrowers with a year end

other than December 31, the CPA must

state whether the information appears

reasonable based upon the audit

procedures performed. If the borrower

represents that an amended report has

been filed as of December 31, the

comments must relate to the amended

report.

(iv) The requirement that a borrower

maintain either a net plant to secured

debt ratio or a funded reserve.

(A) For loans approved after June 10,

1991, and before October 7, 1997, if a

borrower selected a loan maturity

period in excess of the expected

economic life of the facilities financed,

the borrower must maintain a secured

debt ratio of at least 1.2 or a funded

reserve. If, during the audit period, the

borrower has been issued refunding

notes that match the remaining

composite economic life of the facilities

thus eliminating the requirement, the

auditor should so state.

(1) If the net plant to secured debt

ratio option was selected, this ratio must

be achieved one year following the first

advance of funds.

(2) If the funded reserve option was

selected, the reserve must be of such

amount that the balance of the reserve

plus the value of the facilities less

depreciation be at least equal to the

remaining principal payments on the

loan. Funding of the reserve must begin

within one year of approval of release of

funds and must continue regularly over

the composite economic life of the

facilities financed.

(B) For loans approved after October

7, 1997, if a borrower selected a loan

maturity period in excess of the

expected economic life of the facilities

financed, the borrower must maintain a

funded reserve in such amount that the

balance of the reserve plus the value of

the facilities less depreciation be at least

equal to the remaining principal
38724 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations

payments on the loan. Funding of the

reserve must begin within one year of

approval of release of funds and must

continue regularly over the composite

economic life of the facilities financed.

If, during the audit period, the borrower

has been issued refunding notes that

match the remaining composite

economic life of the facilities thus

eliminating the requirement for

maintaining the funded reserve

requirement, the auditor should so state.

* * * * *

11. Reserve § 1773.34.

12. Appendix A to Part 1773 is

amended by revising exhibits 1, 2, and

3, removing exhibits 4, 5, and 6, and

redesignating exhibit 7 as exhibit 4 and

revising it to read as follows:

Appendix A to Part 1773—Sample

Auditor’s Report for an Electric

Cooperative

* * * * *

Exhibit 1—Sample Auditor’s Report

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors, Center County

Electric Cooperative: Independent

Auditor’s Report

We have audited the accompanying

balance sheets of Center County Electric

Cooperative as of December 31, 1998 and

1997, and the related statements of revenue

and patronage capital, and cash flows for the

years then ended. These financial statements

are the responsibility of Center County

Electric Cooperative’s management. Our

responsibility is to express an opinion on

these financial statements based on our audit.

We conducted our audits in accordance

with generally accepted auditing standards

and the standards applicable to financial

audits contained in Government Auditing

Standards, issued by the Comptroller General

of the United States. Those standards

required that we plan and perform the audit

to obtain reasonable assurance about whether

the financial statements are free of material

misstatement. An audit includes examining,

on a test basis, evidence supporting the

amounts and disclosures in the financial

statements. An audit also includes assessing

the accounting principles used and

significant estimates made by management,

as well as evaluating the overall financial

statement presentation. We believe that our

audit provides a reasonable basis for our

opinion.

In our opinion, the financial statements

referred to above present fairly, in all

material respects, the financial position of

Center County Electric Cooperative as of

December 31, 1998 and 1997, and the results

of its operations and its cash flows for the

years then ended in conformity with

generally accepted accounting principles.

In accordance with Government Auditing

Standards, we have also issued a report dated

March 2, 1999, on our consideration of

Center County Electric Cooperative’s internal

control over financial reporting and our tests

of its compliance with certain provisions of

laws, regulations, contracts, and grants.

Certified Public Accountants

March 2, 1999

Exhibit 2—Sample Report on Compliance

and on Internal Control over Financial

Reporting, the CPA found No Reportable

Instances of Noncompliance and No Material

Weaknesses (No Reportable Conditions

Identified).

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors

Center County Electric Cooperative:

We have audited the financial statements

of Center County Electric Cooperative as of

and for the years ended December 31, 1998

and 1997, and have issued our report thereon

dated March 2, 1999. We conducted our

audit in accordance with generally accepted

auditing standards and the standards

applicable to financial audits contained in

Government Auditing Standards, issued by

the Comptroller General of the United States.

Compliance

As part of obtaining reasonable assurance

about whether Center County Electric

Cooperative’s financial statements are free of

material misstatement, we performed tests of

its compliance with certain provisions of

laws, regulations, contracts, and grants,

noncompliance with which could have a

direct and material effect on the

determination of financial statement

amounts. However, providing an opinion on

compliance with those provisions was not an

objective of our audit, and accordingly, we

do not express such an opinion. The results

of our tests disclosed no instances of

noncompliance that are required to be

reported under Government Auditing

Standards. [If the CPA has issued a separate

letter to the management detailing immaterial

instances of noncompliance, modify this

paragraph to include a statement such as the

following: However, we noted certain

immaterial instances of noncompliance

which we have reported to the management

of Center County Electric Cooperative in a

separate letter dated March 2, 1999.]

Internal Control Over Financial Reporting

In planning and performing our audit, we

considered Center County Electric

Cooperative’s internal control over financial

reporting in order to determine our auditing

procedures for the purpose of expressing our

opinion on the financial statements and not

to provide assurance on the internal control

over financial reporting. Our consideration of

the internal control over financial reporting

would not necessarily disclose all matters in

the internal control over financial reporting

that might be material weaknesses. A

material weakness is a condition in which

the design or operation of one or more of the

internal control components does not reduce

to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial

statements being audited may occur and not

be detected within a timely period by

employees in the normal course of

performing their assigned functions. We

noted no matters involving the internal

control over financial reporting and its

operation that we consider to be material

weaknesses. [If the CPA has issued a separate

letter to management to communicate other

matters involving the design and operation of

the internal control over financial reporting,

modify this paragraph to include a statement

such as the following: However, we noted

other matters involving the internal control

over financial reporting which we have

reported to the management of Center County

Electric Cooperative in a separate letter dated

March 2, 1999.]

This report is intended for the information

of the audit committee, management, the

Rural Utilities Service, and supplemental

lenders. However, this report is a matter of

public record and its distribution is not

limited.

Certified Public Accountants

March 2, 1999

Exhibit 3—Sample Report on Compliance

and on Internal Control over Financial

Reporting, the CPA found Reportable

Instances of noncompliance and Reportable

Conditions Identified.

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors

Center County Electric Cooperative:

We have audited the financial statements

of Center County Electric Cooperative as of

and for the years ended December 31, 1998

and 1997, and have issued our report thereon

dated March 2, 1999. We conducted our

audit in accordance with generally accepted

auditing standards and the standards

applicable to financial audits contained in

Government Auditing Standards, issued by

the Comptroller General of the United States.

Compliance

As part of obtaining reasonable assurance

about whether Center County Electric

Cooperative’s financial statements are free of

material misstatement, we performed tests of

its compliance with certain provisions of

laws, regulations, contracts, and grants,

noncompliance with which could have a

direct and material effect on the

determination of financial statement

amounts. However, providing an opinion on

compliance with those provisions was not an

objective of our audit, and accordingly, we

do not express such an opinion. The results

of our tests disclosed instances of

noncompliance that are required to be

reported under Government Auditing

Standards. [A description of the findings

should be included in the report.][If the CPA

has issued a separate letter to the

management detailing immaterial instances

of noncompliance, modify this paragraph to

include a statement such as the following:

We also noted certain immaterial instances of

noncompliance which we have reported to

the management of Center County Electric

Cooperative in a separate letter dated March

2, 1999.]
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations 38725

Internal Control Over Financial Reporting

In planning and performing our audit, we

considered Center County Electric

Cooperative’s internal control over financial

reporting in order to determine our auditing

procedures for the purpose of expressing our

opinion on the financial statements and not

to provide assurance on the internal control

over financial reporting. However, we noted

certain matters involving the internal control

over financial reporting and its operation that

we consider to be reportable conditions.

Reportable conditions involve matters

coming to our attention relating to significant

deficiencies in the design or operation of the

internal control over financial reporting that,

in our judgment, could adversely affect

Center County Electric Cooperative’s ability

to record, process, summarize, and report

financial data consistent with the assertions

of management in the financial statements.

[A description of the reportable conditions

should be included in the report.]

A material weakness is a condition in

which the design or operation of one or more

of the internal control components does not

reduce to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial

statements being audited may occur and not

be detected within a timely period by

employees in the normal course of

performing their assigned functions. Our

consideration of the internal control over

financial reporting would not necessarily

disclose all matters in the internal control

that might be reportable conditions and,

accordingly, would not necessarily disclose

all reportable conditions that are also

considered to be material weaknesses.

However, we believe none of the reportable

conditions described above is a material

weakness. [If conditions believed to be

material weaknesses are disclosed, the last

sentence should be deleted and instead the

report should identify which of the

reportable conditions described above are

considered to be material weaknesses.][If the

CPA has issued a separate letter to

management to communicate other matters

involving the design and operation of the

internal control over financial reporting,

modify this paragraph to include a statement

such as the following: We also noted other

matters involving the internal control over

financial reporting which we have reported

to the management of Center County Electric

Cooperative in a separate letter dated March

2, 1999.]

This report is intended for the information

of the audit committee, management, the

Rural Utilities Service, and supplemental

lenders. However, this report is a matter of

public record and its distribution is not

limited.

Certified Public Accountants

March 2, 1999

EXHIBIT 4—SAMPLE FINANCIAL STATEMENTS

CENTER TELEPHONE COMPANY BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8 ASSETS (NOTES 1 AND 2)

19X9 19X8

CURRENT ASSETS:

Cash—Construction Funds ............................................................................................................................... $21,000 $18,000

Cash—General Funds ...................................................................................................................................... 128,300 140,083

Telecommunications Accounts.

Receivable (less accumulated provision of $11,597 in 19X9 and $1,490 in 19X8) ........................................ 139,642 122,623

Notes Receivable .............................................................................................................................................. 2,500 3,000

Materials and Supplies ..................................................................................................................................... 103,713 73,964

Prepayments (Note 3) ....................................................................................................................................... 49,185 62,201

Other Current Assets ........................................................................................................................................ 1,357 10,131

445,697 430,002

NONCURRENT ASSETS:

Nonregulated Investments: (Note 4)

Net CATV Plant ......................................................................................................................................... 413,511 407,086

Net Nonregulated Customer Premises Equipment ................................................................................... 103,618 0

Deferred Maintenance and Retirements (Note 5) ............................................................................................ 40,000 45,000

557,129 452,086

PROPERTY, PLANT, AND EQUIPMENT: (Note 6)

Telecommunications Plant in Service ............................................................................................................... 7,401,300 6,650,553

Telecommunications Plant Under Construction ............................................................................................... 67,626 199,092

Telecommunications Plant Adjustment (Note 7) .............................................................................................. 176,380 176,380

7,645,306 7,026,025

Less: Accumulated Provision for Depreciation ................................................................................................. 1,760,587 1,504,255

5,884,719 5,521,770

6,887,545 6,403,858

The accompanying notes are an integral part of these statements.

CENTER TELEPHONE COMPANY BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8 LIABILITIES AND EQUITIES

19X9 19X8

CURRENT LIABILITIES:

Accounts Payable ............................................................................................................................................. $123,689 $290,484

Notes Payable ................................................................................................................................................... 61,600 70,400

Advance Billings and Payments ....................................................................................................................... 2,137 2,243

Customers Deposits .......................................................................................................................................... 11,878 4,940

Current Maturities of Long-Term Debt (Note 8) ............................................................................................... 146,646 145,998

Accrued Taxes .................................................................................................................................................. 242,076 224,566
38726 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations

CENTER TELEPHONE COMPANY BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8 LIABILITIES AND EQUITIES—

Continued

19X9 19X8

Other Current Liabilities .................................................................................................................................... 8,500 9,079

596,526 747,710

LONG-TERM DEBT:

RUS Mortgage Notes (Note 8) ......................................................................................................................... 4,592,658 4,128,106

OTHER LIABILITIES AND DEFERRED CREDITS:

Unamortized Investment Tax Credits (Note 10) ............................................................................................... 53,078 61,377

Deferred Income Taxes (Note 11) .................................................................................................................... 37,137 35,039

90,215 96,416

STOCKHOLDERS’ EQUITY:

Capital Stock—Common $2 par value—300,000 Shares Authorized; 102,600 Shares Outstanding 19X9

and 19X8 ....................................................................................................................................................... 205,200 205,200

Additional Paid-in Capital .................................................................................................................................. 820,800 820,800

Retained Earnings (Note 8) .............................................................................................................................. 582,146 405,626

1,608,146 1,431,626

6,887,545 6,403,858

The accompanying notes are an integral part of these statements.

CENTER TELEPHONE COMPANY STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER

31, 19X9 AND 19X8

19X9 19X8

OPERATING REVENUES:

Basic Local Network Services ...................................................................................................................... $836,822 $862,205

Network Access Services ............................................................................................................................. 125,042 -0-

Long Distance Network Services .................................................................................................................. 897,300 775,073

Miscellaneous ............................................................................................................................................... 144,435 147,100

Less: Uncollectible Revenues ....................................................................................................................... (24,000) (24,500)

1,979,599 1,759,878

OPERATING EXPENSES:

Plant Specific Operations ............................................................................................................................. 564,486 480,509

Plant Nonspecific Operations ....................................................................................................................... 187,162 393,143

Depreciation and Amortization ...................................................................................................................... 274,691

Customer Operations .................................................................................................................................... 94,473 78,772

Corporate Operations ................................................................................................................................... 157,453 134,127

1,278,265 1,086,551

OPERATING TAXES:

Federal and State Income.

Taxes—Operating (Notes 10 and 11) .......................................................................................................... 159,845 170,687

Other Operating Taxes ................................................................................................................................. 225,013 204,230

Provision for Deferred Taxes (Note 10) ....................................................................................................... 31,566 29,468

Investment Credits—Net ............................................................................................................................... 6,201 1,640

422,625 406,025

OPERATING INCOME ......................................................................................................................................... 278,709 267,302

FIXED CHARGES:

Interest on Long-Term Debt ......................................................................................................................... 88,432 85,854

Interest Charged to Construction Credit ....................................................................................................... (2,251) (1,516)

86,181 84,338

NONREGULATED INCOME—NET (Note 4) ....................................................................................................... 19,902 10,593

NET INCOME FOR PERIOD ............................................................................................................................... 212,430 193,557

Retained Earnings—January 1, 19X9 and 19X8 ......................................................................................... 405,626 235,153

Dividends Declared ....................................................................................................................................... (35,910) (23,084)
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations 38727

CENTER TELEPHONE COMPANY STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER

31, 19X9 AND 19X8—Continued

19X9 19X8

Retained Earnings—December 31, 19X9 and 19X8 .................................................................................... $582,146 $405,626

Earnings Per Share of Common Stock—Average ....................................................................................... $2.07 $1.89

The accompanying notes are an integral part of these statements.

CENTER COUNTY TELEPHONE COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 19X9

AND 19X8

19X9 19X8

CASH FLOWS FROM OPERATING ACTIVITIES:

Cash Received from Consumers .................................................................................................................. $1,962,580 $1,733,289

Cash Paid to Suppliers and Employees ....................................................................................................... (1,159,158) (960,459)

Interest Paid .................................................................................................................................................. (86,181) (84,338)

Taxes Paid .................................................................................................................................................... (401,316) (376,643)

Net Cash Provided by Operating Activities .................................................................................................. 315,925 311,849

CASH FLOWS FROM INVESTING ACTIVITIES:

Construction and Acquisition of Plant ........................................................................................................... (619,281) (507,617)

Investment in CATV Plant ............................................................................................................................ (6,425) (18,246)

Investment in Nonregulated CPE ................................................................................................................. (103,618)

Plant Removal Costs .................................................................................................................................... (18,359) (27,216)

(Increase)/Decrease In:

Materials Inventory ........................................................................................................................................ (29,749) (19,478)

Notes Receivable .......................................................................................................................................... 500 1,000

Deferred Maintenance and Retirements ....................................................................................................... 5,000 (45,000)

Nonregulated Income .................................................................................................................................... 19,902 10,593

Net Cash Used in Investing Activities .......................................................................................................... (752,030) (605,964)

CASH FLOWS FROM FINANCING ACTIVITIES:

Dividends Paid .............................................................................................................................................. (35,910) (23,084)

Debt Proceeds .............................................................................................................................................. 465,200 386,000

Payments on Short-term Debt ...................................................................................................................... (8,800) (7,500)

Increase/(Decrease) In:

Consumer Deposits and Advance Payments ............................................................................................... 6,832 4,200

Net Cash Provided by Financing Activities .................................................................................................. 427,322 359,616

Net Increase/(Decrease) in Cash ................................................................................................................. (8,783) 65,501

Cash—Beginning of Year ............................................................................................................................. 158,083 92,582

Cash—End of Year ....................................................................................................................................... 149,300 158,083

The accompanying notes are an integral part of these statements.

RECONCILIATION OF NET MARGINS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

Net Margins ................................................................................................................................................... 212,430 193,557

Less: Nonregulated Income .......................................................................................................................... (19,902) (10,593)

Net Income from Regulated Operations ....................................................................................................... 192,528 182,964

Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities:

Depreciation and Amortization .............................................................................................................. 274,691 253,509

Provision for Uncollectible Accounts Receivable .................................................................................. 10,107 (3,610)

(Increase)/Decrease In:

Customer and Other Accounts Receivable ........................................................................................... (27,126) (22,979)

Current and Accrued Assets—Other ..................................................................................................... 8,774 5,119

Prepaid Taxes ........................................................................................................................................ 10,000 (10,000)

Other Prepaid Expenses ....................................................................................................................... 3,016 (5,426)

Increase/(Decrease) In:

Accounts Payable .................................................................................................................................. (166,795) (126,472)

Accrued Taxes ....................................................................................................................................... 17,510 37,742

Other Current Liabilities ......................................................................................................................... (579) (638)

Deferred Credits .................................................................................................................................... (6,201) 1,640

Total Adjustments .................................................................................................................................. 123,397 128,885

Net Cash Provided by Operating Activities ......................................................................................................... 315,925 311,849
38728 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations

The accompanying notes are an integral

part of these statements.

13. Appendix B to Part 1773 is

amended by revising exhibits 1, 2, and

3, deleting exhibits 4, 5 and 6, and

redesignating exhibit 7 as exhibit 4 and

revising it to read as follows:

Appendix B to Part 1773–Sample

Auditor’s Report for A Class A or B

Commercial Telecommunications

Company

* * * * *

Exhibit 1—Same Auditor’s Report

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors, Center Telephone

Company: Independent Auditor’s Report

We have audited the accompanying

balance sheets of Center Telephone Company

as of December 31, 1998 and 1997, and the

related statements of revenue and patronage

capital, and cash flows for the years then

ended. These financial statements are the

responsibility of Center Telephone

Company’s management. Our responsibility

is to express an opinion on these financial

statements based on our audit.

We conducted our audit in accordance

with generally accepted auditing standards

and the standards applicable to financial

audits contained in Government Auditing

Standards, issued by the Comptroller General

of the United States. Those standards require

that we plan and perform the audit to obtain

reasonable assurance about whether the

financial statements are free of material

misstatement. An audit includes examining,

on a test basis, evidence supporting the

amounts and disclosures in the financial

statements. An audit also includes assessing

the accounting principles used and

significant estimates made by management,

as well as evaluating the overall financial

statement presentation. We believe that our

audits provide a reasonable basis for our

audit.

In our opinion, the financial statements

referred to above present fairly, in all

material respects, the financial position of

Center Telephone Company as of December

31, 1998 and 1997, and the results of its

operations and its cash flows for the years

then ended in conformity with general

accepted accounting principles.

In accordance with Government Auditing

Standards, we have also issued our report

dated March 2, 1999, on our consideration of

Center Telephone Company’s internal control

over financial reporting and our tests of its

compliance with certain provisions of laws,

regulations, contracts, and grants.

Certified Public Accountants

March 2, 1999

Exhibit 2—Sample Report on Compliance

and on Internal Control over Financial

Reporting, the CPA found No Reportable

Instances of Noncompliance and No Material

Weaknesses(No Reportable Conditions

Identified)

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors

Center Telephone Company:

We have audited the financial statements

of Center Telephone Company as of and for

the years ended December 31, 1998 and 1997,

and have issued our report thereon dated

March 2, 1999. We conducted our audit in

accordance with generally accepted auditing

standards and the standards applicable to

financial audits contained in Government

Auditing Standards, issued by the

Comptroller General of the United States.

Compliance

As part of obtaining reasonable assurance

about whether Center Telephone Company’s

financial statements are free of material

misstatement, we performed tests of its

compliance with certain provisions of laws,

regulations, contracts, and grants,

noncompliance with which could have a

direct and material effect on the

determination of financial statement

amounts. However, providing an opinion on

compliance with those provisions was not an

objective of our audit, and accordingly, we

do not express such an opinion. The results

of our tests disclosed no instances of

noncompliance that are required to be

reported under Government Auditing

Standards. [If the CPA has issued a separate

letter to the management detailing immaterial

instances of noncompliance, modify this

paragraph to include a statement such as the

following: However, we noted certain

immaterial instances of noncompliance

which we have reported to the management

of Center Telephone Company in a separate

letter dated March 2, 1999.]

Internal Control Over Financial Reporting

In planning and performing our audit, we

considered Center Telephone Company’s

internal control over financial reporting in

order to determine our auditing procedures

for the purpose of expressing our opinion on

the financial statements and not to provide

assurance on the internal control over

financial reporting. Our consideration of the

internal control over financial reporting

would not necessarily disclose all matters in

the internal control over financial reporting

that might be material weaknesses. A

material weakness is a condition in which

the design or operation of one or more of the

internal control components does not reduce

to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial

statements being audited may occur and not

be detected within a timely period by

employees in the normal course of

performing their assigned functions. We

noted no matters involving the internal

control over financial reporting and its

operation that we consider to be material

weaknesses. [If the CPA has issued a separate

letter to management to communicate other

matters involving the design and operation of

the internal control over financial reporting,

modify this paragraph to include a statement

such as the following: However, we noted

other matters involving the internal control

over financial reporting which we have

reported to the management of Center

Telephone Company in a separate letter

dated March 2, 1999.]

This report is intended for the information

of the audit committee, management, the

Rural Utilities Service, and supplemental

lenders. However, this report is a matter of

public record and its distribution is not

limited.

Certified Public Accountants

March 2, 1999

Exhibit 3—Sample Report on Compliance

and on Internal Control over Financial

Reporting, the CPA found Reportable

Instances of Noncompliance and Reportable

Conditions were Identified

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors

Center Telephone Company

We have audited the financial statements

of Center Telephone Company as of and for

the years ended December 31, 1998 and 1997,

and have issued our report thereon dated

March 2, 1999. We conducted our audit in

accordance with generally accepted auditing

standards and the standards applicable to

financial audits contained in Government

Auditing Standards, issued by the

Comptroller General of the United States.

Compliance

As part of obtaining reasonable assurance

about whether Center County Telephone

Company’s financial statements are free of

material misstatement, we performed tests of

its compliance with certain provisions of

laws, regulations, contracts, and grants,

noncompliance with which could have a

direct and material effect on the

determination of financial statement

amounts. However, providing an opinion on

compliance with those provisions was not an

objective of our audit, and accordingly, we

do not express such an opinion. The results

of our tests disclosed instances of

noncompliance that are required to be

reported under Government Auditing

Standards. [A description of the findings

should be included in the report.] [If the CPA

has issued a separate letter to the

management detailing immaterial instances

of noncompliance, modify this paragraph to

include a statement such as the following:

We also noted certain immaterial instances of

noncompliance which we have reported to

the management of Center Telephone

Company in a separate letter dated March 2,

1999.]

Internal Control Over Financial Reporting

In planning and performing our audit, we

considered Center Telephone Company’s

internal control over financial reporting in

order to determine our auditing procedures

for the purpose of expressing our opinion on

the financial statements and not to provide

assurance on the internal control over

financial reporting. However, we noted

certain matters involving the internal control

over financial reporting and its operation that

we consider to be reportable conditions.

Reportable conditions involve matters

coming to our attention relating to significant

deficiencies in the design or operation of the
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations 38729

internal control over financial reporting that,

in our judgment, could adversely affect

Center Telephone Company’s ability to

record, process, summarize and report

financial data consistent with the assertions

of management in the financial statements.

[A description of the findings pertaining to

reportable conditions should be included in

the report.]

A material weakness is a condition in

which the design or operation of one or more

of the internal control components does not

reduce to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial

statements being audited may occur and not

be detected within a timely period by

employees in the normal course of

performing their assigned functions. Our

consideration of the internal control over

financial reporting would not necessarily

disclose all matters in the internal control

that might be reportable conditions and,

accordingly, would not necessarily disclose

all reportable conditions that are also

considered to be material weaknesses.

However, we believe none of the reportable

conditions described above is a material

weakness. [If conditions believed to be

material weaknesses are disclosed, the last

sentence should be deleted and instead the

report should identify which of the

reportable conditions described above are

considered to be material weaknesses.][If the

CPA has issued a separate letter to

management to communicate other matters

involving the design and operation of the

internal control over financial reporting,

modify this paragraph to include a statement

such as the following: We also noted other

matters involving the internal control over

financial reporting which we have reported

to the management of Center Telephone

Company in a separate letter dated March 2,

1999.]

This report is intended for the information

of the audit committee, management, the

Rural Utilities Service, and supplemental

lenders. However, this report is a matter of

public record and its distribution is not

limited.

Certified Public Accountants

March 2, 1999

EXHIBIT 4—SAMPLE FINANCIAL STATEMENTS

CENTER COUNTY ELECTRIC COOPERATIVE BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8 ASSETS (NOTES 1 AND 2)

19X9 19X8

ELECTRIC PLANT: (Note 3)

In Service—at cost ............................................................................................................................................ $9,524,646 $9,365,264

Construction Work in Progress ......................................................................................................................... 407,943 317,166

9,932,589 9,682,430

Less: Accumulated Provisions for Depreciation ............................................................................................... 3,117,629 2,917,295

6,814,960 6,765,135

OTHER ASSETS AND INVESTMENTS:

Nonutility Property ............................................................................................................................................. 20,227 20,227

Investments in Associated Organizations (Note 4) .......................................................................................... 391,258 292,798

411,485 313,025

CURRENT ASSETS:

Cash—General Funds ...................................................................................................................................... 37,350 51,544

Cash—Construction Funds ............................................................................................................................... 10,034 20,193

Accounts Receivable (Less accumulated provision for uncollectible accounts of $2,207 in 19X9 and

$1,933 in 19X8) ............................................................................................................................................. 36,527 35,255

Materials and Supplies (at average cost) ......................................................................................................... 83,652 80,882

Other Current and Accrued Assets .................................................................................................................. 8,613 8,692

176,176 196,566

DEFERRED CHARGES (Note 5): ........................................................................................................................... 5,666 1,762

$7,408,287 $7,276,488

The accompanying notes are an integral part of these statements.

CENTER COUNTY ELECTRIC COOPERATIVE BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8 EQUITIES AND LIABILITIES

(NOTE 1)

19X9 19X8

EQUITIES:

Memberships ..................................................................................................................................................... $60,145 $59,440

Patronage Capital (Note 6) ............................................................................................................................... 1,761,798 1,526,833

Other Equities (Note 7) ..................................................................................................................................... 53,647 35,900

1,875,590 1,622,173

LONG-TERM DEBT:

RUS Mortgage Notes less current maturities (Note 8) .................................................................................... 5,249,115 5,396,385

CURRENT LIABILITIES:

Current Maturities of Long-Term Debt .............................................................................................................. 145,000 140,000

Accounts Payable—Purchased Power ............................................................................................................. 48,916 52,117

Accounts Payable—Other ................................................................................................................................. 21,859 6,556

Consumer Deposits .......................................................................................................................................... 32,660 33,085
38730 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations

CENTER COUNTY ELECTRIC COOPERATIVE BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8 EQUITIES AND LIABILITIES

(NOTE 1)—Continued

19X9 19X8

Accrued Taxes .................................................................................................................................................. 10,958 9,146

Other Current and Accrued Liabilities .............................................................................................................. 12,285 6,461

271,678 247,365

DEFERRED CREDITS (Note 10) ............................................................................................................................ 11,904 10,565

$7,408,287 $7,276,488

The accompanying notes are an integral part of these statements.

CENTER COUNTY ELECTRIC COOPERATIVE STATEMENTS OF REVENUE AND PATRONAGE CAPITAL FOR THE YEARS ENDED

DECEMBER 31, 19X9 AND 19X8

19X9 19X8

OPERATING REVENUES ....................................................................................................................................... $1,719,467 $1,605,690

OPERATING EXPENSES:

Cost of Power ................................................................................................................................................... 587,729 625,411

Distribution—Operation ..................................................................................................................................... 111,058 121,682

Distribution—Maintenance ................................................................................................................................ 158,622 182,740

Consumer Accounts .......................................................................................................................................... 76,675 72,927

Sales ................................................................................................................................................................. 38,378 40,755

Administrative and General .............................................................................................................................. 94,682 87,058

Depreciation and Amortization .......................................................................................................................... 288,389 279,776

Taxes ................................................................................................................................................................ 34,920 34,438

1,390,453 1,444,787

OPERATING MARGINS BEFORE FIXED CHARGES 329,014 160,903

FIXED CHARGES:

Interest on Long-Term Debt ................................................................................................................................. 113,713 115,082

OPERATING MARGINS AFTER FIXED CHARGES .............................................................................................. 215,301 45,821

G&T AND OTHER CAPITAL CREDITS .................................................................................................................. 14,460 17,500

NET OPERATING MARGINS .................................................................................................................................. 229,761 63,321

NONOPERATING MARGINS:

Interest Income ........................................................................................................................................................ 24,289 18,802

Other Nonoperating Income ..................................................................................................................................... 1,200 1,200

25,489 20,002

NET MARGINS ........................................................................................................................................................ 255,250 83,323

PATRONAGE CAPITAL—BEGINNING OF YEAR .................................................................................................. 1,526,833 1,469,125

1,782,083 1,552,448

RETIREMENT OF CAPITAL CREDITS ................................................................................................................... 20,285 25,615

PATRONAGE CAPITAL—END OF YEAR .............................................................................................................. $1,761,798 $1,526,833

The accompanying notes are an integral part of these statements.

CENTER COUNTY ELECTRIC COOPERATIVE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 19X9

AND 19X8

19×9 19×8

CASH FLOWS FROM OPERATING ACTIVITIES:

Cash Received from Consumers .................................................................................................................. $1,721,496 $1,609,933

Cash Paid to Suppliers and Employees ....................................................................................................... (1,049,139) (1,126,367)

Interest Received .......................................................................................................................................... 24,289 18,802

Interest Paid .................................................................................................................................................. (114,131) (115,607)

Taxes Paid .................................................................................................................................................... (33,108) (32,132)

Net Cash Provided by Operating Activities .................................................................................................. 549,407 354,629

CASH FLOWS FROM INVESTING ACTIVITIES:

Construction and Acquisition of Plant ........................................................................................................... (322,234) (216,427)
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations 38731

CENTER COUNTY ELECTRIC COOPERATIVE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 19X9

AND 19X8—Continued

19×9 19×8

Plant Removal Costs .................................................................................................................................... (25,994) (19,268)

Materials Salvaged from Retirements .......................................................................................................... 10,014 7,327

(Increase)/Decrease In:

Materials Inventory ................................................................................................................................ (2,770) 1,916

Deferred Charges-Preliminary Survey & Investigation .......................................................................... (3,486) (2,617)

Investments-CFC Capital Term Certificates .......................................................................................... (82,472) (69,412)

Inventory Adjustment-Deferred Credit Decrease .......................................................................................... (2,290) (1,057)

Net Cash Used in Investing Activities .......................................................................................................... (429,232) (299,538)

CASH FLOWS FROM FINANCING ACTIVITIES:

Retirements of Patronage Capital Credits .................................................................................................... (20,285) (25,615)

Retired Capital Credits—Gain ...................................................................................................................... 1,200 1,200

Donated Capital ............................................................................................................................................ 16,547 6,178

RUS Loan Advances .................................................................................................................................... 174,976 197,450

Payments on RUS Debt ............................................................................................................................... (317,246) (279,575)

Increase/(Decrease) In:

Consumer Deposits ............................................................................................................................... (425) 575

Memberships Issued .............................................................................................................................. 705 450

Net Cash Used in Financing Activities ......................................................................................................... (144,528) (99,337)

Net Increase/(Decrease) in Cash ................................................................................................................. (24,353) (44,246)

Cash—Beginning of Year ............................................................................................................................. 71,737 115,983

Cash—End of Year ....................................................................................................................................... 47,384 71,737

The accompanying notes are an integral part of these statements.

RECONCILIATION OF NET MARGINS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

Net Margins .......................................................................................................................................................... $255,250 $83,323

Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities:

Depreciation and Amortization .............................................................................................................. 288,389 279,776

G&T and Other Capital Credits (Non-Cash) ......................................................................................... (14,460) (17,500)

Patronage Capital Credits-NRUCFC (Non-Cash) ................................................................................. (1,528) (1,200)

Provision for Uncollectible Accounts Receivable .................................................................................. 274 (526)

(Increase)/Decrease In:

Customer and Other Accounts Receivable ........................................................................................... (1,546) 2,523

Current and Accrued Assets-Other ....................................................................................................... 79 112

Increase/(Decrease) In:

Accounts Payable .................................................................................................................................. 12,102 5,117

Accrued Taxes ....................................................................................................................................... 1,812 2,306

Deferred Energy Prepayments .............................................................................................................. 3,629 2,246

Current and Accrued Liabilities-Other ................................................................................................... 5,824 (1,023)

Deferred Interest Expense ............................................................................................................................ (418) (525)

Total Adjustments ...................................................................................................................................... 294,157 271,306

Net Cash Provided by Operating Activities ......................................................................................................... 549,407 354,629

The accompanying notes are an integral part of these statements.

CENTER COUNTY ELECTRIC COOPERATIVE NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 19X9 AND DECEMBER 31,

19X8

19X9 19X8

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Include a brief description of the reporting entity’s significant accounting policies in accordance with Accounting Principles Board Opinion

No. 22, Disclosure of Accounting Policies.

Disclosure of accounting policies should identify and describe the accounting principles followed by the borrower and the methods of applying those principles that materially affect the determination of financial position, cash flow, and results of operations.

Disclosures of accounting policies do not have to be duplicated in this section if presented elsewhere as an integral part of the financial

statements.

2. ASSETS PLEDGED:

Substantially all assets are pledged as security for long-term debt to RUS.

3. ELECTRIC PLANT AND DEPRECIATION RATES AND PROCEDURES:

Listed below are the major classes of the electric plant as of December 31, 19X9, and 19X8:

Intangible Plant .................................................................................................................................................... $2,194 $2,194

Distribution Plant .................................................................................................................................................. 9,011,036 8,873,957

General Plant ....................................................................................................................................................... 511,416 489,113

Electric Plant in Service ....................................................................................................................................... 9,524,646 9,365,264
38732 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations

CENTER COUNTY ELECTRIC COOPERATIVE NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 19X9 AND DECEMBER 31,

19X8—Continued

19X9 19X8

Construction Work in Progress ............................................................................................................................ 407,943 317,166

9,932,589 9,682,430

Provision has been made for depreciation of distribution plant at a straight-line composite rate of 2.86 percent per annum.

General Plant depreciation rates have been applied on a straight-line basis as follows:

Structures and Improvement ........................................................................................................................ 2.5%

Office Furniture ............................................................................................................................................. 6.0%

Transportation Equipment ............................................................................................................................. 14.0%

Power Operated Equipment ......................................................................................................................... 12.0%

Other General Plant ...................................................................................................................................... 4.0%

Communications Equipment ......................................................................................................................... 6.0%

4. INVESTMENTS IN ASSOCIATED ORGANIZATIONS:

Investments in associated organizations consisted of the following at December 31, 19X9 and 19X8:

Capital Term Certificates of the National Rural Utilities Cooperative Finance Corporation (NRUCFC) $385,193 $288,261

NRUCFC Patronage Capital Credits ..................................................................................................... 5,065 3,537

Other ...................................................................................................................................................... 1,000 1,000

391,258 292,798

5. DEFERRED CHARGES:

Following is a summary of amounts recorded as deferred charges as of December 31, 19X9 and 19X8:

Preliminary Surveys 19X0—X1 Work Plan .................................................................................................. 5,666 1,762

6. PATRONAGE CAPITAL:

At December 31, 19X9 and 19X8, patronage capital consisted of:

Assignable $255,250 $83,323

Assigned to Date ................................................................................................................................... 1,952,448 1,869,125

2,207,698 1,952,448

Less: Retirements to Date ..................................................................................................................... 445,900 425,615

1,761,798 1,526,833

Under the provisions of the Mortgage Agreement, until the equities and margins equal or exceed forty percent of the total assets of the cooperative, the return to patrons of contributed capital is generally limited to twenty-five percent of the patronage capital or margins received by the cooperative in the prior calendar year. The equities and margins of the cooperative represent 25.3 percent of the total assets at balance sheet date. Capital credit retirements in the amount of $20,285 were paid in 19X9.

7. OTHER EQUITIES:

At December 31, 19X9 and 19X8, other equities consisted of:

Retired Capital Credits—Gain ............................................................................................................... $36,190 $34,990

Donated Capital ..................................................................................................................................... 17,457 910

53,647 35,900

8. MORTGAGE NOTES—RUS:

Long-term debt is represented by mortgage notes payable to the United States of America. Following is a summary of outstanding longterm debt as of December 31, 19X9 and 19X8:

2% Notes due March 31, 19X5 ............................................................................................................. $1,057,155 $1,098,700

2% Notes due December 31, 19X6 ...................................................................................................... 2,485,927 2,502,370

5% Notes due December 31, 19X6 ...................................................................................................... 1,851,033 1,935,315

Less: Current Maturities ........................................................................................................................ (145,000) (140,000)

5,249,115 5,396,385

Unadvanced loan funds of $285,600 are available to the cooperative on loan commitments from RUS.

Principal and interest installments on the above notes are due quarterly in equal amounts of $99,600. As of December 31, 19X9, annual

maturities of long-term debt outstanding for the next five years are as follows:

19X0 ....................................................................................................................................................... $145,000

19X1 ....................................................................................................................................................... 150,000

19X2 ....................................................................................................................................................... 151,500

19X3 ....................................................................................................................................................... 154,000

19X4 ....................................................................................................................................................... 155,000

Advance payments of $252,300 may be applied to the installments.

9. PENSION PLAN:

Substantially all of the employees of the Cooperative are covered by the ABC Retirement and Security Program, a multiemployer plan.

Pension expense for the years ended 19X9 and 19X8 was $22,400.00 and $20,400.00, respectively.

10. DEFERRED CREDITS:

Following is a summary of the amounts recorded as deferred credits as of December 31, 19X9 and 19X8:

Customer Energy Payments .................................................................................................................. $6,694 $3,065

Inventory Adjustment ............................................................................................................................. 5,210 7,500
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations 38733

CENTER COUNTY ELECTRIC COOPERATIVE NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 19X9 AND DECEMBER 31,

19X8—Continued

19X9 19X8

11,904 10,565

11. LITIGATION:

The cooperative is a defendant in an action in which the plaintiff claims damages totaling $200,000 for personal injuries sustained. The action has been dismissed by the District Court, but is on appeal before the State Supreme Court. Management is of the opinion that no liability will be incurred by the cooperative as a result of this action.

12. COMMITMENTS:

Under its wholesale power agreement, the cooperative is committed to purchase its electric power and energy requirements from Central

Power Cooperative, Inc., until December 31, 19XX. The rates paid for such purchases are subject to review annually.

14. Appendix C To Part 1773 is

revised to read as follows:

Appendix C to Part 1773—Illustrative

Independent Auditor’s Management

Letter for Electric Borrowers

RUS requires that CPAs auditing RUS

borrowers provide a management letter in

accordance with § 1773.33. This letter must

be signed by the CPA, bear the same date as

the auditor’s report, and be addressed to the

borrower’s board of directors.

Illustrative Independent Auditors’

Management Letter for Electric Borrowers

March 2, 1999

Board of Directors

[Name of Borrower]

[City, State]

We have audited the financial statements

of [Name of Borrower] for the year ended

December 31, 1998, and have issued our

report thereon dated March 2, 1999. We

conducted our audit in accordance with

generally accepted auditing standards, the

standards applicable to financial audits

contained in Government Auditing Standards

issued by the Comptroller General of the

United States, and 7 CFR part 1773, Policy

on Audits of Rural Utilities Service (RUS)

Borrowers. Those standards require that we

plan and perform the audit to obtain

reasonable assurance about whether the

financial statements are free of material

misstatement.

In planning and performing our audit of

the financial statements of [Name of

Borrower] for the year ended December 31,

1998, we considered its internal control over

financial reporting in order to determine our

auditing procedures for the purpose of

expressing an opinion on the financial

statements and not to provide assurance on

the internal control over financial reporting.

A description of the responsibility of

management for establishing and maintaining

the internal control over financial reporting

and the objectives of and inherent limitations

in such control is set forth in our

independent auditors’ report on compliance

and on internal control over financial

reporting dated March 2, 1999, and should be

read in conjunction with this report.

Our consideration of the internal control

over financial reporting would not

necessarily disclose all matters in the

internal control over financial reporting that

might be material weaknesses. A material

weakness is a condition in which the design

or operation of one or more of the internal

control components does not reduce to a

relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial

statements being audited may occur and not

be detected within a timely period by

employees in the normal course of

performing their assigned functions. We

noted no matters involving the internal

control over financial reporting that we

consider to be material weaknesses. [If a

material weakness was noted, refer the reader

to the independent auditors’ report on

compliance and on internal control over

financial reportingstructure.]

7 CFR 1773.33 requires comments on

specific aspects of the internal control over

financial reporting, compliance with specific

RUS loan and security instrument provisions,

and other additional matters. We have

grouped our comments accordingly. In

addition to obtaining reasonable assurance

about whether the financial statements are

free from material misstatements, at your

request, we performed tests of specific

aspects of the internal control over financial

reporting, of compliance with specific RUS

loan and security instrument provisions, and

of additional matters. The specific aspects of

the internal control over financial reporting,

compliance with specific RUS loan and

security instrument provisions, and

additional matters tested include, among

other things, the accounting procedures and

records, materials control, compliance with

specific RUS loan and security instrument

provisions set forth in 7 CFR 1773.33 (e)(1),

related party transactions, depreciation rates,

and a schedule of deferred debits and credits,

upon which we express an opinion. In

addition, our audit of the financial

statements also included the procedures

specified in 7 CFR 1773.38—.45. Our

objective was not to provide an opinion on

these specific aspects of the internal control

over financial reporting, compliance with

specific RUS loan and security instrument

provisions, or additional matters, and

accordingly, we express no opinion thereon.

No reports (other than our independent

auditors’ report and our independent

auditors’ report on compliance and on

internal control over financial reporting, all

dated March 2, 1999) or summary of

recommendations related to our audit have

been furnished to management.

Our comments on specific aspects of the

internal control over financial reporting,

compliance with specific RUS loan and

security instrument provisions, and other

additional matters as required by 7 CFR

1773.33 are presented below.

Comments on Certain Specific Aspects of the

Internal Control Over Financial Reporting

We noted no matters regarding [Name of

Borrower]’s internal control over financial

reporting and its operation that we consider

to be a material weakness as previously

defined with respect to:

—The accounting procedures and records

[list other comments];

—The process for accumulating and

recording labor, material, and overhead

costs, and the distribution of these costs to

construction, retirement, and maintenance

or other expense accounts [list other

comments]; and

—The materials control [list other

comments].

Comments on Compliance With Specific RUS

Loan and Security Instrument Provisions

Management’s responsibility for

compliance with laws, regulations, contracts,

and grants is set forth in our independent

auditors’ report on compliance and on

internal control over financial reporting

dated March 2, 1999, and should be read in

conjunction with this report. At your request,

we have performed the procedures

enumerated below with respect to

compliance with certain provisions of laws,

regulations, contracts, and grants. The

procedures we performed are summarized as

follows:

—Procedure performed with respect to the

requirement to maintain all funds from

loans made or guaranteed by RUS in

institutions whose accounts are insured by

an Agency of the Federal government:

1. Obtained information from financial

institutions with which [Name of Borrower]

maintains cash proceeds from loans that

indicated that the institutions are insured by

an Agency of the Federal government.

—Procedures performed with respect to the

requirement for a borrower to obtain

written approval of the mortgagee to enter

into any contract for the operation or

maintenance of property, or for the use of

mortgaged property by others for the year

ended December 31, 19X5 of [Name of

Borrower]:
38734 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations

1. Obtained and read a borrower-prepared

schedule of new written contracts entered

into during the year for the operation or

maintenance of its property, or for the use of

its property by others as defined in

§ 1773.334 (e)(1)(ii).

2. Reviewed Board of Director minutes to

ascertain whether board-approved written

contracts are included in the borrowerprepared schedule.

3. Noted the existence of written RUS [and

other mortgagee] approval of each contract

listed by the borrower.

—Procedure performed with respect to the

requirement to submit RUS Form 7 or

Form 12 to the RUS:

1. Agreed amounts reported in Form 7 or

Form 12 to [Name of Borrower]’s records.

The results of our tests indicate that, with

respect to the items tested, [Name of

Borrower] complied, except as noted below,

in all material respects, with the specific RUS

loan and security instrument provisions

referred to below. The specific provisions

tested, as well as any exceptions noted,

include the requirements that:

—The borrower maintains all funds from

loans made or guaranteed by RUS in

institutions whose accounts are insured by

an agency of the Federal government [list

all exceptions];

—The borrower has obtained written

approval of the RUS [and other mortgagees]

to enter into any contract for the operation

or maintenance of property, or for the use

of mortgaged property by others as defined

in § 1773.334 (e)(1)(ii) [list all exceptions];

and

—The borrower has submitted its Form 7 or

Form 12 to the RUS and the Form 7 or

Form 12, Financial and Statistical Report,

as of December 31, 1998, represented by

the borrower as having been submitted to

RUS is in agreement with the [Name of

Borrower]’s audited records in all material

respects [list all exceptions] [or if the audit

year end is other than December 31],

appears reasonable based upon the audit

procedures performed [list all exceptions].

Comments on Other Additional Matters

In connection with our audit of the

financial statements of [Name of Borrower],

nothing came to our attention that caused us

to believe that [Name of Borrower] failed to

comply with respect to:

—The reconciliation of subsidiary plant

records to the controlling general ledger

plant accounts addressed at 7 CFR

1773.334 (c)(1) [list all exceptions];

—The clearing of the construction accounts

and the accrual of depreciation on

completed construction addressed at 7 CFR

1773.334 (c)(2) [list all exceptions];

—The retirement of plant addressed at 7 CFR

1773.33 (c)(3) and (4) [list all exceptions];

—Sales of plant material, or scrap addressed

at 7 CFR 1773.33 (c)(5) [list all exceptions];

—The disclosure of material related party

transactions, in accordance with Statement

of Financial Accounting Standards No. 57,

Related Party Transactions, for the year

ended December 31, 1998, in the financial

statements referenced in the first paragraph

of this report addressed at 7 CFR 1773.33

(f) [list all exceptions];

—The depreciation rates addressed at 7 CFR

1773.334 (g) [list all exceptions]; and

—The detailed schedule of deferred debits

and deferred credits.

Our audit was made for the purpose of

forming an opinion on the basic financial

statements taken as a whole. The detailed

schedule of deferred debits and deferred

credits required by 7 CFR 1773.33 (h) and

provided below is presented for purposes of

additional analysis and is not a required part

of the basic financial statements. This

information has been subjected to the

auditing procedures applied in our audit of

the basic financial statements and, in our

opinion, is fairly stated in all material

respects in relation to the basic financial

statements taken as a whole.

[The detailed schedule of deferred debits

and deferred credits would be included here.

The total amount of deferred debits and

deferred credits as reported in the schedule

must agree with the totals reported on the

Balance Sheet under the specific captions of

‘‘Deferred Debits’’ and ‘‘Deferred Credits’’.

Those items that have been approved, in

writing, by RUS should be clearly indicated.]

This report is intended solely for the

information and use of the board of directors,

management, and the RUS and supplemental

lenders. However, this report is a matter of

public record and its distribution is not

limited.

Certified Public Accountants

15. Appendix D To Part 1773 is added

to read as follows:

Appendix D to Part 1773—Illustrative

Independent Auditor’s Management

Letter for Telecommunications

Borrowers

RUS requires that CPAs auditing RUS

borrowers provide a management letter in

accordance with § 1773.33. This letter must

be signed by the CPA, bear the same date as

the auditor’s report, and be addressed to the

borrower’s board of directors.

Illustrative Independent Auditors’

Management Letter for Telecommunications

Borrowers

March 2, 1999

Board of Directors

[Name of Borrower]

[City, State]

We have audited the financial statements

of [Name of Borrower] for the year ended

December 31, 1998, and have issued our

report thereon dated March 2, 1999. We

conducted our audit in accordance with

generally accepted auditing standards, the

standards applicable to financial audits

contained in Government Auditing Standards

issued by the Comptroller General of the

United States, and 7 CFR part 1773, Policy

on Audits of Rural Utilities Service (RUS)

Borrowers. Those standards require that we

plan and perform the audit to obtain

reasonable assurance about whether the

financial statements are free of material

misstatement.

In planning and performing our audit of

the financial statements of [Name of

Borrower] for the year ended December 31,

1998, we considered its internal control over

financial reporting in order to determine our

auditing procedures for the purpose of

expressing an opinion on the financial

statements and not to provide assurance on

the internal control over financial reporting.

A description of the responsibility of

management for establishing and maintaining

the internal control over financial reporting

and the objectives of and inherent limitations

in such control is set forth in our

independent auditors’ report on compliance

and on internal control over financial

reporting dated March 2, 1999, and should be

read in conjunction with this report.

Our consideration of the internal control

over financial reporting would not

necessarily disclose all matters in the

internal control over financial reporting that

might be material weaknesses. A material

weakness is a condition in which the design

or operation of one or more of the internal

control components does not reduce to a

relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial

statements being audited may occur and not

be detected within a timely period by

employees in the normal course of

performing their assigned functions. We

noted no matters involving the internal

control over financial reporting that we

consider to be material weaknesses. [If a

material weakness was noted, refer the reader

to the independent auditors’ report on

compliance and on internal control over

financial reporting.]

7 CFR 1773.33 requires comments on

specific aspects of the internal control over

financial reporting, compliance with specific

RUS loan and security instrument provisions,

and other additional matters. We have

grouped our comments accordingly. In

addition to obtaining reasonable assurance

about whether the financial statements are

free from material misstatements, at your

request, we performed tests of specific

aspects of the internal control over financial

reporting, of compliance with specific RUS

loan and security instrument provisions, and

of additional matters. The specific aspects of

the internal control over financial reporting,

compliance with specific RUS loan and

security instrument provisions, and

additional matters tested include, among

other things, the accounting procedures and

records, materials control, compliance with

specific RUS loan and security instrument

provisions set forth in 7 CFR 1773.33 (e)(2),

and related party transactions. In addition,

our audit of the financial statements also

included the procedures specified in 7 CFR

1773.38–.45. Our objective was not to

provide an opinion on these specific aspects

of the internal control over financial

reporting, compliance with specific RUS loan

and security instrument provisions, or

additional matters, and accordingly, we

express no opinion thereon.

No reports (other than our independent

auditors’ report, and our independent

auditors’ report on compliance and on

internal control over financial reporting, all

dated March 2, 1999) or summary of

recommendations related to our audit have

been furnished to management.
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 /Rules and Regulations 38735

Our comments on specific aspects of the

internal control over financial reporting,

compliance with specific RUS loan and

security instrument provisions, and other

additional matters as required by 7 CFR

1773.33 are presented below.

Comments On Certain Specific Aspects of the

Internal Control Over Financial Reporting

We noted no matters regarding [Name of

Borrower]’s internal control over financial

reporting and its operation that we consider

to be a material weakness as previously

defined with respect to:

—The accounting procedures and records

[list other comments];

—The process for accumulating and

recording labor, material, and overhead

costs, and the distribution of these costs to

construction, retirement, and maintenance

or other expense accounts [list other

comments]; and

—The materials control [list other

comments].

Comments On Compliance With Specific

RUS Loan and Security Instrument

Provisions

Management’s responsibility for

compliance with laws, regulations, contracts,

and grants is set forth in our independent

auditors’ report on compliance and on

internal control over financial reporting

dated March 2, 1999, and should be read in

conjunction with this report. At your request,

we have performed the procedures

enumerated below with respect to

compliance with certain provisions of laws,

regulations, contracts, and grants. The

procedures we performed are summarized as

follows:

—Procedure performed with respect to the

requirement to maintain all funds in

institutions whose accounts are insured by

an Agency of the Federal government:

1. Obtained information from financial

institutions with which [Name of Borrower]

maintains funds that indicated that the

institutions are insured by an agency of the

Federal government.

—Procedures performed with respect to the

requirement for a borrower to obtain

written approval of the mortgagee to enter

into any contract for the operation or

maintenance of property, for the use of

mortgaged property by others, or for

services pertaining to toll traffic, operator

assistance, or switching for the year ended

December 31, 1998 of [Name of Borrower]:

1. Obtained and read a borrower-prepared

schedule of new written contracts entered

into during the year for the operation or

maintenance of its property, for the use of its

property by others, or for services pertaining

to toll traffic, operator assistance, or

switching as defined in § 1773.33 (e)(2)(i).

2. Reviewed Board of Director minutes to

ascertain whether board-approved written

contracts are included in the borrowerprepared schedule.

3. Noted the existence of written RUS [and

other mortgagee] approval of each contract

listed by the borrower.

—Procedure performed with respect to the

requirement to submit RUS Form 479 to

the RUS:

1. Agreed amounts reported in Form 479 to

[Name of Borrower]’s records.

—Procedure performed with respect to

funded reserve and net plant to secured

debt ratio requirements:

1. Reviewed loan security instrument to

ascertain which condition was elected by the

borrower.

2. If the funded reserve option was

selected, review financial institution records

to verify the existence of a separate bank

account for the reserve, and determine that

it was funded within one year of approval of

release of funds and that it remained funded

over the composite economic life of the

facilities financed.

3. If the net plant to secured debt ratio

option was selected, calculate the ratio and

confirm that the 1.2 ratio was achieved one

year following the first advance of loan

funds.

The results of our tests indicate that, with

respect to the items tested, [Name of

Borrower] complied, except as noted below,

in all material respects, with the specific RUS

loan and security instrument provisions

referred to below. The specific provisions

tested, as well as any exceptions noted,

include the requirements that:

—The borrower maintains all funds in

institutions whose accounts are insured by

an agency of the Federal government [list

all exceptions];

—The borrower has obtained written

approval of the RUS [and other mortgagees]

to enter into any contract for the operation

or maintenance of property, for the use of

mortgaged property by others, or for

services pertaining to toll traffic, operator

assistance, or switching as defined in

§ 1773.33(e)(2)(i) [list all exceptions]; and

—The borrower has submitted its Form 479

to the RUS and the Form 479, Financial

and Statistical Report, as of December 31,

1999, represented by the borrower as

having been submitted to RUS is in

agreement with the [Name of Borrower]’s

audited records in all material respects [list

all exceptions] [or if the audit year end is

other than December 31], appears

reasonable based upon the audit

procedures performed [list all exceptions].

Comments on Other Additional Matters

In connection with our audit of the

financial statements of [Name of Borrower],

nothing came to our attention that caused us

to believe that [Name of Borrower] failed to

comply with respect to:

—The reconciliation of subsidiary plant

records to the controlling general ledger

plant accounts addressed at 7 CFR

1773.33(c)(1) [list all exceptions];

—The clearing of the construction accounts

and the accrual of depreciation on

completed construction addressed at 7 CFR

1773.33(c)(2) [list all exceptions];

—The retirement of plant addressed at 7 CFR

1773.33(c)(3) and (4) [list all exceptions];

—Sales of plant material, or scrap addressed

at 7 CFR 1773.33(c)(5) [list all exceptions];

and

—The disclosure of material related party

transactions, in accordance with Statement

of Financial Accounting Standards No. 57,

Related Party Transactions, for the year

ended December 31, 1999, in the financial

statements referenced in the first paragraph

of this report addressed at 7 CFR 1773.33(f)

[list all exceptions].

This report is intended solely for the

information and use of the board of directors,

management, and the RUS and supplemental

lenders. However, this report is a matter of

public record and its distribution is not

limited.

Certified Public Accountants

Dated: July 8, 1998.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 98–18758 Filed 7–16–98; 8:45 am]

BILLING CODE 3410–15–P