Financial Audit: Pension Benefit Guaranty Corporation's 1994 and 1993 Financial Statements
Released: 1995-03-08T00:00:00

Letter

Significant Matters

The following information discusses our continuing concerns about the long-term viability of the Single-Employer Fund and weaknesses in employee benefit plan audits and reporting.

In addition, significant matters involving material weaknesses in internal controls are discussed in a separate section below.

Concerns About the Long-term Viability of the Single-Employer Fund

The Single-Employer Fund is able to meet its near-term benefit obligations because premium receipts presently exceed benefit payments and the Fund held investments having a market value of $7.2 billion and cash of $627 million at September 30, 1994. The Single-Employer Fund also reported a significant gain for the year, largely as a result of the effect of rising interest rates on the program’s benefit liabilities.

However, the Fund’s unfunded $1.2 billion deficit, which represents a shortfall in assets needed to satisfy the Corporation’s benefit liabilities for terminated plans and for those plans considered likely to terminate, still constitutes a threat to the Fund’s long-term viability. In addition to the losses recorded in the financial statements and reflected in the unfunded deficit as of September 30, 1994, the Corporation disclosed $18 billion in estimated unfunded liabilities in single-employer plans that represent reasonably possible future losses.

The Employee Retirement Income Security Act of 1974 (ERISA), which created the pension insurance program, established funding standards for insured plans but allowed benefits to become guaranteed before being funded by plan sponsors. The resulting timing difference has contributed, in large measure, to the Corporation’s exposure should a financially troubled plan sponsor be unable to meet its pension obligations.

Moreover, the premium structure of the Single-Employer Fund has limited the Corporation’s ability to manage the exposure posed by underfunded plans because premiums paid by those plans have not fully covered the risks.

In 1987, the Congress modified the Single-Employer Fund’s basic flat-rate premium structure by adding a supplemental variable rate premium which, for the first time, established a link between premiums and plan underfunding. The variable rate premium was based on the unfunded vested liability as calculated by the plan, after adjusting for a common interest rate, rather than the specific unfunded liability the Fund assumes should a plan actually terminate. However, as previously reported, the Single-Employer Fund often assumes a substantially larger liability upon termination than the last one calculated and reported by a plan.

Also, the variable rate premium was subject to a maximum dollar amount that, when reached, effectively limited the risk-based linkage between premiums and plan underfunding. In addition, the Single-Employer Fund’s premium structure did not take into account the added risk of termination posed by underfunded plans sponsored by financially troubled companies.

To address these concerns, the administration supported legislation proposed in the 103rd Congress to strengthen minimum funding standards by requiring sponsors to increase their contributions to underfunded defined benefit pension plans and phasing out the cap on variable rate premiums paid by underfunded plans. A modified version of this proposal, the Retirement Protection Act of 1994, became law on December 8, 1994, as part of legislation implementing the General Agreement on Tariffs and Trade (GATT). The Corporation anticipates that this legislation will significantly reduce underfunding in the plans that it insures and improve its financial condition. We have not assessed the long-term effects of this legislation on the Corporation’s deficit. However, the Corporation will need to monitor whether the legislation achieves the desired results.

Weaknesses in Employee Benefit Plan Audits and Reporting

As we previously reported, weaknesses in the scope and quality of audits of employee benefit plans and the lack of plan reporting on internal controls reduce their effectiveness in safeguarding the interests of plan participants and the government. Under ERISA, the Department of Labor is responsible for establishing reporting and disclosure requirements and monitoring ongoing employee benefit plans, which include defined benefit pension plans insured by the Corporation.

In past reviews of independent public accountants’ audits of employee benefit plans we found severe weaknesses in both the quality and scope of plan audits that made their reliability and usefulness questionable. ERISA allows plan administrators to limit the scope of plan audits by excluding plan assets held by certain regulated institutions from the scope of the auditor’s work. Thus, in cases where the scope is limited, the auditor provides little or no assurance about the existence, ownership, or value of assets that may be material to the financial condition of those plans. In addition, plan auditors are not required to check the accuracy and completeness of pension insurance premium filings applicable to insured plans or related premium payments made to the Corporation. Finally, while plan administrators are responsible for establishing sound internal controls and for complying with applicable laws and regulations, ERISA does not require that either plan administrators or plan auditors report to regulators and participants on the effectiveness of internal controls.

In our April 1992 report (GAO/AFMD-92-14), we recommended that the Congress eliminate ERISA’s limited scope audit provision and require plan administrators and auditors to report on internal controls. Legislation was introduced late in the 103rd Congress that would have eliminated limited scope audits, required peer review of auditors conducting plan audits, and required plan administrators and auditors to report irregularities. This proposed legislation would not have required plan administrators and auditors to report on internal controls. The legislation was not enacted, and as of February 15, 1995, the 104th Congress had not taken up similar legislation.

Material Internal Control Weaknesses

Our work disclosed that the Corporation has continued to make progress in improving internal controls affecting its financial reporting. However, as of September 30, 1994, material weaknesses continued to exist in the Corporation’s internal control structure in the three areas reported in our previous audits: weaknesses in financial systems and related internal controls, inadequate controls over the assessment of the Multiemployer Fund’s liability for future financial assistance, and inadequate controls over nonfinancial participant data.

Through substantive audit procedures, we were able to satisfy ourselves that the weaknesses discussed below did not have a material effect on the fiscal year 1994 and 1993 financial statements of the Single-Employer and Multiemployer Funds. However, these weaknesses could result in misstatements in future financial statements and other financial information if not corrected by management. These weaknesses could also have an adverse impact on management decisions based, in whole or in part, on information whose accuracy is affected by the deficiencies. Unaudited financial information, including budget information, reported by the Corporation or used as a basis for management’s operational decisions also may contain inaccuracies resulting from these weaknesses.

Weaknesses in Financial Systems and Related Internal Controls

We reported for fiscal years 1992 and 1993 that weaknesses in financial systems and related internal controls presented an unacceptable risk to the Corporation that material misstatements might occur in the Corporation’s financial information and not be detected promptly by the Corporation.

During fiscal year 1994, the Corporation continued to take steps to strengthen internal controls and to address weaknesses in financial and management information systems. For example, the Corporation began testing the data supporting multiemployer plan requests for financial assistance to ensure that they were valid and adequately supported prior to providing the assistance, updated certain computer operations procedures, and began detail system design for a new core financial system incorporating the standard general ledger.

However, as of September 30, 1994, the Corporation had not implemented sufficient financial reporting controls to compensate fully for its lack of financial system integration. Deficiencies in automated management and financial information systems continued to inhibit management’s ability to promptly and accurately accumulate and summarize the information needed for internal and external reports. Overall, the Corporation’s cumbersome and nonintegrated processes for preparing the financial and other management information needed to support operations and financial/budgetary reporting were time-consuming and labor-intensive. These conditions were due, in part, to shortcomings in systems development and operations, including the absence of a proven systems development methodology. Thus, system and control weaknesses exposed the Corporation to a significant risk that the information could be materially misstated. These weaknesses were discussed in greater detail in our previous reports.

Inadequate Controls Over the Assessment of the Multiemployer Fund’s Liability for Future Financial Assistance

During fiscal year 1994, the Corporation placed into operation a new computer system to determine the multiemployer plan universe and identify financially troubled plans as part of its assessment of the Multiemployer Fund’s liability for future financial assistance. However, the new system’s security controls were not designed to effectively restrict access to program source code, executable programs, and data tables. Additionally, during system implementation, the Corporation did not maintain evidence to document that key financial and nonfinancial plan data were accurately and completely transferred into the new multiemployer system.

In addition, as reported for fiscal year 1993, the Corporation did not review or properly supervise the process for determining which plans should be included in the universe of multiemployer plans, or address the accuracy of certain data utilized in identifying and assessing financially troubled multiemployer plans.

Inadequate Controls Over Nonfinancial Participant Data

As previously reported, the Corporation’s controls did not ensure the accuracy of nonfinancial participant data entered into the Pension and Lump Sum (PLUS) system. In processing a terminated pension plan, the Corporation obtains nonfinancial participant data (such as social security numbers and dates of birth and employment) and uses the data, in conjunction with other information, to initially determine participants’ guaranteed benefits. After the nonfinancial data are obtained and initial benefits are determined, the data are entered into the PLUS system automated database, which is used to respond to participant inquiries and administer other benefit services. The Corporation uses these data annually to value its benefit liability for participants whose data have been entered in PLUS. Inaccurate nonfinancial data can reduce the precision of the Corporation’s fiscal year-end liability valuation and delay the final calculation of participant benefits.

Weaknesses in controls over nonfinancial participant data and related recommendations are discussed in the Pension Benefit Guaranty Corporation Inspector General Report No. 94-6/23079-1 and as updated in its report No. 95-5/23083-1. In our report (GAO/AIMD-94-109), we concurred with the Inspector General’s recommendations, which are designed primarily to strengthen the verification of participant data and the input and edit controls over participant data maintained in PLUS.

During fiscal year 1993, the Corporation initiated efforts designed to improve the accuracy of certain aspects of nonfinancial participant data entered into the PLUS system. However, control weaknesses involving these data continued to exist for fiscal year 1994 because the Corporation had not made significant progress in improving procedures for obtaining and documenting participant data in a timely manner. Also, weaknesses existed in the Corporation’s verifying and editing of the nonfinancial participant data entered and maintained in the Corporation’s records and its PLUS database.

We previously made recommendations for addressing each of the material internal control weaknesses discussed in this report. These recommendations called for strengthening internal controls over systems development/modification and integration, financial reporting, multiemployer financial assistance, and participant data. While the Corporation made progress during fiscal year 1994 in addressing these recommendations, these efforts have not been completed. The Corporation has stated its commitment to fully addressing the weaknesses disclosed in these reports.

Opinion on Financial Statements

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Single-Employer and Multiemployer Funds administered by the Pension Benefit Guaranty Corporation as of September 30, 1994 and 1993, and the results of their operations and cash flows for the fiscal years then ended, in accordance with generally accepted accounting principles.

However, misstatements may nevertheless occur in other financial information reported by the Corporation as a result of the internal control weaknesses previously described. Furthermore, the Corporation’s assessment of the Multiemployer Fund’s exposure to liabilities for future financial assistance is subject to material uncertainties, whose eventual effects cannot be reasonably determined at present. Many complex factors must be considered to identify multiemployer plans which are likely to require future assistance and to estimate the amount of such assistance. These factors, which include the financial condition of the plans and their multiple sponsors, will be affected by future events, most of which are beyond the Corporation’s control.

Opinion on Internal Controls

We evaluated management’s assertion about the effectiveness of its internal controls designed to: safeguard assets against loss from unauthorized use or disposition; assure the execution of transactions in accordance with management authority and with laws and regulations that have a direct and material effect on the financial statements or that are listed by OMB and could have a material effect; and properly record, process, and summarize transactions to permit the preparation of reliable financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets.

In its 1994 report on internal controls, the Corporation’s management fairly stated that internal controls in effect on September 30, 1994, did not provide reasonable assurance that the Corporation properly recorded, processed, and summarized transactions to permit the preparation of financial statements in accordance with generally accepted accounting principles. However, controls in effect on September 30, 1994, provided reasonable assurance that assets were safeguarded against loss from unauthorized use or disposition and that transactions were executed in accordance with management’s authority and significant provisions of selected laws and regulations. Management made this assertion, which is included in appendix III, using the internal control and reporting criteria set forth in the Federal Managers’ Financial Integrity Act (FMFIA) and implementing guidance. In making this assertion, management considered the material weaknesses we found.

Reportable Condition

While the Corporation made progress in addressing the reportable conditions identified and discussed with the Corporation during our fiscal year 1993 audit, our audit for fiscal year 1994 found that one of these reportable conditions continued to exist. Although this reportable condition is not considered a material weakness, it represents a significant deficiency in the design or operation of the Corporation’s internal controls and should be corrected.

The Corporation’s controls over documentation supporting participant data maintained on PLUS were inadequate. In many cases, the Corporation was unable to provide documentation supporting the nonfinancial participant data entered on PLUS. In addition, the Corporation was not always able to demonstrate that procedures designed to support the accuracy of PLUS data were performed. Without proper supporting documentation, the Corporation may be unable to demonstrate the accuracy of PLUS data used to value the Corporation’s liability for terminated plans.

This reportable condition and related recommendations are discussed further in the Pension Benefit Guaranty Corporation Inspector General Report No. 94-6/23079-1 and as updated in its report No. 95-5/23083-1. In our report (GAO/AIMD-94-109), we concurred with the Inspector General’s recommendations and recommended that the Corporation implement them. The Corporation agreed with the recommendations but its intended corrective actions had not progressed sufficiently to prevent the documentation weakness identified by the audit.

In addition to the material weaknesses and reportable condition described in this report, we noted other less significant matters involving the Corporation’s internal control structure and its operations which we will be reporting separately to the Corporation’s management. Similarly, in addition to the material weakness and reportable condition described in Pension Benefit Guaranty Corporation Inspector General Report No. 95-5/23083-1, other less significant matters related to the Corporation’s internal control structure over its liability for future benefits on terminated plans will be reported separately to management by the Corporation’s Inspector General.

Compliance With Laws and Regulations

Our tests of compliance with significant provisions of selected laws and regulations disclosed no material instances of noncompliance.

Agency Comments and Our Evaluation

Commenting on a draft of this report, the Corporation’s Executive Director agreed with our findings. The Executive Director’s written comments, provided in appendix IV, discuss the Corporation’s ongoing efforts to address the internal control weaknesses and respond to our previous recommendations. We plan to monitor the adequacy and effectiveness of these efforts as part of follow-up audits of the Corporation’s financial statements.

Objectives, Scope, and Methodology

The Corporation’s management is responsible for preparing the annual financial statements of the two funds in conformity with generally accepted accounting principles; establishing, maintaining, and assessing the internal control structure to provide reasonable assurance that the broad control objectives of FMFIA are met; and complying with applicable laws and regulations.

We are responsible for obtaining reasonable assurance about whether (1) the Corporation’s financial statements are reliable (free of material misstatement and presented fairly in conformity with generally accepted accounting principles) and (2) management’s assertion about the effectiveness of internal controls is fairly stated in all material respects based upon the control criteria in GAO’s Standards for Internal Controls in the Federal Government required by the Federal Managers’ Financial Integrity Act. We are also responsible for testing compliance with significant provisions of selected laws and regulations and for performing limited procedures with respect to certain other information appearing in this financial statement.

In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements of each of the two funds; assessed the accounting principles used and significant estimates made by the Corporation’s management; evaluated the overall presentation of the financial statements; obtained an understanding of the internal control structure related to safeguarding assets, compliance with laws and regulations including execution of transactions in accordance with budget authority, financial reporting, and assessed control risk; tested relevant internal controls and evaluated management’s assertion about the effectiveness of internal controls; tested compliance with selected provisions of the following laws and regulations: the Employee Retirement Income Security Act of 1974, as amended, and the Chief Financial Officers Act of 1990. The provisions selected for testing included, but were not limited to, those relating to benefit guarantees and financial assistance; the availability of, accounting for, and use of funds; the preparation and issuance of financial statements and management premiums and the assessment of related interest and penalties.

We also conducted tests of compliance with the Anti-Deficiency Act that were limited to comparing the Corporation’s recorded payments to related authorized limitations on certain payments and apportionments.

In fulfilling our responsibilities, we have relied on audit work performed by an independent public accounting firm under the direction of the Corporation’s Inspector General. The scope of this work, performed in conjunction with our audit, included an audit of the Corporation’s liabilities for future benefits on terminated plans and related losses, expenses, and cash flows, as well as related internal controls and compliance. We worked with the Inspector General to establish the scope of the work. We reviewed the work and concur with its scope, opinions, conclusions, and recommendations, which are presented in Pension Benefit Guaranty Corporation Inspector General Report No. 95-5/23083-1.

We did not evaluate all internal controls relevant to operating objectives as broadly defined by FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to accounting and other controls necessary to achieve the objectives outlined in our opinion on management’s assertion about the effectiveness of internal controls. Because of inherent limitations in any internal control structure, losses, noncompliance, or misstatements may nevertheless occur and not be detected. We also caution that projecting our evaluation of controls to future periods is subject to the risk that controls may become inadequate because of changes in conditions or the degree of compliance with controls may deteriorate.

Our audit was conducted pursuant to provisions of 31 U.S.C. 9105, as amended, and in accordance with generally accepted government auditing standards. We believe our audit provides a reasonable basis for our opinions.

Financial Statements

Accounting and Information Management Division, Washington, D.C.

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