As a result of the District’s financial crisis in 1994, the Congress passed the District of Columbia Financial Responsibility and Management Assistance Act of 1995 (the 1995 Act). The Congress established the Authority to perform the following functions, among others: eliminate budget deficits and cash shortages of the District through visionary financial planning, sound budgeting, accurate revenue forecasts, and careful spending, ensure the most efficient and effective delivery of services, including public safety services, by the District during a period of fiscal emergency, and conduct necessary investigations and studies to determine the fiscal status and operational efficiency of the District. In assuming these responsibilities, the Authority was to ensure that funds were available to meet the District’s obligations to vendors and taxpayers in a timely manner. To accomplish this, the Authority was required by law to establish several escrow accounts separate from the District’s General Fund so that monies could be separately maintained to fund District activities including water and sewer service, public schools, and the University of the District of Columbia. The Authority was established as an entity within the District of Columbia government, with five board members appointed by the President of the United States. The Authority receives a regular, annual appropriation from the general fund of the District of Columbia in fixed amounts. Other appropriations authorizing the use of (1) gifts, bequests, and other contributions and (2) interest earned on escrow accounts maintained by the Authority, are available for an indefinite period. The District of Columbia Management Reform Act of 1997 (Management Reform Act) expanded the Authority’s responsibilities to include the development and implementation of management reform plans. The plans cover the major entities of the District and all departments of the District in the city-wide functions of Asset Management, Information Resource Management, Personnel, and Procurement. The Management Reform Act required that the Authority enter into contracts with consultants to develop plans for the major entities and four city-wide functions and establish management reform teams to implement each plan. These new responsibilities increased the amount of funds being spent by the Authority on behalf of the District. That act also authorized the Authority to spend interest earned on the escrow accounts maintained by the Authority as it considers appropriate to promote the economic stability and management efficiency of the District government. Currently for activities for which the Authority controls the funds provided on behalf of the District, the Authority pays District-related expenses in one of three ways. For contracts originated by the District, the Authority either reimburses the District’s General Fund after District agencies pay vendors, or the Authority pays third parties directly based on District agencies’ submission of a payment request and approved invoice. The third approach involves the Authority using its own contracting authority. For those, it approves the services rendered and pays third parties directly for goods and services provided to District agencies. Our objectives were to determine (1) whether the Authority’s financial information was in the same amounts and consistently presented in the fiscal year 1996 and 1997 audited financial statements of the Authority and the District’s CAFR, (2) why the District’s internal control weakness concerning the Authority was not also included in the audit report on the Authority, (3) the Authority’s use of the escrow accounts’ interest income, (4) the Authority’s purpose for the “Taxable Equipment Lease/Purchase Agreement,” and (5) whether suggestions made to the Authority’s management in our prior letter were implemented. To address these objectives, we reviewed the Authority’s audited financial statements and management letters and the District’s CAFR and Report on Internal Controls and Compliance for fiscal years 1997 and 1996. We also obtained detailed supporting schedules, related documentation, and explanations from Authority officials as we considered necessary. In addition, we obtained and reviewed the specific laws cited and legal interpretations made through discussions with Authority officials. To further support the information provided in the financial statements and management letters, we interviewed and received additional supporting documentation from the external independent auditors of the Authority and the District. We also interviewed the Authority’s Executive Director, Chief Financial Officer, and General Counsel. We conducted our work from April 1998 through August 1998 in accordance with generally accepted government auditing standards. We requested comments from the Authority’s Chairperson on a draft of this report. The Authority’s Executive Director provided us with written comments, which are discussed in the “Authority’s Comments and Our Evaluation” section and are reprinted in appendix II. The Authority’s financial information as reported in its financial statements is consistent with the Authority’s financial information presented in the District’s CAFR. The fiscal years 1996 and 1997 financial statements of the Authority were included in the District’s CAFR, as a component unit, as required by GASB, and both the Authority and the District presented the Authority’s financial activities in accordance with GASB. As a result of the widely different annual revenue amounts for the Authority ($8.6 million for fiscal year 1997) and the District ($5.2 billion in fiscal year 1997), the Authority’s account balances, which represent less than .2 percent of the District’s revenue, are summarized in the District’s CAFR instead of being reported in detail, as in the Authority’s financial statements. For example, several account line items (Due from District-Management Reform, Other Receivables from the District, and Advances from the District) on the Authority’s financial statements were combined, identified by a different name, and rounded to the nearest $1,000 when incorporated into one account (Interfund Account) in the District’s CAFR. However, the total dollar amounts reported by both the Authority and the District were the same. In addition, because the Authority and the District are different reporting entities, there were appropriately some differences in their presentation and classification of accounts. For example, several account balances (Government Appropriation, Interest Transferred from Escrow Accounts, and Other Income) that the Authority presented as “revenue” were presented as Interfund Transfers-In, an “other financing source” in the District’s CAFR. Further, the Sale of Fixed Asset amount was presented as “revenue” by the Authority and as an “other financing sources—proceed” in the District’s CAFR. In the District’s auditors’ Reports on Internal Controls and Compliance for fiscal years 1996 and 1997, an internal control weakness was identified concerning controls over financial reporting involving the Authority’s transactions that relate to the District. The material weakness related to a lack of communication between the District and the Authority when transactions involve funds that are held by the Authority on behalf of the District. No finding on this issue was reported by the Authority’s auditors nor would such a finding be expected since this internal control weakness does not affect the Authority’s financial operations. The District’s auditors reported that the District’s Office of Finance and Treasury did not have complete records of the District funds that are maintained by the Authority in escrow accounts and could not regularly reconcile its balances for those accounts with the Authority’s recorded balances. The auditors also cited the following specific reasons for the above-reported internal control weakness. The Authority did not promptly notify or provide the necessary documentation to the District of the specific details regarding financial activity that it incurred on behalf of the District. The Authority issued the management reform contracts without promptly notifying the District of the financial activity to allow for the prompt recording of the related transactions. The District and the Authority had not developed procedures to promptly notify each other of amounts anticipated or actually received by the Authority on behalf of the District. The District’s auditors recommended that the District and the Authority jointly develop procedures that would result in the Authority providing to the District the kind of monthly financial information needed for the District to perform a comprehensive reconciliation. They further stated that such information should include the monthly balances and the financial activity for each individual escrow account maintained by the Authority on behalf of the District. It was also recommended that the Authority and District develop procedures that provide for dual notification of activities involving donations and contracts administered by the Authority for the District. The Authority’s auditors stated, and we agree, that this material weakness did not affect the Authority’s internal controls related to preparation of its financial statements. Authority officials added their view that the problems cited in the District auditors’ report resulted from an internal control weakness within the District agencies, and not within the Authority, for the following reasons. The Authority did not originally notify the District of the management reform contracts and their cost since the Authority originally intended to pay for those studies from its available funds. However, the documentation of the contract and costs to date were provided to the District agencies once a decision was made by the Authority to have the agencies reimburse the Authority for these costs. The U.S. Department of the Treasury or the District’s Office of Treasury is responsible for notifying District agencies of cash receipts held on their behalf by the Authority for the issuance of general obligation bonds or receipt of the District’s annual appropriation. District agencies should be responsible for recording expenditures when they approve amounts for payment, and prior to their submission to the Authority for payment from escrow accounts. The reasons cited for the Authority’s disagreement with the District’s auditors’ findings are valid for transactions initiated and approved by the District. However, as described in the earlier “Background” section of this report, when transactions are initiated by the Authority, that data would not necessarily be concurrently available for the District. As a result, implementation of the District auditors’ recommendations that the Authority provide monthly information to the District and that the two entities provide dual notification on activities involving Authority-administered contracts and donations is practical and necessary. Effective implementation of these recommendations would improve the District’s controls over cash by enabling it to promptly report and reconcile all financial activity.