II. REVIEW OF FIXED ASSETS
The Government Management Reform Act of 1994 requires the submission of Government wide audited financial statements, beginning with the financial statements filed for Fiscal Year 1996. DEA will be a material component in DOJ's efforts. As of March 31, 1995, the fixed asset balance identified on DEA's general ledger totalled about $271 million. However, this balance was materially misstated. Corrective action is necessary to accurately present reliable figures in audited financial statements.
We determined that the misstatement was due to three types of errors: (1) capitalization errors due to the incorrect coding of purchased assets; (2) the failure to capitalize forfeited and transferred (non-purchased) assets that should have been included in the fixed asset balance; and (3) disposed assets that had not been removed from the fixed asset balance. The following table shows the extent of these errors for the periods reviewed.
|FIXED ASSET BALANCE TESTING RESULTS|
|TOTAL AGGREGATE ERROR||$85,213,000|
The aggregate error for the review periods equaled about $85 million. The net error, after adjustments for understatements and overstatements, equaled an understatement of about $61 million. The aggregate error was illustrative of the type and magnitude of the problems. Using the net amount could lead to the erroneous conclusion that making these adjustments would correct the fixed asset account balance.
We were unable to determine the actual or an estimated balance for the total fixed asset account for several reasons. Specifically, the misstatement was a cumulative error going back to the inception of DEA's accounting system. Furthermore, the magnitude of transactions needing review to obtain the correct balance was overwhelming and information for the full time period no longer existed. Nevertheless, we reviewed activities for specific time periods and asset types and have determined the extent of the errors for these periods. The errors shown were indicative of the problems with the fixed asset account and call into question the accuracy of the entire fixed asset balance.
To arrive at the $85 million aggregate error, we:
utilized statistical sampling techniques to quantify the capitalization errors;
reported on DEA's work in the area of forfeited and transferred assets; and
analyzed listings of disposed assets obtained from property managers and traced a sample of the disposed assets to the accounting records confirming that the assets were not removed from the general ledger.
A discussion of DEA's capitalization process and our findings are detailed below.
A. Capitalization Process
Prior to July 1995, capitalized property was defined by DEA as having an initial acquisition value of $5,000 or more and a useful life of two or more years. Property which did not meet this criteria was called non-capitalized property. Capitalized property composed most of DEA's fixed asset balance.
DEA employees authorized to purchase property were called allowance holders. The allowance holders were also responsible for initially annotating the invoices with the appropriate object classification code, based upon the type and cost of property purchased. This code denoted whether or not an item should have been recorded in the general ledger as capitalized property. The object classification codes were subject to two reviews by the Payment Unit during the payment process. The codes were again reviewed after the transactions were posted to the general ledger by the General Accounting Unit.
B. Capitalization of Purchased Assets
To test the accuracy of the fixed asset balance we reviewed equipment items, the largest category within fixed assets, paid for between April 1, 1994 and March 31, 1995. We selected this time frame for review because the supporting records for these transactions were the most current available. The universe for this period consisted of 3,910 transactions totalling $41,364,797. We statistically selected a sample from this universe using a 95 percent confidence level and a precision of plus or minus 7 percent. The result was a sample of 43 invoices which totalled $15,837,232. Items that were both capitalized and non-capitalized were included in our review. Additional detail on our sampling methodology appears in Appendix I.
Our tests of purchased equipment disclosed two types of errors: (1) property items that should have been capitalized but were not, which resulted in an understatement of the fixed asset balance in the general ledger; and (2) property items that should not have been capitalized but were, which resulted in an overstatement of the fixed asset balance in the general ledger. These errors were caused by allowance holders assigning incorrect object classification codes, as well as accounting personnel failing to identify these incorrect codes during their reviews.
Of the 43 invoices reviewed, 18 should have been capitalized but were not. These results were applied to the universe of transactions using statistical sampling techniques. Consequently, with 95 percent confidence, the estimated understatement of the fixed asset balance was $17.3 million for the period April 1, 1994 to March 31, 1995.
Conversely, 6 of the 43 invoices reviewed included purchases that should not have been capitalized but were. Accordingly, when statistical sampling techniques were applied, with 95 percent confidence, the estimated overstatement of the fixed asset balance was $5.7 million for the period April 1, 1994 to March 31, 1995.
Thus, for equipment purchases paid for during the period April 1, 1994 to March 31, 1995, the fixed asset balance was estimated to be in error by $23 million ($17.3 million understatement plus $5.7 million overstatement) in the aggregate. We were unable to calculate the total misstatement of the balance presented in the general ledger because the fixed asset balance consisted of transactions from prior years and the old records were unavailable.
DEA Accounting Section managers stated that the object classification codes were not always scrutinized during the payment process. In addition, they explained that Payment Unit personnel, as well as allowance holders, did not always know which object classification codes to use. DEA Accounting Section management had issued memoranda to all allowance holders and to accounting personnel on proper object classification coding. However, object classification coding errors continued.
On July 19, 1995, the DEA Chief Financial Officer approved an increase of DEA's capitalization threshold to $25,000. This enabled DEA to reduce the number of capitalized assets. However, this action in itself will not reduce coding errors.
C. Capitalization of Non-Purchased Assets
DEA had placed numerous forfeited items into official use. These assets were obtained through the forfeiture program, once a determination was made that the item would be utilized in the direct performance of law enforcement activities. DEA also acquired assets through transfers from other agencies. However, these forfeited and transferred items were not recorded as assets in DEA's accounting system. This omission has caused the fixed asset balance to be significantly understated.
OMB Statement of Federal Financial Accounting Standards Number 3, dated October 27, 1993 entitled "Accounting for Inventory and Related Property" required transferred and forfeited property held for internal use to be recognized as an asset and be recorded at fair market value.
According to DEA Accounting Section management, forfeited and transferred items placed into service prior to July 19, 1995, with a unit value of $5,000 or more, should have been added to the fixed asset balance of the general ledger. This was never done; only purchased assets were recorded. DEA's new guideline for capitalized property generally required all forfeited motor vehicles, vessels, and aircraft, regardless of value, to be capitalized. For other types of forfeited assets, the new $25,000 threshold applied.
During our review, DEA Accounting Section personnel began reconciling some of the fixed asset accounts. As a result, DEA identified the following forfeited and transferred assets that had not been recorded as fixed assets under the new capitalization threshold.
|NON-PURCHASED FIXED ASSETS|
|ASSET TYPE||NUMBER OF ITEMS||TOTAL VALUE|
Thus, as of September 30, 1995 the fixed asset balance was understated by at least $55.8 million due to the exclusion of these forfeited and transferred assets. However, this figure was likely higher because DEA had not completed a review of the other fixed asset categories, such as administrative and technical equipment.
DEA Accounting Section management explained that a transaction code did not exist under which forfeited and transferred assets could be recorded in the general ledger. During our audit, this was corrected and DEA recorded the $55.8 million understatement into the general ledger using the new transaction code.
Accounting Section management further stated that there were no procedures in effect in the past whereby the appropriate property managers would notify them when an asset was acquired through forfeiture. Accounting Section management were planning to establish a mechanism to correct this deficiency.
D. Disposal of Capitalized Assets
Although DEA routinely disposes of capitalized assets, its accounting records had not been adjusted to reflect disposals. This practice caused the fixed asset balance to be overstated. OMB Bulletin Number 94-01, which discusses the form and content of agency financial statements, states the balances in the financial statements should be reduced by the disposed assets.
We analyzed printouts of capitalized property disposed of between April 1, 1994 and March 31, 1995 and traced a judgmental sample of these items to DEA's accounting records. We concluded that the fixed asset balance was overstated by at least $6,265,000 for the period between April 1, 1994 and March 31, 1995, because disposed capitalized property was not removed from the general ledger. This figure consisted of 66 administrative items totalling $1,094,919 and 424 motor vehicles totalling $5,170,161, with a unit cost of $5,000 or more, that were disposed. However, this figure was likely higher because dispositions of capitalized assets have not been removed from the general ledger since the inception of DEA's accounting system.
DEA Accounting Section management stated that there were no procedures in place whereby property system managers would notify Accounting of asset disposition. Accounting Section management are planning to develop procedures to ensure that asset costs would be removed from the general ledger in a timely manner. The reconciliation of the various fixed asset accounts currently being conducted by DEA should also identify and remove disposed assets that still appear on the general ledger.
E. Interface Between Accounting and Property Systems
The accounting system and the seven property systems' records do not interface because they were developed independently as specific needs arose. Reconciliation efforts between the systems were hindered because the Accounting Section and the various property systems did not use the same identifiers. However, DEA is taking some corrective action. Specifically, as each fixed asset category is reviewed, the identifying number assigned to each asset in the property system is being entered into the general ledger. In addition, acquisition information for administrative property, including cost data which is useful to accounting, was to be entered on the recently instituted automated property custody forms. These efforts should improve the recording, tracking, and reconciliation of assets between DEA's accounting system and the administrative property system.
F. DEA Actions
Prior to our audit, DEA's Accounting Section began taking corrective action to adjust the fixed asset balances, prompted by the impending requirement for audited financial statements. Accounting Section management explained that the fixed asset balances were not previously reviewed due in part to staffing limitations and competing priorities. During our audit, the Accounting Section completed reviews of the following fixed asset categories: official boats, land, construction in process, buildings, and forfeited vehicles and forfeited aircraft. As part of these reviews, the accounting records were reconciled with the property records and adjustments to the general ledger were made. Some of the adjustments included capitalization errors which needed correction, identifying forfeited and transferred assets that needed to be added to the general ledger, and identifying assets that were disposed of that needed to be removed from the records.
DEA had a detailed plan to review the fixed asset balances. However, the review plan did not specify any time frames for reviewing administrative and technical property, the two largest property systems within DEA. DEA management stated that they planned to review and reconcile these categories once the capitalization threshold was increased to $25,000, so that the number of capitalized assets that had to be reviewed and reconciled would be reduced. As of September 30, 1995, the review of administrative property and technical equipment had not been started.
Furthermore, the reconciliation of technical equipment will be hampered because the majority of technical equipment items appeared in TEIS without dollar values. Accounting Section managers opined that they may have to use a best-guess baseline figure for this category due to the missing values.
DEA's fixed asset balance of $271 million was materially misstated. DEA has recognized this weakness and initiated detailed reviews of some of the fixed asset accounts. As part of these reviews, necessary adjustments to the accounting records were made, and procedures which needed to be implemented were identified. While these initial actions are commendable, DEA must take additional measures to develop accurate financial statements. Specifically:
DEA must improve the recording of capitalized property.
Forfeited and transferred assets placed into official use should be properly recorded in the general ledger.
Disposed property should be removed from the general ledger.
All fixed asset categories should be reviewed, reconciled with the property records, and the account balances should be accurate.
H. Recommendations and Status of Corrective Actions
We recommend that the Administrator, DEA ensure that:
2. Allowance holders and accounting personnel receive adequate training in the use of object classification codes.
Resolved. DEA has scheduled fiscal training workshops to begin in February, 1996, which will include a review of the proper use of subobject classification codes.
To close this recommendation, please provide a copy of the training schedule.
3. The object classification codes on the invoices are verified during the payment process.
Closed. The DEA Accounting Section Chief has sent out correspondence to reiterate the responsibility of the office to thoroughly review each document processed. In addition, as the staff reconciles the fixed asset accounts to the appropriate inventory subsystem on a quarterly basis (see Recommendation 6 and Recommendation 7), they will identify and correct any inaccurate object classification code postings to the General Ledger. No further DEA action is necessary.
4. The Accounting Section is notified of forfeited and transferred assets placed into service, and the assets are properly recorded in the general ledger.
Resolved. The DEA Property Management Unit is now required to notify the Accounting Section at the time forfeited/transferred assets are placed into service for the following fixed asset accounts: Official Boats, Land, Construction in Process, Buildings, and Official Vehicles. Upon notification, the Accounting Section will record these assets into the General Ledger.
To close this recommendation, please provide a copy of the document that requires the Property Management Unit to notify the Accounting Section at the time forfeited/transferred assets are placed into service for each of the remaining fixed asset accounts.
5. The Accounting Section is notified of dispositions of capitalized property, and the assets are deleted from the general ledger.
Resolved. The DEA Property Management Unit is now required to notify the Accounting Section when fixed assets are disposed for the following fixed asset accounts: Official Boats, Land, Construction in Process, Buildings, and Official Vehicles. Upon notification, the Accounting Section will record these assets into the General Ledger.
To close this recommendation, please provide a copy of the document that requires the Property Management Unit to notify the Accounting Section at the time of disposal for each of the remaining fixed asset accounts.
6. The reconciliation of all the fixed asset accounts is completed, and the appropriate adjusting entries to the accounting records are made.
Resolved. DEA has completed reconciliations of the following fixed asset accounts: Official Boats, Land, Construction in Process, Buildings, and Official Vehicles. In addition, they have made adjustments to the General Ledger balance for these accounts to bring each into agreement with the property records.
To close this recommendation, please provide documentation of the reconciliations performed for the remaining fixed asset accounts, along with the adjustments made to the General Ledger balance for each account reviewed.
7. The fixed asset accounts are regularly reconciled with the property records.
Resolved. The DEA Accounting Section has completed reconciliations of the following fixed asset accounts: Official Boats, Land, Construction in Process, Buildings, and Official Vehicles. In addition, they have required the property managers to provide a current inventory listing quarterly so that it can be reconciled to the General Ledger.
To close this recommendation, please provide a copy of the notification that requires quarterly submission of the current inventory listing for each of the remaining fixed asset accounts.
8. Assets recorded in the accounting records and the property records have a common identifier.
Closed. The DEA Accounting Section has required the property record's identifier to be noted for all fixed assets. DEA has provided us with the instructions to all accounting personnel concerning the requirements to document unique identifiers in the accounting records. No further DEA action is necessary.
STATEMENT ON COMPLIANCE WITH LAWS AND REGULATIONS
We have conducted an audit of personal property management in DEA, along with the related accounting records. In connection with our audit we tested transactions and records to obtain reasonable assurance about DEA's compliance with laws and regulations that, if not complied with, could have an adverse material effect on DEA's management of personal property.
Government Auditing Standards require a review of the laws and regulations pertaining to the objectives of the entity's programs or activities to gain an understanding of the results expected. Sufficient testing must be conducted to determine whether the programs or activities are being carried out in conformity with these laws or regulations. Our review included:
OMB Circular A-123, Revised;
Justice Property Management Regulations (JPMR) 128;
Government Management Reform Act of 1994;
OMB Bulletin No. 94-01; and
OMB Statement of Federal Financial Accounting Standards Number 3.
For the transactions tested, we found that DEA did not fully comply with OMB Circular A-123, JPMR 128, OMB Bulletin No. 94-01, and OMB Statement of Federal Financial Accounting Standards Number 3. Instances of noncompliance are identified in the Findings and Recommendations section of this report.
SCHEDULE OF DOLLAR RELATED FINDINGS
|Acquisition cost of property not located at audit sites.||$ 120,390||13|
|Idle property at three locations.||$ 217,330||21|
QUESTIONED COSTS are defined as expenses incurred that do not comply with law or other official requirements, or are unsupported by adequate documentation, or are unnecessary or unreasonable for the intended purpose. They can be recoverable or non-recoverable.