Immigration and Naturalization Service Property
Management and Financial Statements

Report No. 98-14
May 1998
Office of the Inspector General

TABLE OF CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION

FINDINGS AND RECOMMENDATIONS

INS COULD NOT SUPPORT THE CAPITALIZED ASSET ACCOUNTS OF THE GENERAL LEDGER

General Ledger Accounts

AMIS Did Not Support The General Ledger

A. Necessary Information for Financial Reporting Not Provided

1. Multiple Funding Sources Not Identified and Reported
2. Depreciation Not Entered in the General Ledger
3. Subsequent Costs Not Reported

B. Appropriate Cost Data Not Disseminated

C. Reconciliations Not Performed

Recent Initiatives

Alternatives for Corrective Action

Conclusion

Recommendation

APPENDIX I - AUDIT SCOPE AND METHODOLOGY

APPENDIX II - ASSET MANAGEMENT INFORMATION SYSTEM OVERVIEW

APPENDIX III - INS GENERAL LEDGER ACCOUNTS FOR CAPITALIZED PROPERTY

APPENDIX IV - AMIS CAPABILITIES MATRIX

APPENDIX V - ACRONYMS AND DEFINITIONS

EXECUTIVE SUMMARY

Weaknesses in its property management system contributed to the Immigration and Naturalization Service (INS) receiving a disclaimer of opinion on its FY 1996 Statement of Financial Position. A disclaimer of opinion means that the examining auditors were unable to substantiate account balances because the agency did not maintain appropriate accounting records and relevant documentation.

In an attempt to correct some of the weaknesses noted in its financial statement audit report, INS managers requested that the Office of the Inspector General assist them in developing appropriate actions to correct deficiencies in accounting for and reporting capitalized property. Our review revealed that about $92 million of capitalized property was not supported by INS' current property management system, the Asset Management Information System (AMIS). Further, we estimated that at least $5 million in depreciation expenses were not reflected in the general ledger.

The primary reasons AMIS did not provide adequate support for the general ledger were:

• AMIS did not provide the necessary information for financial reporting purposes;
• AMIS users did not routinely receive appropriate cost data; and
• AMIS data was not reconciled to the general ledger and adjusted when necessary.

Further, INS needs to aggressively strengthen controls to ensure that property transactions are accurately and completely recorded. INS has taken steps to correct these problems by establishing a working group to address these deficiencies and to discuss alternative solutions.

We recommend that the INS correct the management control weaknesses noted above, either by modifying AMIS or acquiring and implementing a proven capitalized asset system. A decision between these options including an implementation plan should be completed by September 30, 1998.

The details of our results are contained in the Findings and Recommendations section of the report. Our audit scope and methodology are contained in Appendix I.

INTRODUCTION

In FY 1996, independent auditors who reviewed the Immigration and Naturalization Service's (INS) Statement of Financial Position issued a disclaimer of opinion¹ because they were unable to substantiate amounts reported in INS' financial statement account balances, including capitalized property, due to inadequate documentation. At the end of September 1997, INS' general ledger balance for capitalized property totaled $134 million and did not disclose almost $78 million in FY 1997 purchases of capitalized property². Considering the $78 million in purchases, the general ledger balance should have been at least $212 million--about $92 million higher than the balance shown in subsidiary records. These discrepancies occurred because the INS: (1) maintained two separate, non-integrated systems for reporting financial management and property management activities, and did not reconcile differences between the two; (2) did not maintain necessary data in the property management system; and (3) did not maintain clear lines of communication or clearly delineate certain organizational responsibilities.

The INS requested that the Office of the Inspector General (OIG) conduct an independent evaluation of its capitalized property system to assist the agency in developing appropriate courses of action to correct known deficiencies in accounting for and reporting capitalized property. At the time of our review, INS was in a transition period moving from its existing financial management system, the Financial Accounting and Control System (FACS), to the new Federal Financial Management System (FFMS).

Organizationally, two different INS offices are responsible for maintaining the general ledger and its supporting subsidiary records for capitalized property. The Office of Finance (Finance) maintains the general ledger and the Office of Administration (Administration) maintains the property management system, the Asset Management Information System (AMIS). Both of these offices report to the Executive Associate Commissioner for Management.

Our review focused on the capabilities of the current property management system, AMIS, to support the general ledger account for capitalized property. For more detailed information on AMIS see Appendix II. To better understand and evaluate property management systems that successfully support general ledgers, we reviewed systems at two other federal government agencies and three private firms. These entities received unqualified opinions on their financial statements. We reviewed how they accounted for and reported capitalized assets. We also reviewed the extent of the reconciliation of their general ledger to their property system. Results of these reviews are included in applicable sections of this report.

FINDINGS AND RECOMMENDATIONS

INS COULD NOT SUPPORT THE CAPITALIZED ASSET ACCOUNTS OF THE GENERAL LEDGER

AMIS did not accomplish a primary capital asset accounting function--to serve as the subsidiary ledger. This deficiency was due to several factors. AMIS lacked necessary information for financial reporting purposes; AMIS users lacked accurate cost information; and INS staff did not adequately reconcile discrepancies between AMIS and the general ledger. INS managers have initiated actions to alleviate some of these financial reporting deficiencies. However, AMIS must be modified to collect, calculate, and report critical data before it can adequately support the general ledger.

The Chief Financial Officers Act of 1990 (Act), created to bring effective financial management to governmental operations, provides guidance for financial reporting. The Act specifically requires financial information to be complete, reliable, timely, and consistent.

GENERAL LEDGER ACCOUNTS

At the end of September 1997, INS' general ledger balance for capitalized property was $134 million. We identified six general ledger accounts in FACS pertaining to capitalized property: passenger-carrying vehicles, non-passenger vehicles, aircraft, radio equipment, office equipment, and all other equipment. Our review revealed that the general ledger did not include approximately $78 million in capitalized property purchases³.

Considering the $78 million in FY 1997 purchases, the general ledger balance should have been at least $212 million--an amount $92 million higher than the balance shown in subsidiary records (AMIS).⁴ To determine why the general ledger was not properly maintained, we first evaluated the status of the general ledger for capitalized property-related accounts for FY 1997.

The general ledger was maintained on FACS which was a computerized financial system that tracked transactions at a summary level.⁵ FACS did not have a subsidiary function by which assets could be individually tracked by INS; therefore, INS staff attempted to use AMIS as the subsidiary ledger for capitalized property.

AMIS DID NOT SUPPORT THE GENERAL LEDGER

AMIS is a decentralized system that requires input of data for property at over 150 field locations. Both the Offices of Administration and Finance rely on information reported in the system, but for different purposes. Administration uses the system to identify the location, status, etc., of INS property. Finance, on the other hand, uses the data to support the capitalized asset accounts on the general ledger. Consequently, it is important that the system meets the needs of both users.

We compared the AMIS structure with Federal Financial Accounting Standards for capitalized property, noting any differences. In addition, we evaluated INS' existing policies and procedures to identify requirements for the accounting and recording of capitalized property in AMIS.

We identified 11 elements necessary for a system to produce a supportable general ledger for capitalized property. These elements were obtained from a review of Federal Financial Accounting Standards and through discussions with INS staff. The elements were used to assess AMIS as shown in Appendix IV. The three primary reasons why AMIS did not provide adequate support for capitalized property reported on the general ledger are that:

A. AMIS did not provide the necessary information for financial reporting purposes;

B. AMIS users did not routinely receive appropriate cost data; and

C. AMIS data was not reconciled to the general ledger and adjusted when necessary.

A discussion of each deficiency follows.

A. Necessary Information for Financial Reporting Not Provided

With regard to not providing necessary information, AMIS did not: delineate multiple funding sources for capitalized property, provide depreciation for the general ledger, or separately track subsequent costs.

1. Multiple Funding Sources Not Identified and Reported

AMIS, as designed, could not differentiate between multiple sources of funds used to purchase capitalized property. According to the Federal Financial Accounting Standards⁶, each reporting entity should accumulate and report the costs of its activities on a regular basis. This information is important in assessing program performance.

INS receives funding through various appropriations and fee accounts. These accounts fund various program activities within INS. Consequently, it is important that INS be able to identify all costs (i.e. capitalized property purchases) associated with each of its activities.

Our review of AMIS revealed that multiple funding sources could not be recorded for capitalized property purchases. In addition, INS never tracked multiple sources through FACS. However, INS has informed us that the new financial system will correct this deficiency. It is important that funding information involving multiple sources is accurately recorded in either the property or the financial system.

2. Depreciation Data Not Entered in the General Ledger

AMIS did not calculate and track annual depreciation expense for capitalized property. INS did compute accumulated depreciation, but the data was not reflected in the general ledger. These deficiencies affected the accuracy and reliability of INS' FY 1996 and FY 1997 financial statements. According to Federal Financial Accounting Standards⁷, annual depreciation expense and accumulated depreciation must be disclosed in the financial statements.

Federal Financial Accounting Standards state that the estimated useful life of a property should be adjusted when subsequent costs extend its useful life. We found that AMIS did not have the ability to make individual adjustments in the useful life of assets. Currently, the useful life of a fixed asset is predetermined by the property type. For example, according to INS schedules, aircraft at INS have a useful life of 20 years. Replacing an engine in an aircraft would be a subsequent cost that could increase the useful life of that aircraft.

AMIS did not have a data field for entering the salvage value for capitalized property. Federal Financial Accounting Standards require the consideration of salvage value in computing depreciation. In our judgment, the AMIS database should be revised to capture this data.

Even though INS did not use AMIS for depreciation data, it made minimal changes to three of six accumulated depreciation accounts we reviewed. These changes were reflected in the general ledger accounts of only one of INS' five administrative centers. Since none of the property accounts were fully depreciated, all accumulated depreciation accounts generally should have shown increases in FY 1997.

DEPRECIATION OF INS CAPITALIZED ASSETS

Source: INS Consolidated General Ledger for FYs 1996 and 1997

The net asset value for capitalized property categories at the beginning of FY 1997 was $41,701,349⁹. According to the general ledger, only $491,808 of annual depreciation (or about 1 percent) was recorded against these assets. A review of INS annual depreciation rates for these capitalized assets indicated a range between 8-20 percent, averaging at 13 percent. Applying this average to the net asset value ($41,701,349) revealed an estimated annual depreciation of about $5.4 million for FY 1997. This difference of approximately $5 million quantifies the magnitude of the depreciation problem.

3. Subsequent Costs Not Reported

Subsequent costs are any costs that extend the useful life of or materially change capitalized property. AMIS, as designed, cannot differentiate between the acquisition cost and any subsequent costs used to improve capitalized property.

AMIS had only one data field for costs. Any subsequent costs incurred on an asset (such as purchasing a new avionics system for an aircraft) could not be used to adjust the valuation of that asset. As a result, AMIS could not calculate the appropriate value of an asset for the general ledger. In addition, AMIS was not able to determine the appropriate cost basis from which depreciation should be calculated. Both of these shortcomings resulted in the production of an inaccurate general ledger.

B. Appropriate Cost Data Not Disseminated

Source documents that reflected the actual cost of capitalized property purchases, were not distributed to AMIS users. Because AMIS is a decentralized system, end users who receive the property also enter the data into AMIS. Often, the individual making the data entry did not receive the appropriate source documents and, therefore, used an estimated value from a purchase order or some other document. We surveyed 11 INS property custodians. Five of them stated that they used the purchase order amount, rather than the invoice amount, when entering property into AMIS. This deficiency was also reported by the independent auditors in INS' FY 1996 financial statement audit report.¹⁰

According to Federal Financial Accounting Standards, all capitalized property should be recorded at actual cost. Cost should include all expenditures incurred to bring the property to a form and location suitable for its intended use. This includes, but is not limited to: (a) amounts paid to vendors, (b) transportation charges to the point of initial use, (c) handling and storage costs, and (d) installation costs. This information is generally not available on a purchase order. Our review of private firms revealed that, without exception, the basis for their cost data was vendor invoices, not purchase orders.

Using improper cost data not only affects the accuracy of the values recorded in the financial statements, but also complicates the reconciliation process. It is, therefore, essential that INS disseminate the appropriate cost data to the field, and establish a process to ensure that the data is accurately and expeditiously entered into AMIS.

C. Reconciliations Not Performed

The Office of Finance established policy and procedures for performing periodic reconciliations, but they were not followed. The lack of reconciliation contributed to the magnitude of the discrepancy between AMIS and the general ledger ($92 million).

The Offices of Administration and Finance are both under the direction of the Management Division. Historically, there had been little coordination and communication between these two offices. For timely reconciliations to be successfully performed, staff from each of these offices need to participate in resolving differences between the general ledger and AMIS.

One government agency that we reviewed had reliable property figures because there was good cooperation between the property management staff and the finance staff. The staff from each area met on a monthly basis to reconcile differences and make any necessary adjustments to either their property management system or their general ledger. This kind of participation has been lacking at INS and was one reason that AMIS did not accurately support capitalized property.

At all three private firms we reviewed, periodic reconciliations between their property and general ledger systems were an integral part in their producing an accurate general ledger.

RECENT INITIATIVES

In November 1997, INS assigned a contractor to evaluate the reconciliation process between AMIS and the general ledger and to develop procedures for an effective reconciliation. In addition, in December 1997, a working group of INS staff from various offices met to discuss the reconciliation process. The group includes members of both the Administration and Finance offices who have responsibility for property management and financial management, respectively. The group meets on a monthly basis to share ideas and develop corrective actions to identified weaknesses. The establishment of this group has increased communication between INS components and improved coordinated efforts.

In order to determine proper balances for its capitalized property, INS conducted a physical inventory as of September 30, 1997. The independent auditors tested these numbers and will determine the proper adjustments INS will need to make to the general ledger to reflect an appropriate capital property figure. These same numbers will be reflected in the capital property balances of AMIS. With this new starting point, it is imperative that the INS maintain the accuracy of these balances with appropriate future adjustments.

Additionally, according to INS officials, they have initiated some manual procedures to address reconciliations and other related processes. This will serve as a short-term solution until AMIS is improved or a new system is implemented.

ALTERNATIVES FOR CORRECTIVE ACTION

In our judgment, INS has three alternatives to correct deficiencies in accounting for and reporting capitalized property: (1) modify AMIS to provide the information required; (2) acquire and implement a new capitalized asset management system to maintain required financial information on capitalized assets while maintaining AMIS for the general tracking/managing of all property; or (3) acquire a new property management/capitalized asset management system that can provide both the required financial information, as well as track/manage capitalized and non-capitalized property.

If the INS decides to modify AMIS by making technical and administrative changes, it must incorporate fields that:

• provide the various funding sources for INS programs, if the new financial management system does not,
• calculate and track both annual depreciation expense and accumulated depreciation, and
• record and track subsequent costs that extend the useful life of equipment.

The two biggest hurdles INS faces are administrative. Specifically, INS needs to establish a formal process to periodically reconcile the property management and financial aspects of AMIS, or any other system. Absent this, no system will provide complete and accurate data. INS also needs to establish a control process for entering accurate, reliable cost data.

CONCLUSION

INS, through its working group, is attempting to improve AMIS to correct the identified deficiencies. However, by September 30, 1998, INS should know whether modifications to AMIS are feasible or whether a new system that corrects these deficiencies, should be procured. Failure to establish an adequate capitalized property subsidiary ledger could contribute to INS continuing to receive disclaimer of, adverse, or qualified opinions on its future financial statements. The Executive Associate Commissioner for Management should closely monitor the modification and/or acquisition efforts.

Recommendation:

We recommend the Commissioner, INS:

1. Determine whether AMIS can be modified to serve as a subsidiary ledger for capitalized property, or if a new, proven system should be procured. A decision between these options and an implementation plan should be completed by
September 30, 1998.

Resolved. The INS concurs with this recommendation and indicated it would be able to make a decision on the desired system and provide an implementation plan by September 30, 1998.

To close this recommendation, please identify the system you have chosen, or modifications to be made to AMIS, and provide the OIG with a copy of the implementation plan.

APPENDIX I

AUDIT SCOPE AND METHODOLOGY

This audit was conducted in accordance with Government Auditing Standards issued by the Comptroller General of the United States. However, we may not be considered to be completely independent of INS, as required by the standards, because INS has reimbursed us for work that pertained to INS fee-supported programs. The Office of Management and Budget and the Department of Justice (including the OIG, the INS, and the Justice Management Division) disagree with INS funding our work and are attempting to have the funds appropriated directly to the OIG. In FYs 1996 and 1997, the OIG received $5 million for fee-related audits, investigations, and inspections. The dollar amount funded approximately 14 percent of the total OIG staff positions. Nonetheless, we consider ourselves independent and do not believe that our reimbursement arrangements with INS have had any effect with regard to our conduct of this audit.

The primary objective of the audit was to determine whether INS' property management system could provide adequate support for the capitalized property accounts. To accomplish this objective, we determined the reliability of internal controls over recording and reporting capitalized property, and assessed INS' compliance with Federal Financial Accounting Standards pertaining to capitalized property.

Our review focused on the capitalized property portion of the general ledger for FY 1996 and FY 1997, which was the latest information available at the time of our review. We did not audit the asset categories, real property and structures, which were not tracked in the property management system.

Audit work was performed from October 1997 to December 1997, at INS Headquarters, Washington D.C., and at the INS District Office in Chicago, Illinois. We interviewed appropriate personnel in both locations and reviewed pertinent information.

In addition, we interviewed personnel and reviewed documentation pertaining to general ledger/property management systems in two other federal agencies and in three private firms. Each of these organizations received unqualified opinions on their financial statements in the area of capitalized assets. We did not perform a cost benefit analysis of AMIS against any alternative systems.

APPENDIX II

ASSET MANAGEMENT INFORMATION SYSTEM OVERVIEW

The INS implemented AMIS in March 1996 as an automated system designed to capture and maintain data for capitalized property. The AMIS replaced five separate property management systems, including systems that supported, managed, and accounted for automated data processing equipment, facilities, vehicles, weapons, and accountable property. AMIS was designed to record and report information on property throughout its life cycle.

Not only was AMIS a property management system, but also a capitalized property subsidiary ledger. As a subsidiary ledger, it could identify capitalized property items as those valued at $25,000 or more. In addition, AMIS classified property items into categories corresponding to the general ledger capitalized property accounts.

Though the database for AMIS is maintained at a central location, users throughout INS and at all organizational levels have accessibility. This allows for property management and subsidiary ledger functions to be performed at remote locations.

Property management data is entered directly by INS Headquarters, Administrative Centers, Regions, Districts, Sectors, and sublocations into the mainframe system. In total, staff at over 150 locations enter the data.

APPENDIX III

INS GENERAL LEDGER ACCOUNTS
FOR CAPITALIZED PROPERTY

Source: INS Consolidated General Ledger for FYs 1996 and 1997 FACS Report of FY 1997 Disbursements for Capitalized Property

APPENDIX IV

AMIS CAPABILITIES MATRIX

Financial Reporting Requirements for Capitalized Property	AMIS Capabilities
1. a. Historical Cost of Asset in the aggregate. 11
b. Historical Cost of Asset by item.
2. a. Subsequent Costs in the aggregate.
b. Subsequent Costs by item.
3. Depreciation:     a. Annual Depreciation
(1) Useful Life
(2) Salvage Value
b. Accumulated Depreciation
4. Funding Source12 (e.g. S&E fund, User Fee fund, etc.)
5. General Ledger Account Number13
6. Detailed records:     a. Date of Acquisition
b. Date of Disposal (or Out of Service)
c. Asset Identification (e.g. description, serial number, barcode number, etc.)

 = Yes
= No

APPENDIX V

ACRONYMS AND DEFINITIONS

1      OIG Audit Report 97-22A, "INS Annual Financial Statement Fiscal Year 1996" dated August 1997. The auditors who conducted the FY 1997 financial statement audit issued a disclaimer of opinion. However, the final FY 1997 report has not been issued as of this date.

2      Capitalized property is property with an acquisition cost of $25,000 or more and an estimated useful life of more than two years.

3      For a detailed listing of these purchases, see Appendix III.

4      Prior to the exit, INS provided us with figures for the two vehicle categories from AMIS which could potentially decrease this discrepancy. However, as will be stated later, AMIS figures were never reconciled to the general ledger.

5      We were unable to review the general ledger portion of FFMS because it was not fully implemented at INS or at any other federal agency at the time of our review.

6      Statement of Federal Financial Accounting Standards Number 4, "Managerial Cost Accounting Concept and Standards for the Federal Government" issued July 31, 1995.

7      Statement of Federal Financial Accounting Standards Number 6, "Accounting for Property, Plant and Equipment" issued November 30, 1995.

8      These figures represent the annual depreciation expense for FY 97 as represented to us by INS.

9      Net asset value was determined by taking the FY 1996 total capital property balance of $134,444,471 less the FY 1996 total accumulated depreciation of $92,743,122.

10      OIG Audit Report 97-22A, page 22.

11      Requirement numbers 1 through 3 are according to the Statement of Federal Financial Accounting Standards No. 6: "Accounting for Property, Plant, and Equipment."

12      According to the Statement of Federal Financial Accounting Standards No. 4: "Managerial Cost Accounting Concept and Standards for the Federal Government."

13      Requirement numbers 5 and 6 were identified through discussions with INS personnel.

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