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Auditors Say U.S. Agencies Lose Track of Billions October 14, 2002 By JOEL BRINKLEY WASHINGTON, Oct. 13 - Year after year, auditors studying the financial records of federal government departments find many of them so disorganized, even chaotic, that the agencies cannot account for tens of billions of dollars. What is more, when many agencies realize that they have made major accounting errors, rather than looking back to see where the money went, they simply enter multibillion-dollar balance adjustments, writing off the money. That is just one of many problems that auditors typically find in annual financial statements of government agencies. The 2001-2002 fiscal year ended Sept. 30, so government agencies are preparing statements now. In the last year, the Office of Management and Budget has taken on the financial accounting problem in something like an auditor's holy war. In a letter to Congress on Oct. 7, Mitchell E. Daniels Jr., director of the budget office, said the federal government's accounts would "never be tolerated in the private sector," adding that "repair of a system so badly broken will not happen overnight." In part to embarrass the agencies so they will improve their financial performance, the budget office early this year began rating the 24 largest federal departments, scoring each green, yellow or red. Green indicates that the agency's financial systems are acceptable, yellow that they are troubled but improving and red that there are serious, chronic problems. In the most recent rating, completed in June, only one agency was rated green, the tiny National Science Foundation. Twenty were rated red. The Department of Defense routinely makes the largest financial blunders. In the fiscal year that ended Sept. 30, 2000, auditors found, the department entered unsubstantiated balance adjustments totaling $1.1 trillion. That was an improvement over the previous year, when the figure was $2.3 trillion. "They just made the adjustments up," said a senior official with the Defense Department's inspector general's office. That does not mean $1.1 trillion is missing. Some adjustments were deposits, others were debits. For example, the Defense Finance and Accounting Service found last year that its accounts were out of balance with the Treasury Department, the bank, by $3.9 billion. Instead of determining the source of the discrepancy, the service simply entered a balance adjustment for that amount. Hundreds of similar adjustments are behind the $1.1 trillion total. Over all, the department's financial records are so chaotic - the agency has more than 1,100 accounting systems - that Congress advised the agency's auditors not to bother even trying to audit them. Three other federal agencies - the Agriculture Department, NASA and the Agency for International Development - had unauditable books in 2000-2001. But even many of the agencies that received so-called clean audits - with books well organized enough to be audited - had serious financial shortcomings. The Internal Revenue Service, for example, is unable to produce a hard figure for the amount of tax payments due the government. Instead it runs a statistical sample of taxes due and from that derives an estimate - an arduous process that takes several months. That estimate is one of the figures the government uses to plan spending for the year. All told, for the 2000-2001 fiscal year, the Treasury Department entered a balance deduction from the government's general fund of $17.3 billion to make up for financial errors throughout the government. The government also recorded at least $33 billion in erroneous payments last year, like improper Medicare payments of $12.1 billion. "We have to pump money into the executive branch to help them balance these things out," said Representative Steve Horn, the California Republican who is chairman of the House Subcommittee on Government Management. Audits of the departments' financial statements for the fiscal year 2001-2002 are due early next year. For most of the nation's history, no one asked much of government agencies in terms of financial accounting. The Constitution said only that "a regular statement and account of the receipts and expenditures of all public money shall be published from time to time." Early last century Congress passed laws prohibiting government agencies from spending more than Congress appropriated. These laws have not been entirely successful. For example, in the 2000-2001 fiscal year the Forest Service alone overspent its budget by $1.1 billion. Starting in the 1990's, Congress began passing more requirements. One law, in 1994, required each agency for the first time to produce annual financial statements. Those reports would be subject to audit, and in 1996, the first year audited statements were due, only 6 of the 24 agencies produced statements that it was possible to audit. An additional law, in 1996, required major agencies to install a financial accounting system that could generate auditable statements and give managers the ability to examine the agency's situation before making decisions on programs or policies - something they could not do. Now, six years later, only the National Science Foundation has a financial accounting system, and most of the major agencies are still years away from attaining one. As a result, the annual task of preparing a financial statement is a Herculean effort involving hundreds, perhaps thousands, of people at every level of a department, who must pull together records of everything a department has done over the year. At the Internal Revenue Service, for example, "it's a massive effort that begins in the mid-July time frame and typically continues well into late January," said Steven Sebastian, a senior official in the agency's inspector general's office. Several officials said this labor-intensive process distracted from the agencies' principal work. The Immigration and Naturalization Service, for example, "had to count manually approximately five million immigration applications" to determine fees due the government, said an inspector general's report, adding that the work "shut down production at several sites for more than a week and caused delays in processing applications." In the end, to make the books balance, agencies make "billions of dollars in adjustments," the 2000-2001 audit of the federal government said. The government's financial rating system shows the Department of Agriculture to be the worst managed major agency. The agency's financial statements are in such disarray that they have been unauditable since 1994. But Edward R. McPherson, the department's chief financial officer, insisted in a recent interview that most of the problems had been solved and that future audits would be much improved. His predecessors have made similar assertions. A senior auditor in the inspector general's office, while acknowledging that "there have been changes" at the department, added that "we won't know anything until we complete the audit" early next year. The audit for the 2000-2001 fiscal year, completed last February, showed that the department made unsubstantiated balance adjustments totaling $2.9 billion. "I can't tell you what's in that figure," said the senior auditor, who spoke on the condition of anonymity. "I don't think they even know." Behind it, audit reports show, is a department in financial disarray. After seven years of trying, the Agriculture Department recently completed installation of a financial accounting system. But another inspector general's audit, last summer, found the system to be largely dysfunctional because of user errors and unauthorized modifications. For example the system uses a "funds control" program to limit spending to the budgeted amount. In 68 accounts, the audit said, agency employees had overridden the control, or not turned it on, leading to $1.3 billion in what was apparently overspending. When auditors tried to view the system's override log, to see how the overspending had occurred, they found it turned off. The system included a payment limit for each check of $999,999. But users who could not be identified by auditors had added a digit, changing the limit to $9,999,999. Contrary to agency rules requiring approval from supervisors, more than 2,200 agency employees had been authorized to process certain payments with no oversight or approval, raising the risk of fraud, auditors said. In addition, 186 people who no longer worked for the department still had approved access to the system. The Forest Service, a division of the department, tries to hold back money each year so it has money available to fight forest fires. In 2001, as in most years, the service could not figure out how much money it had available and overspent by $274 million, auditors found. At the end of the fiscal year, in a feverish and ultimately futile effort to make the agency's books balance, the Forest Service made 15,337 adjustments, credits and debits, over several weeks. They totaled $11 billion. Auditors examined 144 of those adjustments, totaling $7.9 billion, and found that 73 percent were "unsupported, unapproved and erroneous." http://www.nytimes.com/2002/10/14/politics/14ACCO.html?ex=1035661727&ei=1&en=b91884113fdc5dea HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact [EMAIL PROTECTED] or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to [EMAIL PROTECTED] Copyright 2002 The New York Times Company <A HREF="http://www.ctrl.org/";>www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance—not soap-boxing—please! 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