United States Department of the Interior OFFICE OF INSPECTOR GENERAL Washington, D.C.20240

Memorandum

APR - 7 1998

To:	Director, U.S. Geological Survey
From:	Robert J. Williams Acting Inspector General
Subject:	Report on U.S. Geological Survey Financial Statements for Fiscal Years 1996 and 1997

In accordance with the Chief Financial Officers Act of 1990, we audited the U.S. Geological Survey's financial statements for the fiscal years ended September 30, 1996, and 1997, as contained in the Geological Survey's accompanying "FY [Fiscal Year] 1997 Annual Financial Report. " The Geological Survey is responsible for these financial statements, and we are responsible for expressing an opinion, based on our audit, on these financial statements.

Our audit was conducted in accordance with the "Government Auditing Standards," issued by the Comptroller General of the United States, and with Office of Management and Budget Bulletin 93-06, "Audit Requirements for Federal Financial Statements," as amended, and was completed on March 13, 1998. These audit standards require that we plan and perform the audit to obtain reasonable assurance that the accompanying financial statements are free of material misstatement An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and accompanying notes. An audit also includes assessing the accounting principles used and significant estimates made by management. We believe that our audit provides a reasonable basis for our opinion.

>We found that the financial statements and accompanying notes present fairly the Geological Survey's assets, liabilities, and net position; operational costs; revenues; changes in net position; cash flows; and budgetary resources. We also found that these financial statements are presented in conformity with the accounting standards and policies described in the notes to the financial statements. As discussed in Note 1.C, the Statement of Budgetary Resources contains intrabureau transactions for the Geological Survey that have not been eliminated. Further, the supplemental financial statement for fiscal year 1997, which follows the notes to the financial statements, was subjected to the auditing procedures applied in the audit of the financial statements and is fairly stated in relation to the financial statements taken as a whole.

Management of the U.S. Geological Survey is responsible for establishing and maintaining an internal control structure, which we evaluated as part of our audit. In performing the evaluation, we obtained an understanding of the relevant control policies and procedures, assessed the importance of their proper functioning, and tested whether they have been operating as designed. We also reviewed the Geological Survey's most recent report operating as designed. We also reviewed the Geological Survey's most recent report required by the Federal Managers' Financial Integrity Act of 1982 and compared it with the results of our evaluation of the Geological Survey's internal control structure.

Except as discussed in the Summary of Prior Reports With Significant Unresolved or Unimplemented Recommendations section of this report, we found that the Geological Survey's internal control structure in effect at September 30, 1997, was sufficient to safeguard assets against loss from unauthorized use or disposition; ensure that transactions were executed in accordance with laws and regulations; ensure that transactions were properly recorded, processed, and summarized; and provide reasonable assurance that any losses, noncompliance, or misstatements that are material to the financial statements would be detected. However, losses, noncompliance, or misstatements may occur and not be detected because of inherent limitations in any system of internal controls. We also caution that projecting our evaluations of internal controls to fixture is subject to the risk that controls or the degree of compliance with the controls may diminish.

We performed tests of the U.S. Geological Survey's compliance with certain provisions of laws and regulations specified in Bulletin 93-06, noncompliance with which could have a direct and material effect on the determination of amounts in the financial statements. In planning and performing our tests of compliance, we considered the implementation guidance issued by the Office of Management and Budget on September 9, 1997, relating to the Federal Financial Management Improvement Act of 1996. Under the Act, we are required to report whether the Geological Survey's financial management systems are in compliance with the Federal financial management system requirements, applicable accounting standards, and-the U.S. Government Standard General Ledger at the transaction level. However, providing an opinion on compliance with certain provisions of laws and regulations was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests of compliance with the laws and regulations described above disclosed no instances of noncompliance that are required to be reported under the "Government Auditing Standards."

The conditions identified in the Summary of Prior Reports With Significant Unresolved or Unimplemented Recommendations section of this report are considered to be reportable weaknesses in the Geological Survey's internal control structure that need to be corrected.

We reviewed the financial information presented in the Geological Survey's overview in order to determine whether the information was consistent with the financial statements. Based on our review, we determined that the information in the overview was consistent with the information in the financial statements.

Except as mentioned above, our review of prior Office of Inspector General and General Accounting Office audit reports found that there were no other significant unresolved or unimplemented recommendations that affected the Geological Survey's financial statements.

We reviewed prior Office of Inspector General and General Accounting Of lice reports related to the U.S. Geological Survey's financial statements to determine whether these reports contained any unresolved or unimplemented recommendations that were significant to the financial statements at September 30, 1997. Our review disclosed that there were no General Accounting Office reports related to the financial statements that contained significant unresolved or unimplemented recommendations. However, we identified four Office of Inspector General reports that contained significant unresolved or unimplemented recommendations as follows:

• The report "U.S. Geological Survey Financial Statements for Fiscal Year 1996" (No. 97I-927), issued in June 1997, stated that as a result of the fiscal year 1996 Continuing Resolution, which consolidated the National Biological Service with the U.S. Geological Survey, the Biological Service's financial statements were included in the Geological Survey's financial statements for fiscal year 1996. We concluded that the Geological Survey's and the Biological Service's financial statements for fiscal year 1996 were presented fairly. The report also stated that, except as discussed below, we found that the Geological Survey's and the Biological Service's internal accounting control structure met the established internal control objectives and that the Geological Survey and the Biological Service had complied in all material respects with applicable laws and regulations. However, the report stated:

  The Geological Survey's internal controls in place at September 30, 1996, were not sufficient to provide reasonable assurance that: (1) the amounts reported in the general ledger accounts Advances From Others (incorporated into the Deferred Revenue account in the financial statements), Accounts Receivable Unbilled, and Accounts Payable were properly supported by subsidiary ledgers; (2) costs related to the Federal-State Cooperative Projects were reported accurately and in accordance with applicable agreements; (3) delinquent accounts receivable were collected in a timely manner; (4) monies were disbursed from the investment plan, a component unit of the working capital fund, in accordance with established policies; and (5) Biological Resources Division property was accounted for and reported correctly.

The report contained 10 recommendations: 5 related to amounts reported in the general ledger for accounts receivable-unbilled, advances from others, and accounts payable; 3 related to accounts receivable collections; 1 related to investment plan controls; and 1 related to Biological Resources Division property. On September 30, 1997, we referred nine of the recommendations to the Assistant Secretary for Policy, Management and Budget for tracking of implementation (one recommendation was previously considered resolved and implemented). The Geological Survey's report of corrective actions for the reporting period for the first quarter of fiscal year 1998 stated that corrective actions for four had been completed, corrective actions for three recommendations related to accounts receivable collections were planned to be completed by August 1998, and corrective actions for the remaining two recommendations related to controls over the subsidiary ledgers and investment plan were planned to be completed by September 1998. Based on our current review, we concur with the Geological Survey's status report.

• The report "General Control Environment of the Federal Financial System at the Reston General Purpose Computer Center, U.S. Geological Survey" (No. 97-I-98), issued in October 1996, presented a summary of a draft audit report issued in July 1996 by the Office of Inspector General, U.S. House of Representatives, entitled "Stronger Controls Needed Over the Data Processing Environment at the U.S. Geological Survey, Reston General Purpose Computer Center." The draft audit report, which was finalized on December 12, 1996, identified 42 information system integrity weaknesses that, as a whole, according to the House Office of Inspector General, constituted a material internal control weakness under the Federal Managers' Financial Integrity Act of 1982. The report contained 70 recommendations to the Geological Survey and 1 recommendation to both the Geological Survey and the House's Chief Administrative Officer. Specifically, the report stated that weaknesses existed in data center management and operations; mainframe computer system physical and logical security; telecommunications security; protection of the local area network from unauthorized access and use; and contingency planning, including backup procedures for preventing data loss and for the recovery of data in case of a disaster. The Geological Survey concurred with the findings and recommendations contained in the House report and took immediate corrective actions to resolve the deficiencies that could have adversely impacted the integrity and security of financial data processed on the Federal Financial System. In its report, the House's Of lice of Inspector General stated that it believed that the "actions taken and the continuing commitment demonstrated" by Geological Survey management "to resolve the deficiencies identified has greatly reduced the risk" to the Computer Center's "processing environment."

We believe that the actions planned by the Geological Survey should be sufficient to correct the deficiencies identified; therefore, we are not making any further recommendations. Further, based on the immediate actions taken by the Geological Survey to correct the deficiencies reported, we do not consider these conditions, taken as a whole, to be a material weakness under the Federal Managers' Financial Integrity Act. Instead, we consider these weaknesses to be a reportable condition. The Geological Survey's report of corrective actions for the reporting period for the first quarter of fiscal year 1998 stated that corrective actions had been completed for 68 recommendations, with corrective action on 2 recommendations planned to be completed by April 1998.

• The report "Federal-State Cooperative Program, Water Resources Division, U.S. Geological Survey" (No 95-I-725), issued in March 1995, stated that the Water Resources Division did not properly and accurately account for the costs of projects conducted under the Federal-State Cooperative Program. This occurred, according to the report, because the Division established accounting practices that inappropriately (1) shifted costs to projects with unspent funds and (2) used Program funds to pay for bureau-level administrative costs. We identified overcharges of $3 million and undercharges of $1.2 million to Program project accounts and estimated that Program funding of $660,000 had been used to pay for nonProgram expenses, which was contrary to the legislation establishing exclusive funding for the Program. Also, despite the Program's exemption from bureau-level general and administrative expenses, the Division charged about $6.2 million of these expenses to the Program in fiscal year 1993. The Geological Survey concurred with the report's four recommendations.

The Office of the Assistant Secretary for Policy, Management and Budget closed the recommendations based on an October 28, 1997, memorandum from the Geological Survey which stated that it had completed actions required to implement the recommendations, and the memorandum included supporting documentation. We believe that the actions taken by the Geological Survey are sufficient to consider the recommendation resolved and implemented.

• The report "Use of the Governmentwide Purchase Card, U.S. Geological Survey" (No. 98-I-3 16), issued in March 1998, stated that the Geological Survey "did not have reasonable assurance that improper uses ofthe purchase cards would be prevented or detected in a timely manner." The report also stated:

  The deficiencies occurred because (1) approving officials did not perform all of the required review procedures; (2) the Office of Acquisition and Federal Assistance did not perform periodic reviews of the Purchase Card Program; and (3) the Geological Survey did not provide adequate training to cardholders and approving officials in the areas of acquiring, documenting, and reviewing purchases.

We recommended that the Geological Survey ensure that (1) approving officials follow established review procedures; (2) cardholders comply with policies and procedures concerning unauthorized purchases, split purchases, and telephone orders; (3) purchase cards are adequately safeguarded; (4) written procedures are developed for documenting the review of purchase card transactions; and (5) cardholders and approving officials receive adequate training in the proper use of the purchase card. In a January 8, 1998, memorandum, the Geological Survey concurred with the recommendations and identified the corrective actions taken to address the recommendations. Based on the Geological Survey's response to the draft report, we considered four recommendations resolved and implemented and requested that the Geological Survey reconsider its response to the remaining recommendation, which related to the safeguarding of purchase cards. A response to the final audit report is due by April 15, 1998.